HomeMy WebLinkAboutStaff Report 11886City of Palo Alto (ID # 11886)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/6/2021
City of Palo Alto Page 1
Summary Title: FY 2022 Wastewater Collection Financial Plan and Rates
Title: Staff Recommendation That the Finance Committee Recommend the
City Council Adopt a Resolution Approving the Fiscal Year (FY) 2022
Wastewater Collection Utility Financial Plan Including Transfers to and From
Wastewater Collection Utility Reserve Accounts and an Amendment to the
Wastewater Collection Utility Reserves Management Practices; and Adopt a
Resolution Adjusting Wastewater Rates by Amending Rate Schedules S-1
(Residential Wastewater Collection and Disposal), S-2 (Commercial
Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection
and Disposal) and S-7 (Commercial Wastewater Collection and Disposal –
Industrial Discharger)
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) 2022 Wastewater Collection Financial Plan (linked here,
Attachment C); and
b.Up to a $2.2 million transfer from the Operations Reserve to the Capital
Improvements Projects Reserve in FY 2021; and
c.Up to a $4.35 million transfer from the Operations Reserve to the Capital
Improvement Projects Reserve in FY 2022; and
d.Amendments to the Wastewater Collection Utility Reserves Management
Practices in Appendix C to the FY 2022 Wastewater Collection Financial Plan
(linked here, Attachment D) and separately in Redline of Amended Wastewater
Collection Utility Reserves Management Practices (linked here, Attachment E).
2.Adopt a resolution (Attachment B) approving:
a.Adjustments to Wastewater Collection Utility Rates Via the Amendment of Rate
Schedules S-1 (Residential Wastewater Collection and Disposal), S-2
(Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater
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Collection and Disposal) and S-7 (Commercial Wastewater Collection and
Disposal – Industrial Discharger) (linked here, Attachment F).
EXECUTIVE SUMMARY
The FY 2022 Wastewater Collection Utility Financial Plan includes projections of the utility’s
costs and revenues through FY 2026. The Financial Plan projects costs to rise over the forecast
horizon due primarily to increasing treatment costs related to capital improvements and
increasing operational costs at the Regional Water Quality Control Plant (RWQCP), as well as
increasing collection system costs and capital. A 3% overall revenue increase is needed in FY
2022 and FY 2023 and staff projects overall revenue increases of approximately 5% annually
through FY 2026 to cover current and projected costs. In FY 2022, the increase in revenues
corresponds to an average residential rate increase of 4.7%, an average commercial rate
increase of 1.5% and a rate decrease for restaurant customers of 2.1%. Raftelis Financial
Consultants, Inc. reviewed and updated the cost of service study and made recommendations
that are incorporated into the attached Financial Plan to ensure costs are equitably allocated to
each customer class; the report is titled “City of Palo Alto 2021 Wastewater COS Report”
(Linked Document, Attachment G). As a result of this study, customers in each customer class
will experience different rate impacts than the overall rate increase as outlined in Table 1
below.
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 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.
The City’s sewer system collects wastewater from Palo Alto residents and delivers it to the
RWQCP for treatment. The City of Palo Alto runs the RWQCP, which also treats wastewater for
five other partner agencies (Stanford, East Palo Alto Sanitary District, Los Altos Hills, Lost Altos,
and Mountain View). Some of the wastewater for certain partner agencies is also transported
across the City’s wastewater collection system.
The Wastewater Collection Utility has two main costs: the costs of operating the collection
system and Palo Alto’s share of the cost of running the RWQCP.1 Both cost components have
been increasing and are expected to continue to increase. The RWQCP has been in operation
since 1934. Aging equipment, new regulatory requirements, and the movement to full
1 The costs associated with the RWQCP are shared among Palo Alto and the partner agencies based on wastewater
flows and the composition of the wastewater each agency sends to the treatment plant. Palo Alto’s share varies
from year to year, but is roughly one third of the total cost.
