HomeMy WebLinkAboutStaff Report 11051
City of Palo Alto (ID # 11051)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/21/2020
City of Palo Alto Page 1
Summary Title: Fiscal Year 2021 Water Utility Financial Plan
Title: Staff and the Utilities Advisory Commission Recommend the Finance
Committee Recommend the City Council Adopt a Resolution Approving the
Fiscal Year (FY) 2021 Water Utility Financial Plan, Including Proposed Reserve
Transfers and an Amendment to the Water Utility Reserves Management
Practices, With no Water Rate Adjustment for FY 2021
From: City Manager
Lead Department: Utilities
RECOMMENDATION
Staff requests that the Finance Committee recommend that the Council:
1. Adopt a Resolution (Attachment A) approving:
a. The Fiscal Year (FY) 2021 Water Utility Financial Plan (Attachment B); and
b. Up to a $3 million transfer from the Operations Reserve to the CIP Reserve in FY
2020; and
c. Up to a $5 million transfer from the Operations Reserve to the Rate Stabilization
Reserve in FY 2020; and
d. Up to an $8 million capital program contribution from the Operations Reserve to the
CIP Reserve in FY 2021; and
e. Amendments to the Water Utility Reserves Management Practices relating to the
CIP Reserve (as set forth in the Financial Plan, with a redline provided as Attachment
C); and
f. Approve the maintenance of a balance in the Rate Stabilization Reserve through FY
2028 in order to provide greater rate stabilization to customers.
EXECUTIVE SUMMARY
The FY 2021 Water Utility Financial Plan includes projections of the utility’s costs and revenues
for FY 2020 through FY 2025. Costs are projected to rise by about 4% per year over the next
several years.
Capital projects were deferred in FY 2019 due to nonresponsive construction bids leading to
lower capital costs than budgeted. Many of these deferred capital projects are anticipated to
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be completed in FY 2020 or FY 2021 and reserve CIP funds are available for those in the year
end 2019 balances. Although capital investment needs will fluctuate from FY 2021 through FY
2025, there are enough funds currently in reserves to hold rates steady in FY 2021 while still
fully funding budgeted capital investments.
The SFPUC is projecting no increases in water supply rates until FY 2023. At that point the
SFPUC projects a water supply rate increase of 9% followed by 13% in FY 2024 and 5% in FY
2025. These increases, together with capital investment needs such as one-time needed
reservoir replacements, will place upward pressure on Palo Alto’s water rates. To fund these
increasing costs while minimizing rate increases for the City’s water customers, staff
recommends transferring funds in FY 2020 and FY 2021 to the Rate Stabilization Reserve so
that funds will be available in that reserve to allow for projected customer rate increases of
only 3% to 4% per year between FY 2022 and FY 2025.
BACKGROUND
Every year staff presents the Finance Committee with Financial Plans for the Electric, Gas,
Water, and Wastewater Collection Utilities. The Financial Plans recommend rate adjustments
required to maintain the financial health of these enterprises. These Financial Plans include a
comprehensive overview of the operations of each enterprise, both retrospective and
prospective, and are intended to be a reference for Finance Committee and Council members
as they review the budget and staff’s rate recommendations. Each Financial Plan also contains a
set of Reserves Management Practices describing the reserves for each utility and the
management practices for those reserves.
Most of the City’s water comes from the San Francisco Public Utilities Commission (SFPUC)’s
Hetch Hetchy water system. This same system serves San Francisco and several other Bay Area
cities. The system is run by San Francisco, but as much as two thirds of the water is used
outside of San Francisco by 26 cities, water districts, and private utilities. These agencies,
including CPAU, are frequently referred to as the “wholesale customers” (as compared to the
SFPUC’s “retail customers” in San Francisco). The Bay Area Water Supply and Conservation
Agency (BAWSCA) represents the wholesale customers and negotiates with the SFPUC on their
behalf. BAWSCA also ensures contract compliance through regular review of the SFPUC’s
accounting and capital expenditures.1
The Water Utility has two main costs: water supply costs (primarily the cost of water delivered
to Palo Alto from the Hetch Hetchy water system) and the costs of operating the distribution
system (the system of pipes, pumps, reservoirs, and other infrastructure that carries water to
Palo Alto customers). As discussed in previous years, both cost components have been
increasing and are expected to continue to increase.
For many years the largest cost increases have been on the water supply side. This is due
primarily to major capital investments the SFPUC has made since 2010, partly due to pressure
1 For a video summary of BAWSCA’s activities, see https://vimeo.com/283596665/5619ce2c11
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from wholesale customers. The Water System Improvement Program (WSIP) is a $4.8 billion
capital improvement program, one of the largest in the country, to rehabilitate and seismically
strengthen the lower portions of the Hetch Hetchy water system. One of the goals is to achieve
the capability to return to service within 24 hours after a major earthquake. Although much of
the work is complete (the program was 98.2% complete as of September 2019), some of the
projects are still under construction and bond financing of WSIP projects over the next several
years will continue to drive wholesale rates up. The program has greatly improved the
resiliency of the Hetch Hetchy water system but has also led water supply costs to double.
By contrast, CPAU’s capital and operational costs have increased roughly at inflation for the last
five years. This financial plan projects that capital and operational costs will continue to
increase at approximately 4% per year over the next five years.
The Finance Committee reviewed preliminary financial forecasts at its March 3, 2020 meeting
(Staff Report #11077). The Utilities Advisory Commission (UAC) reviewed the Water Financial
Plan at its March 5, 2020 meeting. The UAC accepted staff’s recommendation and approved
the proposed FY 2021 Financial Plan unanimously. One Commissioner suggested that the
Finance Committee consider a rate increase in FY 2021 to smooth out the rate increase
trajectory over the coming five years. The meeting minutes were not available as of the time of
publishing this report.
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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 adequately to recover these costs. The
current rate proposals are also based on the cost of service (COS) methodology described in the
2012 Palo Alto Water Cost of Service & Rate Study, which was updated in 2015, and the 2015
Drought Rate memorandum completed by Raftelis Financial Consultants, which was updated in
2019 and titled “Proposed FY 2020 Water Rates” (see Attachment Q to Staff Report #102952).
Staff proposes no adjustment to water rates in FY 2021. Tables 1 through 3 below illustrate the
current rates that would remain unchanged under this financial plan. The rates shown below
are in addition to the pass-through commodity rate that is charged to customers based on
SFPUC supply charges. The pass-through commodity rate is currently $4.10 per CCF. SFPUC is
not anticipated to increase its supply charges in FY 2021.
Table 1: Current Water Consumption Charges in $/CCF (No Change is Proposed for FY 2021)3
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 2.56
Tier 2 Rates 5.97
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 5.50
2 A cost of service study (COS) is a study using industry-standard techniques to determine how the costs of running
the utility should be recovered from its customers; charges to each customer are set in proportion to the cost of
serving that customer.
3 Water consumption charges shown in Table 1 does not include the $4.10 per CCF pass-through commodity rate.
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Table 2: Current Monthly Service Charges for W-1, W-4 and W-7
Meter
Size
Monthly Service Charge ($/month based on
meter size)
Residential (W-1) Commercial (W-4)
and Irrigation (W-7)
5/8” 20.25 17.71
3/4” 20.25 23.67
1” 20.25 35.59
1 ½” 65.40 65.40
2” 101.17 101.17
3” 214.44 214.44
4” 381.37 381.37
6” 780.79 780.79
8” 1,436.57 1,436.57
10” 2,271.20 2,271.20
Table 3: Current Monthly Service Charges for Fire Services (W-3)
Meter
Size
Monthly Service Charge
($/month based on meter
size)
Current (7/1/19)
2” $4.17
4” $25.81
6” $74.96
8” $159.74
10” $287.27
12” $464.02
Bill Impact of Proposal
There is no bill impact for water utility customers.
FY 2021 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 4 shows the projected rate adjustments over the next five years and their impact on the
annual median residential water bill for 5/8” customers. These projected rate adjustments
include the impact of projected changes to the pass-through commodity rate.
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Table 4: Projected Rate Adjustments, FY 2021 to FY 2025 (5/8” meter)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Water Utility 0% 3% 3% 4% 4%
Estimated Bill Impact ($/mo)1 $0 $2.70 $2.80 $3.80 $4.00
1) estimated impact on median residential water bill for customers with 5/8” meter, which is
currently $90.42.
Figures 1 and 2 below illustrate the projected increases in the Water Utility’s costs between FY
2020 and FY 2025.
Figure 1: FY 2020 and FY 2025 costs
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Figure 2: Percentage of Total Cost Increase From FY 2020 to FY 2025
Attributed to Supply, Capital, and Operations Costs
Note that Figure 1 reflects the capital funded by rate revenue in FY 2020, while the 2025 bar
shows the capital program contribution to the CIP Reserve in 2025, if Council approves the
proposal in this Financial Plan. In addition, $15 million in capital investments is planned in FY
2020, above what is listed in Figure 1, which will be funded with existing reserves.
A major driver for the increase in the water utility’s costs (and therefore rates) over the next
several years is operations cost. Inflationary increases of 2 to 4% per year are factored into
these changes and, also, larger benefit cost increases to reflect a 6.2% discount rate for pension
liabilities per Council’s recommendation. Salaries and benefits account for less than 20% of the
water fund’s overall costs, so while these benefits assumption changes do create larger expense
projections, they are not significantly higher than they would have been under prior
assumptions. Operations costs are projected to increase by around 4.5% overall over the
forecast period.
The supply cost of water is also a major driver. Wholesale water costs are adopted by the
SFPUC, and generally have changed on an annual basis. Costs are projected to increase annually
on average by 3.4% per year from FY 2020 to FY 2025. The SFPUC is currently engaged in a $4.8
billion Water System Improvement Program (WSIP) for both local (San Francisco) and regional
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projects. As of September 30, 2019, 43 of the 52 regional projects were complete or in close-
out while 6 of the regional projects were under construction and 1 was in pre-construction.4
This has resulted and will continue to result in large increases in the annual debt service costs
assigned to wholesale customers like Palo Alto. After each WSIP project is completed,
wholesale customers must start paying the debt service costs within 3 to 4 years. For most of
those costs, funded with bond financing, the costs will be paid off over approximately 30 years.
The WSIP completion date approved by the SFPUC is December 30, 2021, as adopted by the
SFPUC in March of 2018. However, the latest quarterly report forecasts overall WSIP
completion by June 2022.
The regional WSIP project remaining in pre-construction is the Alameda Creek Recapture
project where environmental impact report work is currently ongoing. Current major projects
underway are the regional groundwater storage and recovery project and fish passage facilities
within the Alameda Creek Watershed. As WSIP projects are completed, SFPUC is pursuing a
suite of other capital improvement work; dam safety improvements and Mountain Tunnel
repairs are rate increase drivers during the next 10-year timeframe. Future and in-progress
construction work will require bond funding, and the SFPUC’s financial plans show debt service
cost for the water enterprise growing by 31% between FY 2020 and FY 2025, and by nearly 50%
by FY 2028.5 Initial wholesale rate increase projections are 5.5% per year on average through FY
2025 to cover increasing costs, primarily debt service from ongoing capital investments.
Changes in usage due to drought, or recovery from drought, can make the magnitude of future
increases difficult to predict. The SFPUC’s costs to operate the Regional Water System are
primarily fixed costs, so the water rate charged to wholesale customers like the City of Palo Alto
is highly dependent on usage by all users of the Regional Water System. The City’s FY 2021
Water Utility Financial Plan assumes that, while the drought has ended and usage has
increased, consumption will not fully return to pre-drought levels. This assumption is based on
CPAU’s experience following past droughts.
The SFPUC is currently working on its budget for FY 2021, and the long-range changes to
wholesale costs are subject to change. Because wholesale sales of water by the SFPUC in
recent years were higher than projected during the drought, the SFPUC has been collecting
funds in its Balancing Account. The SFPUC will use these funds to offset rate increases. Based
upon SFPUC’s current estimates, SFPUC does not anticipate needing to raise wholesale rates
until FY 2023.