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sustainability will require rehabilitation, replacement, and new processes. Palo Alto has seen
increases in operational costs in recent years, and debt service for the plant is expected to
increase substantially in coming years as a major rehabilitation and replacement plan adopted
in 2012 (Long Range Facilities Plan) is implemented. Rehabilitation and replacement of plant
equipment that has been in use for over 40 years is necessary to ensure the city can provide
wastewater treatment safely and in compliance with regulatory requirements for the discharge
of treated wastewater 24 hours a day. A more detailed review of the capital improvement plans
at the RWQCP is tentatively expected on April 20, 2021 with the Finance Committee. Collection
system costs are also increasing, though not as much as treatment costs. This is primarily driven
by increases in collection system capital costs: the cost of underground construction to replace
aging sewer mains has nearly doubled since 2008. Other operational costs have also increased
(e.g. salaries and benefits and overhead), but more slowly than treatment and collection
infrastructure-related costs.
This Financial Plan projects revenue losses due to COVID-19 primarily from the Restaurant and
Commercial customer classes. Staff expects annual revenue loss related to COVID-19 to be
highest during FY 2022 at $0.9 million and projects recovery through FY 2025. Total revenue
loss included in the estimate is $2.6 million for all five utilities from FY 2021 through FY 2025.
The projection also includes approximately $0.2 million due to COVID-19 related bill
delinquencies.
The UAC reviewed the preliminary financial forecasts at its December 2, 2020 meeting (UAC
Report #11649). Since that time, staff adjusted the budget downward for each upcoming
sanitary sewer main replacement project and deferred two of the projects by one year in order
to lower the needed rate increases. The UAC reviewed the Wastewater Collection Financial Plan
at its February 3rd, 2021 meeting (UAC Report #11882). These preliminary rates were reviewed
by the Finance Committee on February 26, 2021 (Finance Committee Report #11864).
DISCUSSION
Staff completes an annual assessment of the financial position of the City’s wastewater
collection utility to ensure adequate revenue to fund operations, in compliance with the cost of
service requirements set forth in the California Constitution (Proposition 218). This includes
making long-term projections of market conditions, the physical condition of the system, and
other factors that could affect utility costs, and setting rates adequate to recover these costs.
This year, Raftelis Financial Consultants, Inc. completed a Cost of Service and Rate Study titled
“City of Palo Alto 2021 Wastewater COS Report” (linked here).2 This study recommends
adjustments to ensure costs are equitably allocated to each customer class. The rates
presented in Table 1 below and in the attached Financial Plan incorporate the results and
recommendations of the study.
2 A cost of service study 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.
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Proposed Actions for FY 2022
1. Increase overall revenues by 3% and adopt cost of service adjustments to the rate
schedules that combined would
a. increase residential monthly service charges in Rate Schedule S-1 (Residential
Wastewater Collection and Disposal) by approximately 4.7%,
b. increase S-2 (Commercial Wastewater Collection and Disposal) volumetric rates
by approximately 1.5% and eliminate minimum monthly charges,
c. decrease S-6 (Restaurant Wastewater Collection and Disposal) volumetric rates
by approximately 2.1% and eliminate minimum monthly charges and
d. update the S-7 (Commercial Wastewater Collection and Disposal – Industrial
Discharger);
2. Transfer up to $2.2 million from the Operations Reserve to the CIP Reserve in FY 2021;
and
3. Approve up to a $4.35 million transfer from the Operations Reserve to the CIP Reserve
in FY 2022;
4. Amend the Wastewater Collection Utility Reserves Management Practices (Redline of
Amended Wastewater Collection Utility Reserves Management Practices (Linked
Document).
The FY 2022 Wastewater Collection Utility Financial Plan (Linked Document) describes these
proposed actions in detail. Staff proposes to adjust wastewater rates as shown in Table 1
below, effective July 1, 2021. The adjustments increase the system average rate by 3% and
were made in accordance with the recommendations in the COS Study. These rate changes are
included in the amended rate schedules S-1 (Residential Wastewater Collection and Disposal),
S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection
and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger)
(linked here). Residential customers pay a monthly service charge while commercial customers
are charged based on average winter water usage to minimize the effects of irrigation.