There remains some uncertainty in the forecasts of capital costs for the water utility in coming
years. Water main replacement costs have risen substantially in recent years. The regional and
even national focus on infrastructure improvement has created labor shortages, leading to
4 First Quarter FY 2019-20 WSIP Regional Quarterly Report,
https://sfwater.org/Modules/ShowDocument.aspx?documentid=14501
5 FY 2018-19 & FY 2019-20 Adopted SFPUC Budget,
https://sfwater.org/modules/showdocument.aspx?documentid=13147
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higher bid prices than were seen in the past. Several factors go into main replacement cost,
such as location as well as the length of main segments. The projects in FY 2019 and FY 2020,
although of smaller segment size than in later years, are also located in higher traffic areas
which require enhanced strategic planning and coordination (such as University Avenue).
Consistent with the FY 2020 financial plan, this plan includes larger main replacement
construction projects every other year instead of smaller projects annually. This main
replacement schedule will allow CPAU to meet its main replacement needs and addresses
challenges in the current construction market while optimizing current staffing resources. This
shift to larger main replacement construction projects every other year is anticipated to attract
more contractors to bid on the larger projects. Additionally, this main replacement project
schedule for water will be staggered with wastewater and gas (water and wastewater
construction every even year and gas construction every odd year), which will ease scheduling
difficulties for inspection coverage due to shared inspection staff across water, wastewater,
gas, and large development services projects. Beyond this, work has begun on the design of
Corte Madera reservoir replacement project in FY 2019, and staff estimates the construction
work for Corte Madera, together with design for the replacement of Dahl and Park reservoirs
will cost an additional $2 million in FY 2021. The replacements planned for the Dahl and Park
reservoirs in FY 2023 and 2026 are estimated to cost $3.5 to $3.7 million, respectively.
Although the revised main replacement schedule is important for the reasons described above,
fluctuations in capital expenditures can lead to fluctuations in customer rates. To promote rate
stability and provide continuity in water expenditure levels, this plan establishes a consistent
annual contribution from the Operations Reserve to the CIP Reserve. CIP projects will then be
charged to the CIP Reserve, which will experience fluctuations in its balance as a result of
projects carried over from past years (but already funded) and as a result of the two-year
project cycle. This should enable rate increases to remain relatively smooth. Figure 3 below
shows the projected CIP Reserve balances under this Financial Plan.
Staff proposes modifications to the Water Utility Reserves Management Practices to
synchronize them with the staggered main replacement schedule, as well as annual funding
based on staff’s estimate of annual CIP work for the next 48 months. Specifically, the
modifications would set a new maximum CIP Reserve guideline level equal to the average
annual (12 month) CIP budget, for 48 months of budgeted CIP expense.6 Staff also proposes
that the Water Utility Reserves Management Practices be amended to provide that if there are
funds in this reserve in excess of the maximum level, staff must propose in the next Financial
Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a
specific use of the funds for CIP investments that will be made by the end of the next Financial
Planning Period. The proposed amendment would also authorize Staff to seek City Council
approval to hold funds in this reserve in excess of the maximum level if they are held for a
specific future purpose related to the CIP.
6 Each month is calculated based upon 1/12 of the annual budget.
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Although this Financial Plan includes a forecast period of five years, or 60 months, an even
number of years (48 months or 4 years) is used for the CIP Reserve maximum calculation,
because of the staggered main replacement schedule including a larger main replacement
project every other year.7 The new minimum CIP Reserve level is 20% of the maximum CIP
Reserve guideline level. This maximum in FY 2021 is $9.6 million and the minimum in FY 2021 is
$1.9 million. Table 5 below shows the planned capital spending in row 12 fluctuating from year
to year with the staggered main replacement schedule, and shows the stable capital program
contributions to the CIP Reserve in rows 9 and 10. The Operations Reserve is shown as
combined with unassigned funds, because when the Operations Reserve reaches its maximum
level, any further additions to the Water Utility’s Fund Balance are considered unassigned. In
accordance with the Water Utility Reserves Management Practices, the attached Financial Plan
includes a plan to assign these funds to both rate stabilization and capital investment purposes.
Figure 4 shows the amount of funds that are considered unassigned during the forecast period,
together with reserve balance changes for each reserve from FY 2019 and projected through FY
2025.
7 For example, in this Financial Plan for FY 2021, the 48-month period to use to derive the annual average is FY
2021 through FY 2024. In the FY 2022 Financial Plan, the 48-month period to use to derive the annual average
would be FY 2022 through FY 2025 etc.
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Figure 3: Projected Capital Reserve Balances FY 2021 to FY 2025
Figure 4: Actual Reserve Levels for FY 2019 and Projections through FY 2025
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Table 5: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending
Balances, Revenues, Transfers To/(From) Reserves, Capital Program Contribution To/(From)
Reserves, and Operations Reserve Guideline Levels for FY 2020 to FY 2025 ($000)
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Starting Balance
(1) Operations/Unassigned 20,652 18,583 14,496 12,126 11,332 11,889
(2) Rate Stabilization 4,069 9,069 12,569 12,569 12,569 9,500
(3) CIP 2,726 5,726 9,466 8,601 9,890 5,851
Revenues
(4) Total Revenue 49,655 49,005 49,815 50,641 51,958 53,310
(5) Transfers In 550 561 572 584 595 607
Transfers
(6) Operations/Unassigned (8,000) (5,000) (3,500) - 3,069 3,000
(7) Rate Stabilization 5,000 3,500 - - (3,069) (3,000)
(8) CIP 3,000 1,500 3,500 - - -
Capital Program
Contribution
(9) Operations/Unassigned - (8,000) (8,240) (8,487) (8,742) (9,004)
(10) CIP - 8,000 8,240 8,487 8,742 9,004
Expenses
(11) Total Expenses other than
CIP (38,694) (40,196) (40,553) (43,057) (45,841) (47,136)
(12) Planned CIP (5,132) (5,760) (12,605) (7,199) (12,780) (7,376)
(13) Transfers Out (447) (456) (465) (474) (484) (494)
Ending Balance
(1)+(4)+(5)+(6)
+(9)+(11)+(13)* Operations/Unassigned 18,583 14,496 12,126 11,332 11,889 12,172
(2)+(7) Rate Stabilization 9,069 12,569 12,569 12,569 9,500 6,500
(3)+(8)+(10)+
(12)* CIP 5,726 9,466 8,601 9,890 5,851 7,479
Operations Reserve
Guideline Levels
(14) Minimum 6,808 7,064 7,131 7,552 8,019 8,242
(15) Maximum 12,721 13,215 13,332 14,156 15,071 15,497
* Note: The current year, FY 2020, differs from FY 2021 through FY 2025 in that Planned CIP
(item 12) is reflected as an expense in the Operations Reserve; the proposal in this Financial
Plan for FY 2021 – FY 2025 reflects Planned CIP (item 12) as an expense in the CIP Reserve.
Capital Projects & Reserve
Higher bid cost and delays in project schedules resulted in a deferment of main replacement
projects in FY 2017 through FY 2019, temporarily lowering CIP expenditures. This resulted in the
Operations Reserve being filled to the maximum guideline level. As current Operations Reserve
levels are sufficient to fund deferred capital projects and as supply costs are anticipated to
remain relatively flat until FY 2023, staff recommends transferring up to $3 million from the
Operations Reserve to the CIP Reserve in FY 2020, and projects the need for reserve transfers of
up to $1.5 million to the CIP reserve in FY 2021 and up to $3.5 million to the CIP reserve in FY
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2022. Staff is currently requesting Council to approve the $3 million transfer from the
Operations Reserve to the CIP Reserve in FY 2020 and will request Council approval for any
further transfers to the CIP Reserve in the FY 2022 Water Utility Financial Plan once the year-
end FY 2020 reserve balances are known. Beginning in FY 2021, capital projects will be funded
from CIP Reserves. Having these funds in place will address uneven annual funding associated
with ongoing CIP projects, and will be a source for one-time or immediately needed projects.
This funding is equivalent to the amount needed to fund one-time reservoir replacements for
each of the following years: $2.4 million of new funding in FY 2020, $2 million in FY 2021, and
$3.5 million in FY 2023 for a total of nearly $8 million. By transferring $3 million to the CIP
Reserve in FY 2020, $1.5 million to the CIP Reserve in FY 2021, and $3.5 million to the CIP
Reserve in FY 2022, although it will not all be needed for the reservoir replacements until FY
2023, this will ensure the reserve has sufficient funding for budgeted CIP as fluctuating annual
amounts of capital investment occur going forward.
Table 5 above shows the anticipated CIP Reserve transfers in FY 2020 through FY 2025. There is
also approximately $15 million in CIP that was budgeted in 2019 or prior years that is
reappropriated or carried forward from previous years and is currently in the CIP
Reappropriations and CIP Commitments Reserves. That total includes approximately $1.4
million in commitments (CIP Commitments Reserve), $4.1 million for one-time projects, $8.2
million for water main replacements, and $1.4 for ongoing projects (CIP Reappropriations
Reserve). See Appendix B of the Water Utility Financial Plan for detailed information.
Additionally, the attached Financial Plan proposes that a capital program contribution would be
made annually from the Operations Reserve to the CIP Reserve ($8 million in FY 2021, and $8
million in FY 2022 and future years plus annual inflationary increases) to adequately fund the
CIP budget.
Rate Stabilization Reserve
This Financial Plan recommends funding the Rate Stabilization Reserve by transferring up to $5
million from the Operations Reserve in FY 2020, and projects the need for reserve transfers of
up to an additional $3.5 million in FY 2021. Staff is currently requesting Council to approve the
$5 million transfer from the Operations Reserve to the CIP Reserve in FY 2020 and will request
Council approval for the FY 2021 transfer from the Operations Reserve to the Rate Stabilization
Reserve in the FY 2022 Water Utility Financial Plan. The Rate Stabilization Reserve will be used
to buffer rate impacts that would have occurred from the utility’s need to pay for a series of
large wholesale supply rate increases that are anticipated to begin annually in FY 2023.
Beginning in FY 2024, CPAU expects to transfer funds annually from the Rate Stabilization
Reserve to the Operations Reserve to limit water rate increases. Although the existing council-
approved reserve practices call for rate stabilization reserves to be spent within five years of a
transfer, this schedule would leave the Rate Stabilization Reserve with some funds beyond FY
2025. Staff and UAC recommend that the City Council approve this deviation from the
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guidelines in order to allow rate smoothing to occur in FY 2024 through 2028, when it is
anticipated to be needed.
Water Bill Comparison with Surrounding Cities
Table 6 compares water bills for residential customers to those in surrounding communities as
of January 2020 (under current the City’s current water rates). Palo Alto customers have some
of the highest monthly bills of the group, although bills for smaller water users are lower than
in some surrounding communities. It is unclear at this time what water rate changes may be
implemented in surrounding communities for FY 2021. The average calculated in the following
table is the mean of the six surrounding communities listed. These communities are the same
six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas and
Electric industries.
Table 6: Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of January 2020
Palo
Alto
Menlo
Park
Mountain
View Hayward Redwood
City
Santa
Clara Los Altos
Average of
Surrounding
Communities
4 $46.89 $56.69 $37.92 $37.20 $54.04 $43.69 $41.26 $45.13
(Winter
median) 7
$70.28 $85.35 $58.74 $54.60 $72.43 $62.44 $59.17 $65.46
(Annual
median) 9
$90.42 $104.46 $72.62 $67.54 $85.91 $74.94 $71.10 $79.43
(Summer
median) 14
$140.77 $150.03 $107.32 $103.24 $122.66 $106.19 $99.75 $114.87
25 $251.54 $249.10 $225.26 $181.78 $217.76 $174.94 $167.27 $202.69
*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. Los Altos does not
receive water supply from SFPUC.
Changes from Last Year’s Financial Forecast
Table 7 compares current rate projections to those projected in the Financial Plans from the
last two years. As shown, the current rate projections for FY 2021, FY 2023 and FY 2024 are
lower than projected last year while FY 2022 is the same. Delays in water main replacement
and reservoir replacement resulted in an increase in reserves, which together with the use of
the Rate Stabilization Reserve and the level approach to funding CIP through the CIP Reserve
enables the more gradual increases projected in the current plan.
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Table 7: Projected Water Rate Trajectory for FY 2021 to FY 2025
Projection FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
Current
(FY 2021 Financial Plan) 0% 3% 3% 4% 4%
Last year
(FY 2020 Financial Plan) 2% 3% 6% 6% -
Two years ago
(FY 2019 Financial Plan) 7% 6% 4% 4% -
Changes to Reserve Guidelines
Staff proposes modifications to the Water Utility Reserves Management Practices to
synchronize them with the water utility’s staggered main replacement schedule, as well as the
capital program contributions to the CIP Reserve. The new maximum and minimum CIP
Reserve guideline levels as well as the funding plans are described above and in detail in the
attached Financial Plan.
Staff further proposes to modify the Water Utility Reserves Management Practices to provide
that if there are funds in the CIP Reserve in excess of the maximum level staff must propose in
the next Financial Plan to transfer these funds to another reserve, return the funds to
ratepayers, or designate a specific use of the funds for CIP investments that will be made by the
end of the next Financial Period. 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.
Additionally, staff proposes that Council approve, pursuant to the last sentence of Section 6 of
the Management Practices, to maintain funds in the Rate Stabilization Reserve through FY
2028.
NEXT STEPS
Assuming the Finance Committee supports staff’s recommendation, no notification of rate
increases would be necessary because the current rates would not increase. The FY 2021
Water Utility Financial Plan and resolution to adopt the FY 2021 Water Utility Financial Plan will
then go to the City Council with the FY 2021 budget for adoption.
RESOURCE IMPACT
Normal year sales revenues for the Water Utility will not be impacted by this proposal to
maintain the current rates for FY 2021. The FY 2021 Budget is being developed concurrent with
these rates and, depending on the final rates, adjustments to the budget may be necessary
later. See the attached FY 2021 Water Financial Plan for a more comprehensive overview of
projected cost and revenue changes for the next five years.
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POLICY IMPLICATIONS
Maintaining the current rates for FY 2021 is consistent with Reserve Management Practices and
exemptions included in the Financial Plans and described above, and the rates 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 2021 Water
Financial Plan does not meet the definition of a project requiring California Environmental
Quality Act (CEQA) review under Public Resources Code Section 21065 thus no environmental
review is required.
Attachments:
• Attachment A: Resolution Adopting Water FY 2021 Financial Plan
• Attachment B: FY 2021 Water Utility Financial Plan
• Attachment C: Water Utility Reserves Management Practices
Attachment A
* NOT YET APPROVED *
6055334
Resolution No.
Resolution of the Council of the City of Palo Alto Approving the FY 2021
Water Utility Financial Plan and Amending the Water Utility Reserves
Management Practices
R E C I T A L S
A. Each year the City of Palo Alto (“City”) regularly assesses the financial position of
its utilities with the goal of ensuring adequate revenue to fund operations. This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. The City
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 2021 Water Utility Financial Plan.
SECTION 2. The Council hereby approves the following transfers as described in the FY
2021 Water Utility Financial Plan:
a. Up to $3,000,000 in FY 2020 from the Operations Reserve to the
Capital Improvement Projects Reserve;
b. Up to $5,000,000 in FY 2020 from the Operations Reserve to the Rate
Stabilization Reserve;
SECTION 3. The Council hereby approves a capital program contribution to the Capital
Improvement Projects Reserve from the Operations Reserve (system revenues) of up to
$8,000,000 in FY 2021. Annual rate-funded contributions beyond FY 2021 will be approved by
Resolution annually.
SECTION 4. The Council hereby approves the amendments to the Water Utility
Reserves Management Practices as shown in Attachment C.
Attachment A
* NOT YET APPROVED *
6055334
SECTION 5. The Council hereby approves the maintenance of a balance in the Rate
Stabilization Reserve through FY 2028 in order to provide greater rate stabilization to customers.
SECTION 6. 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 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, and therefore, no environmental review is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
FY 2021 WATER
UTILITY
FINANCIAL PLAN
FY 2021 TO FY 2025
Attachment B
March 2020 2 | Page
FY 2021 WATER UTILITY
FINANCIAL PLAN
FY 2021 TO FY 2025
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 .................................................................................. 8
Section 3: Detail of FY 2021 Rate and Reserves Proposals ....................................................... 9
Section 3A: Rate Design ............................................................................................................... 9
Section 3B: Current and Proposed Rates ..................................................................................... 9
Section 3C: Proposed Reserve Transfers .................................................................................... 12
Section 4: Utility Overview .................................................................................................. 13
Section 4A: Water Utility History ............................................................................................... 14
Section 4B: Customer Base ........................................................................................................ 15
Section 4C: Distribution System ................................................................................................. 15
Section 4D: Cost Structure and Revenue Sources ...................................................................... 15
Section 4E: Reserves Structure ................................................................................................... 16
Section 4F: Competitiveness ...................................................................................................... 16
Section 5: Utility Financial Projections ................................................................................. 17
Section 5A: Load Forecast .......................................................................................................... 17
Section 5B: FY 2015 to FY 2019 Cost and Revenue Trends ........................................................ 19
Section 5C: FY 2019 Results ....................................................................................................... 20
Section 5D: FY 2020 Projections ................................................................................................ 20
Section 5E: FY 2021 – FY 2025 Projections ................................................................................ 21
Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 24
Section 5G: Alternate scenario .................................................................................................. 25
Section 5H: Long-Term Outlook ................................................................................................. 25
March 2020 3 | Page
Section 6: Details and Assumptions ..................................................................................... 26
Section 6A: Water Purchase Costs ............................................................................................. 26
Section 6B: Operations .............................................................................................................. 27
Section 6C: Capital Improvement Program (CIP) ....................................................................... 28
Section 6D: Debt Service ............................................................................................................ 33
Section 6E: Other Revenues ....................................................................................................... 34
Section 6F: Sales Revenues ........................................................................................................ 34
Section 7: Communications Plan .......................................................................................... 34
Appendices ......................................................................................................................... 36
Appendix A: Water Utility Financial Forecast Detail ................................................................. 37
Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 39
Appendix C: Water Utility Reserves Management Practices ..................................................... 40
Appendix D: Description of Water Utility Operational Activities ............................................... 43
Appendix E: Sample of Water Utility Outreach Communications ............................................. 44
March 2020 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 FY 2021 through FY 2025.
This Financial Plan provides for revenues to cover the costs of operating the utility safely over
that period 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
Staff expects overall costs in the Water Utility to rise on average by about 4% per year from fiscal
year (FY) 2021 to 2025. Operations cost projections rise on average by about 3% annually through
the projection period. Water supply costs are based on current SFPUC projections and are the
largest individual component of the utility’s costs. The cost of the City’s SFPUC water supply is
increasing over the forecast period due to a series of major capital projects on the Hetch Hetchy
Regional Water System. However, the SFPUC’s water supply rates will remain relatively flat
through FY 2022 as SFPUC returns to customers reserves it accumulated in prior years, with rates
rising steeply after FY 2022. See Section 6A: Water Purchase Costs for more information. Capital
costs were lower than budgeted in FY 2019. In FY 2020 many of the budgeted capital projects
that were deferred from previous years are anticipated to be completed and reserve funds are
available for those. For this reason, funds needed are lower than originally budgeted in staff’s
projection for FY 2020. For FY 2021 through 2025, capital expenditures will fluctuate for several
reasons including one-time reservoir replacement projects and the switch to a two-year cycle
(rather than an annual cycle) for main replacement construction projects. This main
replacement schedule is important allow CPAU to meet its main replacement needs while
addressing challenges in the current construction market and optimizing current staffing
resources. However, fluctuations in capital expenditures can lead to fluctuations in customer
rates. To promote rate stability and provide continuity in water expenditure levels, this plan
incorporates a stable annual “capital contribution” from the Operations Reserve that is set aside
in the capital reserve to absorb annual spending fluctuations. Section 6C: Capital Improvement
Program (CIP) provides more detail. Table 1 below shows the costs for the Water Utility from FY
2019 through FY 2025.
March 2020 5 | Page
Table 1: Expenses for FY 2019 to FY 2025 (Thousand $’s)
Expenses
($000)
FY
2019
(act.)
FY
2020
(est.)
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
Water
Purchases 21,210 21,662 21,371 21,085 22,471 24,794 25,633
Operations 16,623 17,479 19,281 19,933 21,061 21,530 21,997
Capital
Projects 11,791 5,132 8,000 8,240 8,487 8,742 9,004
TOTAL 49,625 44,274 48,652 49,258 52,019 55,067 56,634
This proposed Financial Plan projects that the Water Utility will need the rate increases shown in
Table 2 to ensure that revenues cover costs and reserves remain healthy. Staff projects a need
for sales revenue increases averaging about 3% per year through FY 2025. This is because water
supply costs are projected to increase beginning in FY 2023, water sales are projected to decline
somewhat, and little or no increase is expected in non-sales revenue (e.g. interest, connection
fees).
Table 2 also shows rate projections from the last two Financial Plans for FY 2020 and FY 2019,
which projected higher rate increases. Delays in water main replacement and reservoir
replacement projects resulted in an increase in reserves. In addition, the lack of projected
increases from SFPUC until FY 2023, together with use of the Rate Stabilization Reserve to offset
increases from SFPUC once they begin in FY 2023 will enable the more gradual rate increases
projected in the current plan.
Table 2: Proposed and Projected Water Rate Changes for FY 2021 to FY 2025
Projection FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
Current 0% 3% 3% 4% 4%
FY 2020 Plan 2% 3% 6% 6% -
FY 2019 Plan 7% 6% 4% 4% -
The Water Utility’s Rate Stabilization Reserve can be used to smooth rate increases over several
years. This Financial Plan recommends further use of this reserve by transferring funds from the
Operations Reserve to the Rate Stabilization Reserve in FY 2020 and FY 2021, and using those
funds to mitigate rate increases that will begin annually in FY 2023. The use of the Rate
Stabilization Reserve in this way, together with the cost and revenue projections in this Financial
Plan will allow CPAU water rates to increase by 4% or less annually over the next five years. This
Financial Plan projects that these reserves will be exhausted by the end of FY 2028.
The Water Utility also has a Capital Improvement Program (CIP) Reserve that is used to manage
cash flow for capital projects and acts as a reserve for capital contingencies. Staff proposes
modifications to the Water Utility Reserves Management Practices to synchronize them with the
staggered main replacement schedule, as well as annual funding based on staff’s estimate of
annual CIP work for the next 48 months. Specifically, the modifications would set a new
maximum CIP Reserve guideline level equal to the average annual (12 month) CIP budget, for 48
March 2020 6 | Page
months of budgeted CIP expense.1 Staff also proposes that the Water Utility Reserves
Management Practices be amended to provide that if there are funds in this reserve in excess of
the maximum level, staff must propose in the next Financial Plan to transfer these funds to
another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP
investments that will be made by the end of the next Financial Planning Period. The proposed
amendment would also authorize Staff to seek City Council approval to hold funds in this reserve
in excess of the maximum level if they are held for a specific future purpose related to the CIP.
Appendix C, section 5, reflects the new maximum and minimum CIP Reserve guideline levels.
Although this Financial Plan includes a forecast period of five years, or 60 months, an even
number of years (48 months or 4 years) is used for the CIP Reserve calculations, because of the
staggered main replacement schedule including a larger main replacement project every other
year.2 The new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level.
This maximum in FY 2021 is $9.6 million and the minimum in FY 2021 is $1.9 million. Previously,
the minimum and maximum CIP Reserve guideline levels were 12 and 24 months of budgeted
CIP expenditure, respectively.
The 2020 Financial Plan anticipated replenishing the CIP Reserve by $5 million in FY 2020 and $4
million in FY 2021. This Financial Plan recommends transferring up to $3 million from the
Operations Reserve to the CIP Reserve in FY 2020, and projects the need for reserve transfers of
up to $1.5 million to the CIP Reserve in FY 2021 and up to $3.5 million to the CIP Reserve in FY
2022. Staff is currently requesting Council to approve the $3 million transfer from the Operations
Reserve to the CIP Reserve in FY 2020 and will request Council approval for the other transfers
to the CIP Reserve in the FY 2022 Water Utility Financial Plan once the year-end FY 2020 reserve
balances are known. Beginning in FY 2021, capital projects will be funded from CIP Reserves.