Restaurant customers are charged based on monthly water usage as they generally lack
irrigation, but are charged higher rates due to higher grease and oil discharges necessitating
more maintenance cost.
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Table 1: Current and Proposed Wastewater Collection Charges
Current
(7/1/2019)
Proposed
(7/1/2021)
Change
$/mo. %
Monthly Service Charges ($/month)
S-1 (Residential) Service
charge
$41.37 $43.32 $1.95 4.7%
Quantity Rates
S-2 (Commercial) $/CCF 7.97 8.09 0.12 1.5%
S-6 (Restaurant) $/CCF 12.33 12.07 (0.26) (2.1%)
(1) Monthly charges for S-1 (Residential) are fixed monthly charges.
(2) For S-2 (Commercial) customers, the quantity charges are based upon the
average water usage for the months of January, February and March and
applied in the following July. For Restaurant customers, the quantity charges
are based on monthly metered water usage. Estimated bills for S-2 and S-6
customers would be $113.26 and $675.92 respectively.
(3) Currently there are no customers on the S-7 (Industrial) rate schedule;
however, CPAU continues to maintain the S-7 rate schedule in case there is a
need for the rate schedule in the future. The attached Financial Plan updates
the S-7 Industrial rates to reflect the COS adjustments.
As noted above, staff has updated the COS study according to the attached memo. It was
updated to reflect actual winter (January – March) water usage patterns from associated water
accounts (data reflects pre-COVID usage). Also, over the past 10 years the 15 industrial
customers that used to be served by the Wastewater Collection Utility have either left the
system, moved industrial operations out of Palo Alto, or are now considered commercial
customers rather than industrial due to changes in operations. Those customers accounted for
approximately 11% of the estimated wastewater flows. With the flow changes of those
customers and other changes in the non-residential flows, residential customers have increased
their relative percentage of wastewater flows while non-residential customers have decreased
their relative contributions to wastewater flows. This is a primary reason for the increases in
rates for residential customers relative to commercial customers. The restaurant customer class
pays for 5% of the total revenue both at current and proposed rates (see Table 2 below).
However, because the customer class is so small, the approximately $14,000 drop in revenue
required leads to a 1.4% decrease in customer class revenue and a 2.1% decrease in restaurant
rates.
The analysis also recommended removing the minimum charge for commercial and restaurant
customer classes, as the volumetric charge is an equitable way to capture the variability in
sewer usage among non-residential customers. Commercial customers will be billed
volumetrically based on average water usage for the months of January, February and March,
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applied through the year starting in the following July.3 New commercial customers without an
applicable usage history will be conservatively presumed to have a usage of 4.8ccf per month,
until a water usage history is established. Restaurant customers’ volumetric charge will be
based each month on metered water us during the prior metered-read period.
Meanwhile, over the past 10 years, Palo Alto’s wastewater has become more concentrated as
water conservation has occurred system-wide. These changed usage patterns and strength
changes together with updated costs reflect the current cost of Wastewater Collection service.
Based upon the analysis, the relative changes to customer class groups are shown in Table 2
below:
Table 2: Revenue Allocation by Customer Class in FY 2022
Customer Class
Customer Class Revenue
Difference
Customer
Class
Percentage of
Total Revenue
at Current
Rates
Customer
Class
Percentage of
Total Revenue
at Cost of
Service
Average Rate
Impact %
(from Table 1)
At Current
Rates
At Cost of
Service
Residential (S-1) $12,924,319 $13,531,403 4.7% 63% 64% 4.7%
Commercial (S-2) $6,482,022 $6,467,761 (0.2%) 32% 31% 1.5%
Restaurant (S-6) $1,031,313 $1,017,018 (1.4%) 5% 5% (2.1%)
Industrial (S-7) $0 $0 $0 0% 0% 0%
TOTAL $20,437,654 $21,016,183 2.8% 100% 100% -
As a result of the COS update together with the overall revenue increase of 3%, residential
customers (S-1) will see a 4.7% rate increase (on average), Commercial (S-2) a 1.5% rate
increase, and Restaurant (S-6) a 2.1% rate decrease. Individual customer impacts will vary for
non-residential customers depending on usage. Note that although there is a rate increase of
1.5% for commercial customers, overall revenue from this class decreases by 0.2%. This is due
to the elimination of the minimum charge.
FY 2022 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 3 shows the projected rate adjustments included in the Wastewater Collection Utility
Financial Plans and their impact on a residential wastewater bill.
3 This is done since the rainy and cool winter months are the period when water use is well correlated to sewer
use, and when fluctuations in water use due to landscape needs is minimized.
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Table 3: Projected Rate Adjustments and Residential Bill Impact, FY 2022 to FY 2026
FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Wastewater Collection Utility
Overall Rate Adjustment
3%* 3% 5% 5% 5%
Residential Rate Adjustment 4.7% 3% 5% 5% 5%
Estimated Bill Impact for
Residential Customers ($/mo) $1.95 $1.30 $2.24 $2.35 $2.47
* The overall revenue increase proposed in FY 2022 is 3%. However, due to the COS
adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY
2022.
As noted above, one of the main drivers for the increase in the Wastewater Collection Utility’s
costs (and therefore rates) over the next several years is the cost for wastewater treatment,
which is projected to increase by about 7.9% per year as the City makes several upgrades to the
RWQCP. A major project at the RWQCP, the Sludge Dewatering and Truck Loadout Facility, was
completed in 2019 which allowed the retirement of the Plant’s two sewage sludge incinerators
that were in operation since 1972. Future projects include secondary treatment upgrades as
well as replacement of the headworks facility. Beyond FY 2026 some of the upward pressure on
treatment costs are expected to be relieved as the projected growth in treatment costs
decrease to approximately 3% on average annually between FY 2026 and FY 2031.
Wastewater Collection operations and capital costs (excluding costs associated with treatment)
are projected to remain flat on average; operations costs are expected to grow an average of
2% annually, and this plan reflects deferrals of sanitary sewer main replacements and
decreasing the budget for each upcoming main replacement to lower the overall collection
system CIP budget. Over the last few years, main replacement costs have been increasing for
utilities due to economic activity in the Bay Area causing construction cost inflation. It is likely
that this trend will continue in the short term. Staff has not observed any dip in construction
costs although more information will be known once the Utilities Department issues more
construction bids. Additionally, the California Construction Cost index shows 2.8% increase
from December 2019 – December 2020.4 Wastewater Collection utility undertakes a larger
main replacement project every other year with the next project occurring in FY 2022. The
budget for the upcoming sanitary sewer main replacement will be reduced and the FY 2024 and
FY 2026 main replacement projects will be deferred by one year and their budgets reduced.
Undertaking a larger main replacement project every other year allows staff to continue
replacing wastewater mains that are in poor condition while easing scheduling difficulties for
inspection coverage due to shared staffing across water, wastewater, gas and large
development services projects.
Figure 1 and 2 below illustrate the increase in the Wastewater Collection Utility’s costs. The
figures use FY 2016 as a comparison year because FY 2017 and FY 2018 are atypical years, due
4 https://www.dgs.ca.gov/RESD/Resources/Page-Content/Real-Estate-Services-Division-Resources-List-
Folder/DGS-California-Construction-Cost-Index-CCCI
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to one-time cost savings related to delayed main replacement projects. Note that Figure 1
reflects the capital funded by rate revenue in FY 2016, while the FY 2026 bar shows the capital
program contribution to the CIP Reserve that will occur if Council approves the proposal in the
attached Financial Plan. In the following figure, all RWQCP costs are included in “Treatment,”
while “Capital” and “Operations” include only collection system costs.