Having these funds earmarked will address uneven annual funding associated with ongoing CIP
projects, and will be a source for one-time or emergency projects. This funding is equivalent to
the amount needed to fund one-time reservoir replacements for each of the following years: $2.4
million of new funding in FY 2020, $2 million in FY 2021, and $3.5 million in FY 2023 for a total of
nearly $8 million. By transferring $3 million to the CIP Reserve in FY 2020, $1.5 million to the CIP
Reserve in FY 2021, and $3.5 million to the CIP Reserve in FY 2022, although it will not all be
needed for the reservoir replacements until FY 2023, this will ensure the reserve has sufficient
funding for budgeted CIP as fluctuating annual amounts of capital investment occur going
forward.
Figure 11 shows the projected CIP Reserve balances and guideline levels for FY 2021 through FY
2025. These modifications will make full use of the CIP reserve to manage fluctuations in capital
investments while stabilizing customer rates.
Higher bid cost and delays in project schedules resulted in a deferment of main replacement
projects in FY 2017 through FY 2019, temporarily lowering costs. This resulted in the Operations
1 Each month is calculated based upon 1/12 of the annual budget.
2 For example, in this Financial Plan for FY 2021, the 48 month period to use to derive the annual
average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use
to derive the annual average would be FY 2022 through FY 2025 etc.
March 2020 7 | Page
Reserve being filled to the maximum guideline level, with surplus reserves available to phase in
rate increases more slowly over the forecast period. The maximum guideline level for the
Operations Reserve equals 120 days of operations and maintenance and commodity expense. At
year end FY 2019, the maximum guideline level equaled $12.3 million while the total Operations
Reserve plus Unassigned Reserve funds equaled $20.7 million, which is $8.4 million more than
the maximum guideline level. Table 3 shows that the balance at the start of FY 2020 in the CIP
Reserve is approximately $2.7 million (in row 3) and in the Operations Reserve plus Unassigned
Reserve combined is $20.7 million (in row 1). Figure 7 shows the water utility reserve balances
including the Unassigned Reserve balance at year end for FY 2019 and projected through FY 2025.
However, these funds will be needed to adequately fund CIP investments and the CIP Reserve in
FY 2020 through FY 2022, bringing the Operations Reserve within guidelines by the end of FY
2022. Table 3 shows the starting and ending balances for the Operations & Unassigned Reserves
combined, Rate Stabilization Reserve, and CIP Reserve together with the Transfers To/(From)
projected reserve transfers over the forecast period. See Section 3D: Proposed Reserve Transfers
for more details.
March 2020 8 | Page
Table 3: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending
Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution
To/(From) Reserves for FY 2020 to FY 2025 ($000)
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Starting Balance
(1) Operations/Unassigned 20,652 18,583 14,496 12,126 11,332 11,889
(2) Rate Stabilization 4,069 9,069 12,569 12,569 12,569 9,500
(3) CIP 2,726 5,726 9,466 8,601 9,890 5,851
Revenues
(4) Total Revenue 49,655 49,005 49,815 50,641 51,958 53,310
(5) Transfers In 550 561 572 584 595 607
Transfers
(6) Operations/Unassigned (8,000) (5,000) (3,500) - 3,069 3,000
(7) Rate Stabilization 5,000 3,500 - - (3,069) (3,000)
(8) CIP 3,000 1,500 3,500 - - -
Capital Program Contribution
(9) Operations/Unassigned - (8,000) (8,240) (8,487) (8,742) (9,004)
(10) CIP - 8,000 8,240 8,487 8,742 9,004
Expenses
(11) Total Expenses other than
CIP (38,694) (40,196) (40,553) (43,057) (45,841) (47,136)
(12) Planned CIP (5,132) (5,760) (12,605) (7,199) (12,780) (7,376)
(13) Transfers Out (447) (456) (465) (474) (484) (494)
Ending Balance
(1)+(4)+(5)+(6)
+(9)+(11)+(13)* Operations/Unassigned 18,583 14,496 12,126 11,332 11,889 12,172
(2)+(7) Rate Stabilization 9,069 12,569 12,569 12,569 9,500 6,500
(3)+(8)+(10)+
(12)* CIP 5,726 9,466 8,601 9,890 5,851 7,479
Operations Reserve Guideline Levels
(14) Minimum 6,808 7,064 7,131 7,552 8,019 8,242
(15) Maximum 12,721 13,215 13,332 14,156 15,071 15,497
* Note: The current year, FY 2020 differs from FY 2021 through FY 2025 in that Planned CIP (item
12) is reflected as an expense in the Operations Reserve; the proposal in this Financial Plan for
FY 2021 – FY 2025 reflects Planned CIP (item 12) as an expense in the CIP Reserve.
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following action for the Water Utility in FY 2020 and FY 2021:
1. Transfer up to $3 million in FY 2020 from the Operations Reserve to the CIP Reserve. See
Section 3D: Proposed Reserve Transfers for more details.
2. Transfer up to $5 million in FY 2020 from the Operations Reserve to the Rate Stabilization
Reserve. See Section 3D: Proposed Reserve Transfers for more details.
3. An up to $8 million rate-funded contribution from the Operations Reserve to the CIP
Reserve in FY 2021. See Section 6C: Capital Improvement Program (CIP) for more details.
4. Amendments to the Water Utility Reserves Management Practices relating to the CIP
Reserve reflected in Appendix C, Section 5 and described above in Section 2A: Overview
of Financial Position.
March 2020 9 | Page
5. Approve the maintenance of a balance in the Rate Stabilization Reserve through FY 2028
in order to provide greater rate stabilization to customers. See Appendix C, Section 6 and
description in Section 2A: Overview of Financial Position
SECTION 3: DETAIL OF FY 2021 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 Article XIII D of the California Constitution
(Proposition 218) and applicable statutory law. The City structured current rates based on staff’s
assessment of the financial position of the Water Utility, and updated current rates using the
methodology from the March 2012 Palo Alto Water Cost of Service & Rate Study by Raftelis
Financial Consultants, Inc. (RFC) (Staff Report 2676), RFC’s 2015 Memorandum: Proposed Water
Rates updating the 2012 Study and analyzing drought rates (Staff Report 5951), as well as RFC’s
2019 Memorandum updating the 2012 study (Staff Report 10295). Staff plans to update the cost
of service study in 1 to 2 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 became effective on July 1, 2019. CPAU has five rate schedules:
separately metered residential customers (W-1), commercial and master-metered multi-family
residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in
buildings and private hydrants (W-3), and 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, and also
the cost of maintaining the capability to deliver a peak flow for that customer based on 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 at the first tier price per CCF, and all additional units charged
a higher tier price per CCF. Commercial customers, including most multi-family customers, pay a
uniform price for each CCF used. A separate rate per CCF exists for separately metered irrigation
service.
For July 1, 2020, staff is proposing no rate increase. Water rates are composed of two general
types of costs: commodity and distribution. Commodity costs are mainly volumetric in nature
and charged by the San Francisco Public Utilities Commission (SFPUC). In April 2019, the SFPUC
provided an estimate that their W-25 wholesale rate for agencies with long-term contracts would
remain at $4.10/CCF in FY 2021. The SFPUC will not determine its final rate until May or June,
2020. Staff is using the SFPUC’s April 2019 estimate in this forecast for no rate increase. If
March 2020 10 | Page
SFPUC’s final rate for FY 2021 does increase, the City must notify customers 30 days in advance
of the pass-through rate increase.
Distribution rates cover all the costs to deliver water within the City, such as operations,
maintenance, metering, billing, and capital improvements. In the past, the distribution costs
would fluctuate depending on capital improvement spending. However, this plan provides a
steady amount of capital improvement funding to the capital reserve beginning in FY 2021. Going
forward, the CIP Reserve will reflect actual fluctuations in CIP expenditures (money spent on
actual projects in a given year) beginning in FY 2021. Previously, CIP expenditures were reflected
in the Operations Reserve. Table 3 reflects this change; in FY 2021 (row 12) shows planned CIP
expenditures and the CIP Reserve balance is calculated by taking the starting balance for the CIP
Reserve (row 3), adding the one-time transfers (row 8) and capital program contributions (row
10) and subtracting planned CIP expenditures (row 12). Section 5E: FY 2021 – FY 2025 Projections
contains a more detailed description of this change. In this way, although CIP expenditures
fluctuate from year to year, the capital program contribution to the CIP reserve is projected to
remain fairly constant over the next five years, increasing by 3% per year on average. Operations
costs are discussed in Section 6B: Operations, below.
Customers have a separate commodity rate for purchased water from SFPUC relative to the rest
of the distribution-related portion of the volumetric rates. This charge passes-through any future
SFPUC rate increases to customers. All customers will pay this separate commodity cost for each
unit of water in addition to the volumetric rate that is applicable for their customer class. The
rates shown below are in addition to the pass-through commodity rate that is charged to
customers based on SFPUC supply charges. The pass-through commodity rate is currently $4.10
per CCF. SFPUC is not anticipated to increase its supply charges in FY 2021. This automatically
adjusting pass-through charge is effective July 1, 2019 through July 1, 2024 pursuant to
Resolution 9844 “Resolution of the Council of the City of Palo Alto Adopting a Water Rate
Increase and Amending Utility Rate Schedules W-1, W-2, W-3, W-4 and W-7, June 17, 2019.
March 2020 11 | Page
Table 4 shows the current consumption charges, which, like the rates in Tables 5 and 6, are not
proposed to change for FY 2021.
Table 4: Water Consumption Charges ($/CCF)3
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 2.56
Tier 2 Rates 5.97
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 5.50
3 Water consumption charges shown in Table 4 does not include the $4.10 per CCF pass-through commodity rate.
March 2020 12 | Page
Table 5 shows the current monthly service charges for rate schedule W-1, W-4 and W-7.
Table 5: Current Monthly Service Charges for W-1, W-4 and W-7
Meter
Size
Monthly Service Charge ($/month based on
meter size)
Residential (W-1) Commercial (W-4)
and Irrigation (W-7)
5/8” 20.25 17.71
3/4” 20.25 23.67
1” 20.25 35.59
1 ½” 65.40 65.40
2” 101.17 101.17
3” 214.44 214.44
4” 381.37 381.37
6” 780.79 780.79
8” 1,436.57 1,436.57
10” 2,271.20 2,271.20
Table 6 shows the current monthly service charges for rate schedule W-3
Table 6: Current Monthly Service Charges for Fire Services (W-3)
Meter
Size
Monthly Service Charge
($/month based on meter
size)
Current (7/1/19)
2” $4.17
4” $25.81
6” $74.96
8” $159.74
10” $287.27
12” $464.02
SECTION 3C: PROPOSED RESERVE TRANSFERS
In the FY 2018 Financial Plan, staff proposed transferring $1.87 million from the Rate Stabilization
Reserve to the Operations Reserve in FY 2018. This transfer was not necessary as increased sales
during FY 2017 resulted in larger than expected revenues, largely from the drought surcharge.
The drought surcharge was discontinued on July 1, 2017. Customer sales recovery after the
drought in FY 2018 was more robust than staff’s initial projections, and in FY 2019 revenues were
similar to projections and the Operations Reserve has remained healthy.
The Rate Stabilization Reserve has a year-end FY 2019 balance of $4.07 million. This Financial
Plan recommends further funding of this reserve by transferring $5 million from the Operations
Reserve to the Rate Stabilization Reserve in FY 2020 and projects the need to transfer $3.5 million
from the Operations Reserve to the Rate Stabilization Reserve in FY 2021. With these transfers,
the Rate Stabilization Reserve would be available to fund a series of large wholesale supply rate
March 2020 13 | Page
increases that are anticipated to begin annually in FY 2023. The use of the Rate Stabilization
Reserve in this way will allow CPAU water rates to increase by 4% or less annually over the next
five years. Funds from the Rate Stabilization Reserve would be drawn down annually beginning
in FY 2024 to minimize the need for a rate increase triggered by increasing costs. See Table 3
above, row 7, for a summary of the reserve transfers into and out of the Rate Stabilization
Reserve. SFPUC projects wholesale rate increases from $4.10 per CCF currently to $4.47 per CCF
in FY 2023, $5.06 per CCF in FY 2024, and $5.33 per CCF in FY 2025 with increases continuing
beyond FY 2025.