Figure 1: FY 2016 and FY 2026 costs ($ millions)
Figure 2: Percentage of Total Cost Increase From FY 2016 to FY 2026 Attributed to Treatment,
Capital, and Operations Costs
Figure 1 and 2 show that 83% of the increase from FY 2016 to FY 2026 is due to treatment cost
increases, 17% is due to increases in operations costs. Collection capital costs are not expected
to increase on average over this time period due to the project deferrals projected to keep rate
increases to a minimum.
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To promote rate stability and provide continuity in collection system CIP expenditure levels, this
plan establishes a consistent annual level of capital program contribution to the CIP Reserve.
The CIP Reserve will then absorb annual spending fluctuations, reducing or eliminating the
impact on rates. Figure 3 below shows the projected CIP Reserve balances.
Staff proposes modifications to the Wastewater Collection 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.5 Staff also proposes
that the Wastewater Collection 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.
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.6 The new minimum CIP Reserve level is 20% of the maximum CIP
Reserve guideline level. This maximum in FY 2022 is $3.6 million and the minimum in FY 2022 is
$0.7 million. Table 4 below shows the planned capital spending in row 11 fluctuating from year
to year with the staggered main replacement schedule, and shows the stable capital program
contributions to the CIP Reserve in rows 8 and 9. Figure 4 shows reserve balance changes for
each reserve from FY 2020 and projected through FY 2026.
5 Each month is calculated based upon 1/12 of the annual budget.
6 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 2022 to FY 2026
Figure 4: Wastewater Collection Utility Actual Reserve Levels for FY 2020 and Projected
Reserve Levels through FY 2026
City of Palo Alto Page 11
Table 4: Operations, Rate Stabilization and CIP Reserves Starting and Ending Balances,
Revenues, Transfers To/(From) Reserves, Expenses, Capital Program Contribution To/(From)
Reserves, and Operations Reserve Guideline Levels for FY 2021 to FY 2026 ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Starting Balance
(1) Operations 5,661 6,188 5,907 5,913 5,642 5,750
(2) Rate Stabilization 342 342 342 342 295 295
(3) CIP 978 3,178 2,559 3,681 3,861 2,461
Revenues
(4) Total Revenue 21,404 21,452 22,359 23,707 25,127 26,606
Transfers
(5) Operations (2,200) - - 47 - 295
(6) Rate Stabilization - - - (47) - (295)
(7) CIP 2,200 - - - - -
Capital Program
Contribution
(8) Operations - (4,350) (4,459) (4,593) (4,730) (4,872)
(9) CIP - 4,350 4,459 4,593 4,730 4,872
Expenses
(10) Total Expenses other than
CIP and Debt Service
(18,550) (17,254) (17,764) (19,304) (20,289) (22,901)
(11) Debt Service (128) (129) (129) (129) - -
(12) Planned CIP (1,231) (4,969) (3,337) (4,413) (6,130) (4,251)
Ending Balance
(1)+(4)+(5)+(8)+(
10)+(11)* Operations/Unassigned 6,188 5,907 5,913 5,642 5,750 4,878
(2)+(6) Rate Stabilization 342 342 342 295 295 -
(3)+(7)+(9)+
(12)* CIP 3,178 2,559 3,681 3,861 2,461 3,082
Operations Reserve
Guideline Levels
(13) Minimum 2,868 2,756 3,126 3,224 3,105 3,867
(14) Maximum 7,170 6,889 7,815 8,060 7,763 9,667
* Note: The current year, FY 2021, differs from FY 2022 through FY 2026 in that Planned CIP
(item 12) is reflected as an expense in the Operations Reserve; the proposal in this Financial
Plan for FY 2022 – FY 2026 reflects Planned CIP (item 12) as an expense in the CIP Reserve and
reflects the capital program contribution as an expense in the Operations Reserve.
Capital Projects & Reserve
Table 4 above shows the anticipated CIP planned for FY 2021 through FY 2026. Beginning in FY
2022, capital projects will be funded from CIP Reserves instead of from the Operations Reserve.