The Water Utility Reserves Management Practices states that 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 Financial Planning
Period. Once the funds are withdrawn under this plan, they will help keep rates lower by funding
operations and supply costs. However, due to the ongoing large increases in supply rates
expected to be passed through from SFPUC beyond 2025, staff recommends making a change to
the regular approach. Specifically, staff requests approval to hold the funds in the Rate
Stabilization Reserve until FY 2028 in order to help keep rates lower and gradually increase rates.
The proposed modifications to the Water Utility Reserves Management Practices shown in
Appendix C reflect this change.
Based upon current reserve levels and capital budget needs staff recommends a transfer of $3
million from the Operations Reserve to the CIP Reserve in FY 2020, and projects a transfer of $1.5
million from the Operations Reserve to the CIP Reserve in FY 2021, and a transfer of $3.5 million
from the Operations Reserve to the CIP Reserve in FY 2022 will be needed. The CIP Reserve
currently contains $2.726 million. Table 3 above shows these proposed reserve transfers in row
8. Having these funds in place will address uneven annual funding associated with ongoing CIP
projects, and will be a source for one-time or immediately needed projects. This funding is
equivalent to the amount needed to fund one-time reservoir replacements for each of the
following years: $2.4 million of new funding in FY 2020, $2 million in FY 2021, and $3.5 million in
FY 2023 for a total of nearly $8 million. The projected one-time spending needs for reservoir
replacement are shown in Appendix B on the line labeled “WS-09000 Seismic Water System”.
Through these one-time transfers to the CIP Reserve, although the funds will not all be needed
for the reservoir replacements until FY 2023, this will ensure the reserve has sufficient funding
for budgeted CIP as fluctuating annual amounts of capital investment occur going forward. In
addition, the funds will help to stabilize rate fluctuations for customers resulting from
fluctuations in capital spending.
Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail shows
details of reserves levels.
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It provides general background
information and helps readers better understand the forecasts in Section 5: Utility Financial
Projections and Section 6: Details and Assumptions.
March 2020 14 | Page
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
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. CPAU signed a 20-year contract
with SFWD, 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, 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, CPAU performed an analysis of cost-effective system improvements and
increased the rate of main replacement from one mile per year to three. CPAU began a plan to
replace 75 miles of deficient mains within 25 years.
In 1999, a study of system reliability concluded that the distribution system needed major
upgrades to provide adequate water supply during a natural disaster. This ultimately resulted in
the $40 million Emergency Water Supply and Storage Project, completed in 2013, 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. Upon
completion, the city began to focus reliability efforts on its system of water storage reservoirs
and transmission lines in the Foothills.
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 Regional
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. This has resulted and will continue to result in large increases in the annual debt service
costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed,
wholesale customers must start paying the debt service costs within 3 to 4 years. The majority
of those costs, funded with bond financing, will be paid off over approximately 30 years. The
SFPUC continues to evaluate its aging system for other needed infrastructure improvements;
future major improvements include dam safety and Mountain Tunnel repairs.
March 2020 15 | Page
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 (primarily in Los Altos Hills). Approximately
20,100 customers are connected to the water system. Approximately 16,200 (81%) of these are
separately metered residential customers and approximately 3,900 (19%) of these 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.
SECTION 4C: DISTRIBUTION SYSTEM
To deliver water to its customers, CPAU owns and operates 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 43% of the Water
Utility’s costs in FY 2019, Operational
costs represented 33%, and capital
investment was responsible for the
remaining 24%. Staff projects these
percentage distributions to remain similar
over the forecast period.
The Water Utility’s revenue is primarily
from sales of water and the remainder
from capacity and connection fees,
interest on reserves, and other sources.
Appendix A: Water Utility Financial
Forecast Detail shows more detail on the
utility’s cost and revenue structures.
Approximately 19% of the utility’s
revenues come from fixed service
charges, though most of its costs are
fixed.
Figure 1: Cost Structure (FY 2019)
43%
33%
24%
Supply
Operations
Capital
Figure 2: Revenue Structure (FY 2019)
90%
10%
Sales of Water
Other Revenue
March 2020 16 | Page
SECTION 4E: RESERVES STRUCTURE
CPAU maintains six reserves for its Water Utility to manage various types of contingencies. The
descriptions below summarize these reserves; 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, as well as to manage cash flow for ongoing
capital projects. This reserve 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 the city
anticipates one or more large rate increases 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 the 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 7 shows the current water bills for single-family residential customers compared to what
they would be under surrounding communities’ rate schedules. CPAU is among the highest
monthly bills of the group, although bills for smaller water users are less than in some
surrounding communities. These comparison cities were selected because they are the cities
CPAU compares itself to in the annual budget across all industries.
March 2020 17 | Page
Table 7: Single-Family Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of January 2020
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
Los
Altos
4 $46.89 $56.69 $37.92 $37.20 $54.04 $43.69 $41.26
(Winter median) 7 $70.28 $85.35 $58.74 $54.60 $72.43 $62.44 $59.17
(Annual median) 9 $90.42 $104.46 $72.62 $67.54 $85.91 $74.94 $71.10
(Summer median) 14 $140.77 $150.03 $107.32 $103.24 $122.66 $106.19 $99.75
25 $251.54 $249.10 $225.26 $181.78 $217.76 $174.94 $167.27
* 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. Los Altos does not receive water supply from
SFPUC.
SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: LOAD FORECAST
Figure 4 shows 40 years of water consumption history. Average water use has trended downward
over time even as Palo Alto’s population has grown. Significant water use reductions over the 40-
year history were in response to requests to reduce water use in the 1976-77 and 1988-92
drought periods. During these periods, customers invested in efficient equipment and modified
behavior to achieve water reduction goals. Reductions in usage achieved during these drought
periods endured even after those periods. More recently, water sales decreased substantially
during the 2007-2009 recession and during the 2014-2017 drought. Usage has started to return
to pre-drought levels, though the level at which usage will finally plateau is unknown.
March 2020 18 | Page
Figure 3: Historical Water Consumption
Figure 4 shows the forecast of water consumption through FY 2025 and beyond, as denoted by
the dotted line.
Figure 4: Forecast Water Consumption
March 2020 19 | Page
During the recent drought, the State mandated a 24% water use restriction for Palo Alto until
May 2016. Customers continue to conserve, but water usage has been increasing. Based on
patterns experienced in previous droughts, this forecast assumes consumption will only rebound
by 50% of the difference between pre-drought and drought levels, then resume with the previous
trend of decreasing usage over time.
SECTION 5B: FY 2015 TO FY 2019 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 staff projects they will change over the
next decade.
The annual expenses for the water utility rose substantially between 2015 and 2019. The
increases were primarily related to water purchase costs, which increased 35% from $15.7 million
in FY 2015 to $21.2 million in FY 2019. Section 6A: Water Purchase Costs contains a more in-depth
discussion of water purchase costs. Operations costs have remained fairly steady since FY 2015,
increasing by about 6%, while CIP costs have generally increased but fluctuated down in certain
years. For example, in FY 2017, a water main replacement project that CPAU put out for bid
resulted in very few contractors competing, and project bids that were higher than budgeted.
This led to delays due to the changing market conditions and rising CIP costs.
March 2020 20 | Page
Figure 5: Water Utility Expenses, Revenues, and Rate Changes:
Actual Expenses through FY 2019 and Projections through FY 2025
SECTION 5C: FY 2019 RESULTS
Actual revenues for FY 2019 were very close to projected ($49.4 million vs. $49.6 million).
Operating costs were lower during FY 2019, mainly due to deferrals of capital spending, savings
in water purchases due to sales volumes below projected, and savings in operations and
maintenance costs. Table 8 summarizes the variances from forecast.
Table 8: FY 2019, Actual Results vs. Financial Plan Forecast Net Cost/
(Benefit) (000)
Type of
change
Deferrals of capital spending $ (1,903) Cost savings
Water purchases lower than expected $ (1,401) Cost savings
Operations and Maintenance costs lower than expected $ (1,434) Cost savings
Net Cost / (Benefit) of Variances $ (4,739)
SECTION 5D: FY 2020 PROJECTIONS
Estimated sales revenues are expected to be slightly lower than forecasted in the FY 2020
Financial Plan by about $0.6 million. This is because of the updated sales forecast that takes into
account the lower actual water sales in FY 2019. However, interest income was higher in FY 2019
March 2020 21 | Page
and the updated projection for FY 2020 brings up the overall revenue forecast to $1.3 million
higher than projected in FY 2020.
On the expense side, the most notable change from the FY 2020 Financial Plan is changes to CIP
expenditures. Approximately $13.7 million in projects budgeted in FY19 or earlier are slated to
be re-appropriated to FY2020, the largest being main replacement project 27, estimated at $7.1
million, and some seismic water system upgrades, estimated at $2.9 million. The FY 2020
Financial Plan estimated the CIP expenditure for FY 2020 to be $16.9 million while the current
estimated CIP expenditure for FY 2020 is $20.8 million, of which $5.1 million will be funded
through rate revenue, $13.7 will be funded through reappropriations and $1.3 million through
committed funds. Table 9 below shows the difference between the $16.9 million projected in
last year’s Financial Plan and the $5.1 million projected in this year’s Financial Plan as the delay
of capital project spending. Operations & Maintenance expense decreases are anticipated from
lower than expected budgets. Table 9 summarizes the changes from the FY 2020 forecast.
Table 9: FY 2020 Change in Projected Results, 2020 Forecast vs 2021 Forecast Net Cost/ (Benefit) Type of Change
Sales Revenue 588 Revenue decrease
Other Revenue (Including Interest Income) (1,935) Revenue increase
Higher Total Revenue ($1,348) Revenue increase
Delay of Capital Project Spending budgeted in FY
2019 ($11,812) Cost decrease
Operations & Maintenance Costs ($1,131) Cost decrease
Lower Total Expense ($12,943) Cost decrease
Net Cost / (Benefit) of Variances ( $14,291)
SECTION 5E: FY 2021 – FY 2025 PROJECTIONS
Figure 5 above shows that on average the costs for the Water Utility are increasing through the
rest of the forecast period, though mainly after FY 2022 based on current estimates from the
SFPUC. Water supply costs are the largest component, and are generally projected to grow by
about 3.4 percent on average over the forecast period. Operations and capital investment costs
are also expected to increase at the same rate of inflation used in the City’s long-term financial
plans (3% to 5% per year), which also take into account higher estimated pension costs. While
future CIP costs have been revised upwards to reflect the higher construction costs seen in recent
projects, 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.
As shown in Figure 5, above the Water Utility requires rate increases of between 0% and 4% per
year through FY 2025 to provide sufficient revenues to fund annual expenses. This forecast
assumes the use of the Rate Stabilization Reserve annually beginning in FY 2024 to spread the
series of large water supply rate increases expected from the SFPUC over multiple years. In
addition, the CIP Reserve is used to assist in funding Capital Improvements going forward as well
as in stabilizing rates.
Annually, beginning in FY 2021, a fixed funding amount ($8 million in FY 2021 and $8 million in
FY 2022 – FY 2025, plus annual inflation), will be provided from the Operations Reserve to the
March 2020 22 | Page
CIP Reserve to fund capital improvements. Table 3 shows this capital program contribution to
the CIP Reserve in rows 9 and 10. This amount is an estimate of the amount of CIP work there is
in a given year, spread out over the forecast period. It was derived by calculating the approximate
average annual CIP budget for FY 2021 through FY 2025 less an allowance for unspent funds and
excluding the one-time reservoir replacement costs. The reservoir replacement costs will be
funded through the one-time transfers of $3 million in FY 2020, $1.5 million in FY 2021 and $3.5
million in FY 2022 from the Operations Reserve to the CIP Reserve. Table 3 shows these transfers
in row 8. This approach will provide stability to the Operations Reserve by providing for a steady
funding stream for CIP work and by reflecting fluctuations due to CIP such as project delays or
accelerations in the CIP Reserve; ultimately, this stability should provide more stable customer
rates. The use of the CIP Reserve in this way will isolate fluctuations due to CIP delays or
accelerations and allow those to be viewed together in the CIP Reserve. Conversely, other trends
or factors affecting the Operations Reserve will be easier to identify and communicate in that
reserve. Without this change, the relative stability of total costs, and revenues shown in Figure
5 would fluctuate greatly from year to year as shown below in Figure 6.