Table 4 shows the capital program contribution from the Operations Reserve to the CIP reserve
in rows 8 and 9. The capital program contribution would be made annually from the Operations
Reserve to the CIP Reserve ($4.35 million in FY 2022, and $4.35 million in FY 2023 and future
years plus annual inflationary increases) to adequately fund the CIP budget. $4.35 million 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 2022
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through FY 2025 less an allowance for unspent funds and with consideration of making sure the
CIP Reserve and Operations Reserve remain within the guideline ranges throughout the
forecast period and excluding $1.4 million in reappropriated dollars that are expected to be
available in FY 2022. Having the annual capital contribution to the CIP Reserve in place will
address uneven annual funding associated with ongoing CIP projects, and will be a source for
one-time or immediately needed projects.
Wastewater Bill Comparison with Surrounding Cities
The annual sewer bill for a Palo Alto resident is $496.44 under current rates, 29% lower than the
average neighboring community. Table 5 shows the monthly sewer bills for residential
customers compared to what they would be in surrounding communities. These communities
are the same six that Palo Alto compares itself to in the annual budget across Water,
Wastewater, Gas, and Electric industries.
Table 5: Residential Monthly Equivalent Sewer Bill Comparison ($)
Palo Alto
Neighboring Communities
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View Los Altos Hayward
41.37 102.00 85.44 44.53 42.90 39.63 35.81
If Council adopts the proposed wastewater rate change, and assuming other agencies do not
change their sewer rates, Palo Alto’s residential rates would remain 26% lower than the average
neighboring community. Furthermore, under the attached financial plan and cost of service
study, Palo Alto’s residential monthly bills would rise to $51.68 per month in FY 2026 which is
still under the current neighboring community average of $58.38 per month. Staff has no
information at this time as to whether or when the surrounding communities are planning
wastewater rate changes. However, as most agencies are also requiring renovations to their
respective treatment plants, increases at other agencies are likely. Note that as partners in the
RWQCP, Mountain View and Los Altos will be affected by the same treatment cost increases as
Palo Alto.
Table 6 shows the monthly sewer bills for Commercial and Restaurant customers. Palo Alto is
less competitive with surrounding cities with regards to commercial sewer rates but is not the
most expensive jurisdiction. Palo Alto’s commercial bills are 10% higher than the neighboring
community average while Palo Alto’s restaurant bills are 6% below the neighboring community
average. Table 6 assumes 14 units of water for general commercial and 56 units of water for
restaurants.
Table 6: Non-Residential Monthly Equivalent Sewer Bill Comparison ($)
Palo
Alto
Neighboring Communities
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View Los Altos Hayward
City of Palo Alto Page 13
General
Commercial
111.58 138.04 112.70 74.06 134.12 68.06 81.62
Restaurant 690.48 1,163.68 1,079.68 743.12 614.88 272.26 541.52
Changes from Prior Financial Forecasts
Staff projects the need for ongoing annual wastewater rate increases from FY 2022 through FY
2026. Table 7 compares current rate projections to those projected in the last two year’s
Financial Forecasts. The FY 2022 rate projections are lower than was projected last year for FY
2022 and FY 2023 and this is in part because of deferrals of sanitary sewer replacement projects
to lower collection system costs. The FY 2022 projections reflect current information on capital
improvement costs both in Palo Alto’s streets as well as at the RWQCP.
Table 7: Projected Wastewater Rate Changes for FY 2022 to FY 2026
Projection FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Current
(FY 2022 Financial Plan) 3%* 3% 5% 5% 5%
FY 2021 Financial Forecast7 5% 5% 5% 5% -
FY 2020 Financial Plan 6% 6% 6% - -
* The overall revenue increase proposed in FY 2022 is 3%. However, due to the COS
adjustments, the residential customers will receive a rate increase of approximately
4.7% in FY 2022.
Changes to Reserve Guidelines
Staff proposes modifications to the Wastewater Collection Utility Reserves Management
practices to synchronize them with the 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 Wastewater Collection 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.
COMMISSION REVIEW AND RECOMMENDATION
The Finance Committee reviewed preliminary financial forecasts at its February 16, 2021
meeting (Staff Report #11864). The Utilities Advisory Commission (UAC) reviewed the
7 Presented to the Finance Committee, April 21, 2020.
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Wastewater Financial Plan at its February 3, 2021 meeting (Utilities Advisory Commission Staff
Report #11882). The UAC accepted staff’s recommendation and approved the proposed FY
2022 Financial Plan unanimously. The meeting minutes were not available as of the time of
publishing this report. The discussion at the UAC was focused on the shifts in cost allocation
between residential and non-residential customers. Some Commissioners requested more
detail about cost allocation among residential and commercial customers, and staff explained
how the COSA was developed to ensure the proposed rates accurately reflect the cost to serve
all customer classes. There was also some interest in looking at other comparator cities to
understand how bills for customers served by Palo Alto’s RWQCP compared to bills for
customers served by other treatment plants.
NEXT STEPS
If the Finance Committee supports the proposed rate adjustments, staff will send notification of
the potential rate increases to customers as required by Article XIIID of the State Constitution
(added by Proposition 218). The City Council will consider the proposed Financial Plans and
amended rate schedules with the FY 2022 budget, at which time the public hearing required by
Article XIIID of the State Constitution will be held.
RESOURCE IMPACT
Staff projects normal year revenues for the Wastewater Collection Utility to increase by roughly
3% ($612,000) in FY 2022 as a result of the proposed rate changes. See the FY 2022 Wastewater
Collection Utility Financial Plan (Linked Document) for a more comprehensive overview of
projected cost and revenue changes for the next five years. The FY 2022 Budget is being
developed concurrent with these rates and depending on final rates, adjustments to the budget
may be necessary at a later time.
POLICY IMPLICATIONS
The proposed wastewater rate adjustments are consistent with Council-adopted Reserve
Management Practices that are part of the Financial Plans. Staff developed the wastewater rate
adjustments using a cost of service study and methodology that was completed in compliance
with the cost of service requirements of Proposition 218.
ENVIRONMENTAL REVIEW
The Finance Committee’s review and recommendation to Council on the proposed FY 2022
Wastewater Collection Financial Plan and rate adjustments do not meet the definition of a
project, pursuant to Section 21065 of the California Environmental Quality Act, thus no
environmental review is required.
Attachments:
• Attachment A: Resolution Approving Financial Plan and Reserve Mgmt Practices
• Attachment B: Resolution Approving FY 2022 Wastewater Rates
• Attachment C: FY 2022 Wastewater Collection Utility Financial Plan
• Attachment D: Appendix C of the Wastewater Collection Utility Reserves Management
Practices
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• Attachment E: Redline of Amended Wastewater Collection Utility Reserves Mgmt
Practices
• Attachment F: Rate Schedule S
• Attachment G: 2021 Wastewater COS Report
Attachment A
6055473
* NOT YET APPROVED *
Resolution No.__________
Resolution of the Council of the City of Palo Alto Approving the FY 2022
Wastewater Collection Utility Financial Plan and Amending the Wastewater
Collection Utility Reserves Management Practices
R E C I T A L S
A. Each year the City of Palo Alto (“City”) assesses the financial position of its utilities with
the goal of ensuring adequate revenue to fund operations. This includes making long-
term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs.
It does this with the goal of providing safe, reliable, and sustainable utility services at
competitive rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other aspects of
its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and
made a 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 2022 Wastewater Collection Utility Financial
Plan.
SECTION 2. The Council hereby approves the following transfers as described in the FY 2022
Wastewater Collection Utility Financial Plan:
a. Up to $2,200,000 in FY 2021 from the Operations Reserve to the
Capital Improvements Projects Reserve; and
b. Up to $4,350,000 in FY 2022 from the Operations Reserve to the
Capital Improvements Projects Reserve. Annual capital program
contributions beyond FY 2022 will be approved by Resolution
annually.
SECTION 3. The Council hereby approves the amendments to the Wastewater Collection
Utility Reserves Management Practices as shown in Attachment D.