Figure 6: Water Utility Expenses, Revenues, and Rate Changes:
Actual Expenses through FY 2019 and Projections through FY 2025
Note that the fluctuations in CIP show a mismatch in many forecasted years between revenues
and costs. Isolating fluctuations in capital investment in the CIP Reserve not only helps to ensure
adequate funding for needed capital improvements but also shows a more realistic view of the
relationship between costs and revenues as shown in Figure 5.
March 2020 23 | Page
Figure 7 below shows reserves trends based on these cost and revenue projections. The figure
shows credits to the Rate Stabilization Reserve in FY 2020 and FY 2021 and the contributions from
the Rate Stabilization Reserve to the Operations Reserve in FY 2024 and FY 2025. Staff projects
transfers from the Operations Reserve to the CIP Reserve of $3 million in FY 2020, $1.5 million in
FY 2021 and $3.5 million in FY 2022.
This estimate decreased from the recommended level in the FY 2020 Financial Plan of $5 million
in FY 2020 and $4 million in FY 2021. In the FY 2020 Financial Plan no transfer to the CIP Reserve
was planned for FY 2022. Assuming the projected increases in revenue, staff expects the
Operations Reserve, the main contingency reserve, to be within the target range by the end of
FY 2022 and for the remainder of the forecast period, and that this reserve will be adequate to
meet all identified risks, as discussed in Section 5F: Risk Assessment and Reserves Adequacy. In
addition, the Unassigned Reserve reflects reserve funds in the Operations Reserve above the
maximum guideline level. With the expected increase in costs in FY 2020 and FY 2021 and with
the infusion of funds to the CIP Reserve and Rate Stabilization Reserve, these excess reserves will
be utilized by the end of FY 2022 and must be used before Rate Stabilization Reserve funds are
utilized. In accordance with the Water Utility Reserves Management Practices, this Financial Plan
includes a plan to assign these funds to both rate stabilization and capital investment purposes.
Figure 7: Water Utility Reserves
Actual Reserve Levels for FY 2019 and Projections through FY 2025
March 2020 24 | Page
SECTION 5F: RISK ASSESSMENT AND RESERVES ADEQUACY
The Water Utility currently has one contingency reserve, the Operations Reserve, and this
Financial Plan proposes using funds and raising rates slowly such that reserves remain well within
the guideline levels throughout the forecast period, as shown in Figure 8. Staff will consider funds
in the Operations Reserve in excess of the maximum as of the end of FY 2020 to be unassigned.
The Operations Reserve is projected to exceed both the minimum reserve level and the short
term risk assessment level throughout the forecast period.
Figure 8: Operations Reserve Adequacy
Table 10 summarizes the risk assessment calculation for the Water Utility through FY 2025. The
risk assessment includes the revenue shortfall that could accrue due to lower than forecasted
sales revenue. Because of the proposal in this Financial Plan for an annual capital contribution
to the CIP Reserve, staff proposes to change the water risk assessment by reflecting the risk of
increased CIP expenditures in the CIP Reserve instead of in the Operations Reserve. Specifically,
the risk assessment calculation previously included an estimate for an increase of 10% of planned
system improvement CIP expenditures for the budget year. The revised calculation shown below
does not include that component because the CIP risk is being captured in the CIP Reserve.
March 2020 25 | Page
Table 10: Water Risk Assessment ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Total non-commodity revenue $25,985 $27,018 $26,471 $25,495 $25,970
Max. revenue variance, previous ten years 13% 13% 13% 13% 13%
Risk of revenue loss $2,386 $2,481 $2,431 $2,341 $2,385
Total Risk Assessment value $2,386 $2,481 $2,431 $2,341 $2,385
SECTION 5G: ALTERNATE SCENARIO
There is no alternate scenario presented in this Financial Plan.
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, recently completed and 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 Regional Water System customers over the long term.
The opportunities for CPAU’s Water Utility to obtain additional supplies over the long term may
be in alternative water supplies such as recycled water, groundwater, and water from Valley
Water. These alternatives have been analyzed in the past, and were analyzed again most recently
in the 2017 Water Integrated Resource Plan4. Some of these alternatives may provide cost
savings or increased drought protection. For example, in November, 2019, the City of Palo Alto
entered into an agreement with Valley Water and the City of Mountain View that will provide (1)
funding for a salt removal facility at the Regional Water Quality Control Plant in Palo Alto to
improve the quality of non-potable recycled water used in Palo Alto and Mountain View, (2) a
transfer of treated wastewater from Palo Alto to Valley Water for use in the county south of
Mountain View, and (3) Palo Alto and Mountain View will have a future option to request new
potable or non-potable water supply from Valley Water if needed.
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
4 2017 Water Integrated Resource Plan: https://www.cityofpaloalto.org/civicax/filebank/documents/56088
March 2020 26 | Page
rise could result in greater exposure of utility infrastructure to inundation, possibly resulting in
higher maintenance and replacement costs. 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 its 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 begins with a system of reservoirs and tunnels in the
high Sierra in Yosemite County and water 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. As of December 31, 2018, nearly 96% of the WSIP regional
projects are complete.5 This has resulted and will continue to result in large increases in the
annual debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project
is completed, wholesale customers must start paying the debt service costs within 3 to 4 years.
The currently estimated WSIP completion date is December 30, 2021, as adopted by the SFPUC
in March of 2018. In large part because of these WSIP-related debt service costs, the SFPUC’s
wholesale water rate has already increased from $1.43 per CCF in FY 2009 to $4.10 per CCF in FY
2019, and is forecast to increase to slightly more than $5 per CCF by FY 2024 (these projections
are subject to change based on future SFPUC budget estimates). Figure 9 shows the SFPUC’s
actual wholesale water rate since FY 2009 and a projection through FY 2024 and beyond. Note
that the wholesale water rate decreased in FY 2014, but the apparent rate decrease is due to a
debt the BAWSCA agencies owed to SFPUC being directly paid by the BAWSCA agencies via bond
financing. This cost is in addition to the wholesale water rate and adds about $0.35 to $0.45 per
CCF to the wholesale rate.
Parts of SFPUC’s system not included in the WSIP will also need rehabilitation after the WSIP is
completed, and some of these projects are already included in the SFPUC’s rate projections, such
as additional Transmission, Supply & Storage and Treatment system upgrade projects,
particularly dam safety work slated to occur during the next 10 years. The SFPUC is also
conducting condition assessments of other “up-country” facilities, located in the Sierras, in the
coming years. Current estimates are that $1.8 billion will be needed between FY 2019 and FY
2028 primarily for these non-WSIP projects, but if these assessments identify other facilities that
need replacement, it may result in additional rate increases as new debt is issued to finance the
projects.
5 Second Quarter FY 2018-19 WSIP Regional Quarterly Report, http://www.sfwater.org/index.aspx?page=307
March 2020 27 | Page
In January 2020, the SFPUC provided an informal estimate for FY 2021 wholesale water rates to
remain at $4.10 per CCF. However, there is uncertainty surrounding the level of continued water
usage by the BAWSCA agencies as staff continues to analyze the drought rebound level.
Sales have been increasing on average since the end of the drought in 2017. If that trend
continues in upcoming years, rate projections may level out. However, if snow and rain do not
materialize in future years further calls for restricted usage may reoccur.
Figure 9: Historical and Projected SFPUC Wholesale Water Rate
During FY 2017 through FY 2019, the balancing account for SFPUC’s wholesale customers built
up an over-collection of revenue due to wholesale customer revenues exceeding costs. This is
because SFPUC sold more wholesale water than its sales projection used for rate setting.
Additional reasons for the balancing account balance are the cost savings in the wholesale
revenue requirement due to the SFPUC’s debt refinancing, and credits applied to the balancing
account due to BAWSCA’s annual review of the wholesale revenue requirement calculations.
These balancing account funds will be refunded approximately between FY 2021 and FY 2023,
which allows some rate stabilization of SFPUC’s wholesale rates. If it weren’t for this rate
stabilization effect of the balancing account, Palo Alto would pay higher rates in FY 2021 for water
purchased from SFPUC.
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
March 2020 28 | Page
• 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 2015 to FY 2019, overall Operations costs increased 2% per year on average (see Figure
10). Operations and Maintenance costs were the main driver, followed by Administration and
Resource Management costs. Transfers have varied from year to year, but staff expect transfers
to remain relatively low and stable through the forecast period.
Staff project inflationary increases for all operations costs with underlying assumptions for salary
and benefit costs, consumer price index, and other cost projections that match the City’s
long-range financial forecast.
Figure 10: Historical and Projected Operational Costs
SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP)
The Water Utility’s CIP consists of the following types of projects:
March 2020 29 | 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 the services associated with those mains.
• 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.
• 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.
Table 11 shows the FY 2020 projected budget and 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. As mentioned earlier in this report, $13.7 million of funds in the Current Budget column will
be carried over to FY 2021.
Table 11: Budgeted Water Utility CIP Spending ($000)
This budget does not include allocated overhead, which is estimated to be $0.83 million in 2020
and escalating at 2-4% annually thereafter as shown in the table below. Allocated overhead is
shown below, and added to the capital budget as a capital expenditure.
Table 12: Allocated Overhead
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Allocated Overhead $831,481 $851,636 $889,380 $914,372 $936,994 $960,456
The water main replacement program funds the replacement of deteriorating water mains or
water mains in liquefaction zones. The water system consists of over 236 miles of mains,
approximately 2,000 fire hydrants, and over 20,000 metered service connections spanning 9
pressure zones over a 26 square mile service area. In recent years, CPAU has already replaced
many miles of the most leak-prone and deteriorated pipes. CPAU is currently pursuing a pipe
replacement program of mains that are subject to recurring breaks based on maintenance history
and 13.5 miles of mains that were identified in the 2016 water system study. CPAU also
coordinates with the Public Works street maintenance program to avoid cutting into newly
repaved streets. The main replacement schedule in this financial plan will allow CPAU to replace
these mains on schedule.
Project Category
Current
Budget*
Spending,
Curr. Yr
Remain.
Budget**Committed FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
One Time Projects 6,117 (164) 5,953 384 2,000 - 3,500 - -
Water Main Replacement 8,159 (294) 7,865 546 - 9,350 - 9,350 -
Ongoing Projects 3,587 (349) 3,238 430 2,589 2,035 2,083 2,132 2,132
Customer Connections 750 (362) 388 11 775 800 825 850 850
TOTAL 18,613 (1,169) 17,444 1,372 5,364 12,185 6,408 12,332 2,982
*Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year
**Equal to CIP Reserves (Reserve for Reappropriations + Reserve for Commitments).
March 2020 30 | Page
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. The regional and even national focus on
infrastructure improvement has created labor shortages in the construction market,
leading to higher bids than were seen in the past.
These factors have created some uncertainty in future water main replacement costs. As bids for
new projects, such as upgrades to University Avenue, have consistently come in higher over the
last few years, future main replacement project budgets have been increased from prior year’s
estimates to reflect expected bid estimates. If the cost of water main replacement continues to
rise at its current levels, budgets may need to be revised further. In 1993, the long term water
main replacement program focused on replacing 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%. CPAU initiated a master planning process in FY 2015 that was completed in 2016 to evaluate
the current state of the distribution system and determine the necessary rate of main
replacement in the next 20 years. This study factored in seismically vulnerable mains as well as
the remaining old mains. Mains with recurring maintenance issues are added to projects as they
are identified. Preparing for the future, CPAU is in the process of evaluating the utility’s asbestos
cement pipe (ACP) mains. Over half the mains in the system are ACP. The ACP pipe has
performed very well, but CPAU wants to verify its life expectancy and plan for its future
replacement in 20 to 30 years.
This financial plan addresses these challenges in a way that will allow CPAU to meet its main
replacement needs. This financial plan includes approximately $8.5 million every other year for
main replacement construction instead of $5.7 million annually. This shift to larger main
replacement construction projects every other year will allow CPAU to meet its main
replacement needs while attracting more contractors to bid on the larger projects. Additionally,
this main replacement project schedule for water will be staggered with wastewater and gas
(water and wastewater construction every even year and gas construction every odd year), which
will ease scheduling difficulties for inspection coverage due to shared inspection staff across
water, wastewater, and gas utilities.
Included in the one-time project budget are seismic water system upgrades and/or replacement
for the Corte Madera, Park, Boronda and Dahl reservoirs to improve earthquake resistance. This
work will improve protection from water loss at these reservoirs in a seismic event. If an
March 2020 31 | Page
earthquake caused a significant water leak, this could lead to loss of water for firefighting, loss of
water storage for drinking, property damage from flooding or mudslides, and environmental
damages. Work has begun on this design of Corte Madera reservoir replacement project in 2019
and staff estimates the construction work and design for the replacement for Dahl and Park
reservoirs will cost an additional $2 million in FY 2021. AMI projects are now planned to begin in
2024 and will be included as an inter-fund transfer to the electric fund, or a loan payment to the
Electric Special Projects Reserve.
One project not included in this forecast is protecting the large water transmission line in the
foothills from seismic events. 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.
However, storing and maintaining several thousand feet of hose was not an ideal solution, since
multiple breaks could be a possibility. The alternative to the future replacement of the
transmission line is to move storage to locations that are not dependent on the transmission line
or replace the transmission lines with a pipe that is more earthquake resistant (HDPE). CPAU has
already replaced two tanks in the foothills and have to maintain fire service to the area, so
replacement is a more likely option. To date the concrete cylinder pipe has performed well and
is not in need of immediate replacement. Once the storage issues are addressed, the focus will
be to address the transmission main replacement. It could cost between $15 million and $20
million, which would likely require bond financing and would substantially affect the financial
forecast.
Ongoing Projects and Customer Connections are projected to cost approximately $2.9 million in
FY 2021 and increase to approximately $3 million 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 2021 to FY 2025 is funded by revenue from
utility rates and capacity fees. Appendix B: Water Utility Capital Improvement Program (CIP)
Detail shows the details of the plan.
Figure 11 below shows the projected CIP Reserve balances from FY 2021 through FY 2025. Figure
12 below shows the projected CIP expenditure fluctuating from year to year with the staggered
main replacement schedule, relative to the more steady capital program contributions to the CIP
Reserve. In FY 2021, the capital program contribution to the CIP Reserve is $8 million. The capital
program contribution increases with inflation at a projected level of 3%. Appendix A: Water
Utility Financial Forecast Detail shows the amount of the capital program contributions under
“Expenses” for FY 2021 through FY 2025.
March 2020 32 | Page
Figure 11: Projected CIP Reserve Balances FY 2021 to FY 2025
Figure 12: Projected CIP Expenditure,and Projected Capital Program Contribution,FY 2021 to
FY 2025
March 2020 33 | Page
SECTION 6D: DEBT SERVICE
The Water Utility’s annual debt service is roughly $3.2 million per year. This is associated with
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, and rehabilitation of existing wells and tanks) which will 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 offering 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.
Table 13 shows the cost of debt service for the Water Utility’s share of these bond issuances for
the financial forecast period:
Table 13: Water Utility Debt Service ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
2009 Water Revenue Bonds,
Series A (net of grants) 2,097 2,114 2,132 2,151 2,151
2011 Utility Revenue Bonds,
Series A 654 656 657 658 658
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 14 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. Amounts advanced from one utility to pay debt service for another utility
would be repaid by the borrowing fund.
March 2020 34 | Page
Table 14: 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. The next largest source in FY
2019 was interest income, which was higher than forecasted and represented 45% of revenue
from sources other than water sales; connection and capacity fees represented 37% of revenue
from sources other than water sales. The remainder consisted of a variety of miscellaneous
charges, transfers, and grants.
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 increased
substantially since then. Staff is forecasting revenue from these sources to increase at an average
of 2% per year in subsequent years.
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
Staff based the sales revenue projections 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, and this can
affect revenues substantially. In dry years customers use more water, increasing revenues, and
in wet years they use less. One factor that is difficult to predict is customer usage recovery post-
drought. It appears that customer irrigation usage has resumed, although total usage has not
reached pre-drought levels. FY 2019 usage levels were lower than FY 2018 usage levels across
commercial, residential and irrigation customer classes. This may be due to normal weather
variations rather than an indication of stabilizing post-drought usage levels. It remains uncertain
whether the ongoing pattern of usage declines will continue at the same levels seen before the
drought occurred. Staff will continue to monitor these patterns and adjust projections
accordingly.
SECTION 7: COMMUNICATIONS PLAN
In FY 2021, the communications focus for water utility rates will continue to be on cost drivers
for any rate increases, what CPAU is doing to keep costs down, and the value of our customers’
investment through their rates. One of the main reasons for water utility rate increases over the
past decade has been the infrastructure costs from the Water System Improvement Program
March 2020 35 | Page
(WSIP), which raised rates for all San Francisco Public Utilities Commission (SFPUC) customers.
Rising costs from our wholesale water supplier increase costs to CPAU, which must be recovered
through rates. Additionally, CPAU has made improvements in the local water distribution system
through capital projects to replace, upgrade or maintain the infrastructure. Market economics
have continued to drive up labor and material costs for such projects. As a not for profit, public
utility, CPAU must recover its costs through revenue generated by rates.
Staff maintain a dedicated webpage at cityofpaloalto.org/ratesoverview to provide an overview
on all utility rates, including information on costs, utilities supply resources, infrastructure
projects, and the value of what customers get for what they pay. Outbound marketing and
communication channels include bill inserts, web content, email newsletters, online videos,
print and digital ads, presentations to customer groups and social media. For all utility
outreach, while print materials and webpages still feature prominently, CPAU is placing more
emphasis on digital advertising content, direct mail, and in-person attendance at community
outreach events, festivals, and safety and emergency preparedness fairs.
For the water utility, CPAU will continue its outreach on making water conservation a way of life,
regardless of drought or rain conditions, which is in line with the State of California’s current
outreach campaign. CPAU promotes available water use efficiency rebates, incentives and easy
water-saving behaviors. Messaging reinforces the importance of water use efficiency, and that
although rates are increasing, efficient usage can help customers avoid seeing a significant water
cost increase on the utility bill. The City is also exploring opportunities to expand water reuse,
such as through recycled water, to further reduce demands on potable water supplies. To keep
customers apprised of the status and accomplishments of capital improvement projects, CPAU
maintains a network of project webpages at cityofpaloalto.org/utilityprojects Safety topics are
also emphasized year-round.
The communications team will provide rates information to internal and external stakeholders
including City staff who may interact with the public, the City Manager’s Office, Utilities Advisory
Commission (UAC), City Council, business and residential customers. Rates communications will
include a substantial update to the web, discussion in the Proposition 218 public hearing notice,
utility bill inserts, educational updates to Customer Service staff, and addition of a “breaking
news” page on the Utilities home website. Other communication methods will involve updates
to financial plans, presentations to UAC, Finance Committee, City Council and any media
coverage provided as a result of any rate increases.
WATER UTILITY FINANCIAL PLAN
March 2020 36 | 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 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
2
3 WATER SUPPLY
4 Purchases (CCF)5,507,153 4,671,433 4,127,085 4,172,038 4,859,576 4,600,987 4,730,282 4,659,327 4,589,437 4,520,596 4,452,787 4,385,995
5 Sales (CCF)5,047,148 4,433,016 3,858,825 3,852,185 4,609,893 4,411,473 4,511,342 4,443,672 4,377,017 4,311,361 4,246,691 4,182,991
6
7 BILL AND RATE CHANGES
8 Variable Charge (Supply)25%22%9%7%-6%0%0%0%0%9%13%5%
9 Residential Variable Charge (Distribution)-16%15%5%-2%-4%4%0%2%5%0%-2%4%
10 System Average Rate 0%14%7%2%1%1%0%0%3%3%4%4%
11 Average Customer Bill (projected)1%0%3%3%4%4%
12
13 STARTING RESERVES
14 Reappropriations (Non-CIP)- - - - - - 258,000 258,000 258,000 258,000 258,000 258,000
15 Commitments (Non-CIP)2,000 347,000 347,000 177,273 177,273 284,034 442,000 442,000 442,000 442,000 442,000 442,000
16 Restricted for Debt Service 3,225,000 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000
17 Emergency Plant Replacement 1,000,000 1,000,000 - - - - - - - - - -
18 Reappropriations & Commitments 10,423,000 10,847,000 9,656,000 10,530,000 13,266,000 11,326,000 15,090,505 6,930,333 6,930,333 6,930,333 6,930,333 6,930,333
19 Capital Reserve - - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 9,466,020 8,600,934 9,889,525 5,851,185
20 Rate Stabilization Reserve 17,272,000 20,133,000 6,567,000 1,877,437 4,069,437 4,069,437 4,069,437 9,069,437 12,569,437 12,569,437 12,569,437 9,500,000
21 Operations Reserve - - 11,663,836 14,606,828 12,734,948 13,741,000 12,294,351 12,721,406 13,215,248 12,126,287 11,332,404 11,888,718
22 Unassigned - - - - 7,056,052 7,182,707 8,357,649 5,861,621 1,281,096 - - -
23 TOTAL STARTING RESERVES 31,922,000 35,658,000 35,549,836 33,216,828 43,289,806 42,589,274 46,498,038 44,268,893 47,422,134 44,186,991 44,681,700 38,130,237
24
25 REVENUES
26 Net Sales 39,029,262 33,654,549 36,136,644 41,657,382 44,078,960 44,134,246 44,905,506 44,204,516 44,963,993 45,738,009 46,978,598 48,252,866
27 Other Revenues and Transfers In 4,053,920 7,504,848 3,258,936 5,829,851 4,116,200 5,218,976 5,299,292 5,361,211 5,423,739 5,486,826 5,574,801 5,664,347
28 TOTAL REVENUES 43,083,182 41,159,397 39,395,579 47,487,233 48,195,160 49,353,223 50,204,798 49,565,727 50,387,732 51,224,835 52,553,399 53,917,213
29
30 EXPENSES
31 Water Purchases 15,705,288 15,669,935 17,626,020 20,075,322 21,957,711 21,210,399 21,662,358 21,371,446 21,084,897 22,470,747 24,794,443 25,632,532
32 Operating Expenses 679.9%2.9%5.8% -54.7%
33 Administration
34 Allocated Charges 2,366,077 2,342,985 2,953,291 3,151,373 2,809,112 2,626,526 2,759,271 2,826,156 2,951,411 3,034,346 3,109,415 3,187,275
35 Rent 2,192,454 2,249,457 1,803,087 1,720,711 1,775,774 1,832,599 1,880,246 2,305,182 2,365,116 2,426,609 2,489,701 2,554,434
36 Debt Service 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 3,834,553 3,834,553 3,834,553
37 Transfers and Other Adjustments 335,808 63,612 (377,200) (256,608) 393,607 438,322 447,088 456,030 465,151 474,454 483,943 493,622
38 Subtotal, Administration 8,114,546 7,874,923 7,601,785 7,834,792 8,201,161 8,118,304 8,307,243 8,810,210 9,005,241 9,769,961 9,917,612 10,069,883
39 Resource Management 570,040 488,331 592,744 868,038 922,558 963,976 1,038,462 1,075,972 1,122,949 1,160,062 1,192,973 1,225,207
40 Operations and Mtc 4,986,274 5,283,426 5,038,570 5,290,549 5,725,236 5,964,589 6,420,642 7,650,244 7,984,407 8,247,094 8,480,157 8,708,782
41 Engineering (Operating)381,502 358,128 282,472 355,852 354,597 383,877 407,321 419,100 437,566 450,715 462,510 474,452
42 Customer Service 1,677,926 1,821,447 2,076,559 1,616,008 1,625,332 1,620,421 1,764,007 1,836,613 1,916,285 1,983,643 2,042,974 2,099,891
43 Allowance for Unspent Budget - - - - - (427,929) (458,667) (511,175) (533,555) (550,704) (565,963) (581,051)
44 Subtotal, Operating Expenses 15,730,288 15,826,254 15,592,128 15,965,239 16,828,885 16,623,240 17,479,008 19,280,964 19,932,892 21,060,771 21,530,262 21,997,163
45 Capital Program Contribution^8,335,605 8,580,372 9,082,021 4,110,131 8,169,097 11,791,292 5,132,404 8,000,000 8,240,000 8,487,200 8,741,816 9,004,070
46 TOTAL EXPENSES 39,771,182 40,076,561 42,300,170 40,150,692 46,955,693 49,624,930 44,273,771 48,652,410 49,257,790 52,018,717 55,066,522 56,633,765
47 9.04
48 ENDING RESERVES
49 Reappropriations (Non-CIP)- - - - - 258,000 258,000 258,000 258,000 258,000 258,000 258,000
50 Commitments (Non-CIP)347,000 347,000 177,273 177,273 284,034 442,000 442,000 442,000 442,000 442,000 442,000 442,000
51 Restricted for Debt Service 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000
52 Emergency Plant Replacement 1,000,000 - - - - - - - - - - -
53 Reappropriations & Commitments 10,847,000 9,656,000 10,530,000 13,266,000 11,326,000 15,090,505 6,930,333 6,930,333 6,930,333 6,930,333 6,930,333 6,930,333
54 Capital Reserve - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 9,466,020 8,600,934 9,889,525 5,851,185 7,479,328
55 Rate Stabilization Reserve 20,133,000 6,567,000 1,877,437 4,069,000 4,069,437 4,069,437 9,069,437 12,569,437 12,569,437 12,569,437 9,500,000 6,500,000
56 Operations Reserve - 11,663,836 14,606,828 12,734,948 13,741,000 12,294,351 13,215,248 12,126,287 11,332,404 11,888,718 12,172,166
57 Unassigned - - - 7,056,052 7,182,707 8,357,649 5,861,621 1,281,096 - - - -
58 TOTAL ENDING RESERVES 35,658,000 35,549,836 33,216,828 43,289,369 42,589,274 46,498,038 31,547,487 47,422,134 44,186,991 44,681,700 38,130,237 37,041,828
*For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the
reserves of other utilities to meet its debt covenants.
^ Capital Reserve Contribution represents levelized amount of CIP funding for the Capital reserve beginning in FY 2021
Appendix A (continued)
1 FISCAL YEAR FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
2
3 REVENUES
4 Net Sales 91%82%92%88%91%89%89%89%89%89%89%89%
5 Other Revenues and Transfers In 9%18%8%12%9%11%11%11%11%11%11%11%
6 TOTAL REVENUES 100% 100%100%100%100%100%100%100%100%100%100%100%
7
8 EXPENSES
9 Water Purchases 39%39%42%50%47%43%49%44%43%43%45%45%
10 Operating Expenses
11 Administration
12 Allocated Charges 6%6%7%8%6%5%6%6%6%6%6%6%
13 Rent 6%6%4%4%4%4%4%5%5%5%5%5%
14 Debt Service 8%8%8%8%7%6%7%7%7%7%7%7%
15 Transfers and Other Adjustments 1%0%-1%-1%1%1%1%1%1%1%1%1%
16 Subtotal, Administration 20%20%18%20%17%16%19%18%18%19%18%18%
17 Resource Management 1%1%1%2%2%2%2%2%2%2%2%2%
18 Operations and Mtc 13%13%12%13%12%12%15%16%16%16%15%15%
19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1%
20 Customer Service 4%5%5%4%3%3%4%4%4%4%4%4%
21 Allowance for Unspent Budget 0%0%0%0%0%-1%-1%-1%-1%-1%-1%-1%
22 Subtotal, Operating Expenses 40%39%37%40%36%33%39%40%40%40%39%39%
23 Capital Program Contribution 21%21%21%10%17%24%12%16%17%16%16%16%
24 TOTAL EXPENSES 100% 100%100%100%100%100%100%100%100%100%100%100%
25
26 RISK ASSESSMENT DETAIL
27 Distribution Revenue Variance 1,684,153 1,826,395 1,877,534 1,877,534 1,638,217 2,424,977 2,386,086 2,480,918 2,430,627 2,341,048 2,384,662
28 10% CIP Program Contingency 858,037 908,202 411,013 816,910 1,179,129 - - - - - -
29 Total Risk Asssessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,424,977 2,386,086 2,480,918 2,430,627 2,341,048 2,384,662
30 Projected Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,000 12,294,351 12,721,406 13,215,248 12,126,287 11,332,404 11,888,718 12,172,166
31 Operations Reserve, % of Risk Value 459%534%556%510%436%525%554%489%466%508%510%
32
33 OPERATIONS RESERVE
34 Min (60 days of non-capital expenses)- 5,230,611 5,145,323 6,320,551 6,704,783 6,585,497 6,807,792 7,063,654 7,131,338 7,552,327 8,019,411 8,242,017
35 Target (90 days of non-capital expenses)- 9,395,240 8,698,557 9,527,750 10,222,892 9,439,924 9,764,599 10,139,451 10,231,856 10,854,037 11,545,173 11,869,404
36 Max (120 days of non-capital expenses)- 13,559,870 12,251,790 12,734,948 13,741,000 12,294,351 12,721,406 13,215,248 13,332,374 14,155,747 15,070,936 15,496,791
37 Risk Assessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,424,977 2,386,086 2,480,918 2,430,627 2,341,048 2,384,662
38
39 DEBT SERVICE COVERAGE RATIO
40 Net Revenues (125% of Debt Service)876%878%931% 1020% 1104% 1075% 1115% 1161% 1172% 1035% 1108% 1142%
41 Available Reserves (5x Debt Service)*9.9 9.9 9.2 12.4 12.1 13.2 12.5 13.5 12.5 10.6 8.9 8.6
42
*For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of
other utilities to meet its debt covenants.
WATER UTILITY FINANCIAL PLAN
March, 2020 39 | Page
APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Project # Project Name
Reappropriated / Carried
Forward from Previous Years Current Year Funding Proposed Budget Amendments Spending, Current Year Remaining in CIP Reserve Fund Commitments FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
ONE TIME PROJECTSWS-07000 Regulation Station Imp.797,100 - - (17,861) 779,239 - - - - - -
WS-07001 Water Recycling Facilities 395,649 - - (4,629) 391,020 - - - - - -
WS-08001 Water Reservoir Coating 55,532 - - (12,795) 42,737 - - - - - - WS-09000 Seismic Water System 2,868,532 2,000,000 - (128,881) 4,739,651 383,656 2,000,000 - 3,500,000 - -
WS-08002 Emergency Water Supply - - - - - - - - - - -
Subtotal, One-time Projects 4,116,813 2,000,000 - (164,166) 5,952,647 383,656 2,000,000 - 3,500,000 - -
WATER MAIN REPLACEMENT PROGRAM
WS-12001 WMR- Project 26 505,400 - - (210,201) 295,199 546,315 - - - - -
WS-13001 WMR - Project 27 7,068,638 - - (84,203) 6,984,435 1 - - - - - WS-14001 WMR - Project 28 585,107 - - - 585,107 - - 8,500,000 - - - WS-15002 WMR - Project 29 - - - - - - - 850,000 - 8,500,000 -
WS-16001 WMR - Project 30 - - - - - - - - - 850,000 -
Subtotal, Water Main Replacement Prog.8,159,145 - - (294,404) 7,864,741 546,316 - 9,350,000 - 9,350,000 -
ONGOING PROJECTSWS-80014 Services/Hydrants - 400,000 - (82,054) 317,946 49,673 400,000 400,000 400,000 400,000 400,000 WS-80015 Water Meters 777,700 515,000 - (33,322) 1,259,378 - 530,450 546,364 562,755 579,638 579,638
WS-02014 W-G-W Utility GIS Data 280,222 456,177 - (130,324) 606,075 329,878 469,862 483,958 498,477 513,431 513,431
WS-13002 Equipment/Tools - 50,000 - - 50,000 - 50,000 50,000 50,000 50,000 50,000 WS-11003 Dist. Sys. Improvements 185,000 261,620 - (83,481) 363,139 48,851 269,469 277,553 285,880 294,456 294,456
WS-11004 Supply Sys. Improvements - 261,620 - (19,777) 241,843 1,707 269,469 277,553 285,880 294,456 294,456
WS-19000 Mayfield Reservoir 200,000 200,000 - (5,603) 200,000 PLC Upgrade 400,000 360,000 Subtotal, Ongoing Projects 1,442,922 2,144,417 - (348,958) 3,238,381 430,109 2,589,250 2,035,428 2,082,992 2,131,981 2,131,981
CUSTOMER CONNECTIONS (FEE FUNDED)WS-80013 Water System Extensions - 750,000 - (361,876) 388,124 11,424 775,000 800,000 825,027 850,000 850,000
Subtotal, Customer Connections - 750,000 - (361,876) 388,124 11,424 775,000 800,000 825,027 850,000 850,000
GRAND TOTAL 13,718,880 4,894,417 - (1,169,404)17,443,893 1,371,505 5,364,250 12,185,428 6,408,019 12,331,981 2,981,981
Funding Sources
Connection/Capacity Fees 929,348 - 985,946 1,015,524 1,045,990 1,195,819 1,195,819 Other Utility Funds (Asset Mgmt, GIS Systems)295,260 - 268,418 295,260 304,118 313,242 322,640
Utility Rates 4,894,417 - 4,109,886 10,874,644 5,057,911 10,822,920 1,463,522
CIP-RELATED RESERVES DETAIL 6/30/2019 Actual 6/30/2019(Unaudited)Reappropriations (excl. Bond Funded)13,718,880 16,072,388
Commitments (excl. Bond Funded)1,067,702 1,371,505
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March, 2020 40 | 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.
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:
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March, 2020 41 | Page
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 and approved by Council
resolution.
Minimum Level 20% of the maximum CIP Reserve guideline
level
Maximum Level Average annual (12 month)6 CIP budget, for
48 months of budgeted CIP expenses7
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: 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 there are funds in this reserve in excess of the maximum level staff
must propose in the next Financial Plan to transfer these funds to another reserve, return
the funds to ratepayers, or designate a specific use of the funds for CIP investments that
will be made by the end of the next Financial Planning Period. 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. The Council may approve exceptions to this requirement, when
proposed by staff to provide greater rate stabilization to customers.
6 Each month is calculated based upon 1/12 of the annual budget.
7 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual
average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use
to derive the annual average would be FY 2022 through FY 2025 etc.
WATER UTILITY FINANCIAL PLAN
March, 2020 42 | 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.
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March, 2020 43 | 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 Valley Water, and tracking of
legislation and regulation related to the water industry.
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March , 2020 1 | Page
APPENDIX A: 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.
ATTACHMENT C
March , 2020 2 | 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 and approved by Council
resolution.
Minimum Level 20% of the maximum CIP Reserve guideline
level
Maximum Level Average annual (12 month)1 CIP budget, for 48
months of budgeted CIP expenses2
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) 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 there are funds in this reserve in excess of the maximum level staff
must propose in the next Financial Plan to transfer these funds to another reserve, return
the funds to ratepayers, or designate a specific use of the funds for CIP investments that
will be made by the end of the next Financial Planning Period. 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
1 Each month is calculated based upon 1/12 of the annual budget.
2 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual
average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use
to derive the annual average would be FY 2022 through FY 2025 etc.
ATTACHMENT C
March , 2020 3 | Page
Financial Planning Period. The Council may approve exceptions to this requirement, when
proposed by staff to provide greater rate stabilization to customers.
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
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March , 2020 4 | Page
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.