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Attachment A
6055473
//
SECTION 4. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act’s 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
Attachment B
* NOT YET APPROVED *
6055474
Resolution No. _________
Resolution of the Council of the City of Palo Alto Adjusting
Wastewater Rates by Amending Rate Schedules S-1 (Residential
Wastewater Collection and Disposal), S-2 (Commercial Wastewater
Collection and Disposal), S-6 (Restaurant Wastewater Collection and
Disposal) and S-7 (Commercial Wastewater Collection and Disposal –
Industrial Discharger)
R E C I T A L S
A. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of
the City of Palo Alto may by resolution adopt rules and regulations governing utility services,
fees and charges.
B. On ____, 2021, the City Council held a full and fair public hearing regarding the
proposed rate increase and considered all protests against the proposals.
C. As required by Article XIII D, Section 6 of the California Constitution and
applicable law, notice of the ________ 2021 public hearing was mailed to all City of Palo Alto
Utilities wastewater customers by _______, 2021.
D. The City Clerk has tabulated the total number of written protests presented by
the close of the public hearing, and determined that it was less than fifty percent (50%) of the
total number of customers and property owners subject to the proposed wastewater rate
amendments, therefore a majority protest does not exist against the proposal.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule S-1 (Residential Wastewater Collection and Disposal) is hereby amended to read
as attached and incorporated. Utility Rate Schedule S-1, as amended, shall become effective
July 1, 2021.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule S-2 (Commercial Wastewater Collection and Disposal) is hereby amended to read
as attached and incorporated. Utility Rate Schedule S-2, as amended, shall become effective
July 1, 2021.
SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule S-6 (Restaurant Wastewater Collection and Disposal) is hereby amended to read
as attached and incorporated. Utility Rate Schedule S-6, as amended, shall become effective
July 1, 2021.
Attachment B
* NOT YET APPROVED *
6055474
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) is
hereby amended to read as attached and incorporated. Utility Rate Schedule S-7, as amended,
shall become effective July 1, 2021.
SECTION 5. The Council finds that the revenue derived from the wastewater rates
approved by this resolution do not exceed the funds required to provide wastewater service,
and the revenue derived from the adoption of this resolution shall be used only for the
purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto.
SECTION 6. The Council finds that the fees and charges adopted by this resolution
are charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
//
//
//
//
//
//
//
//
//
//
//
//
//
//
//
Attachment B
* NOT YET APPROVED *
6055474
//
SECTION 7. The Council finds that the adoption of this resolution changing wastewater
collection rates to meet operating expenses, purchase supplies and materials, meet financial
reserve needs and obtain funds for capital improvements necessary to maintain service is not
subject to the California Environmental Quality Act (CEQA), pursuant to California Public
Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a).
After reviewing the staff report and all attachments presented to Council, the Council
incorporates these documents herein and finds that sufficient evidence has been presented
setting forth with specificity the basis for this claim of CEQA exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Assistant City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
FY 2022 WASTEWATER
COLLECTION UTILITY
FINANCIAL PLAN
FY 2022 TO FY 2026
Attachment C
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 2 | Page
FY 2022 WASTEWATER COLLECTION
UTILITY FINANCIAL PLAN
FY 2022 TO FY 2026
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations................................................................................ 4
Section 2: Executive Summary and Recommendations ........................................................... 4
Section 2A: Overview of Financial Position .................................................................................. 4
Section 2B: Summary of Proposed Actions .................................................................................. 8
Section 3: Detail of FY 2022 Rate and Reserves Proposals ....................................................... 9
Section 3A: Rate Design ............................................................................................................... 9
Section 3B: Current and Proposed Rates ..................................................................................... 9
Section 3C: Bill Impact of Proposed Changes ............................................................................ 10
Section 3D: Proposed Reserve Transfers ................................................................................... 11
Section 4: Utility Overview .................................................................................................. 11
Section 4A: Wastewater Utility History ..................................................................................... 12
Section 4B: Customer base ........................................................................................................ 13
Section 4C: Collection System .................................................................................................... 13
Section 4D: Cost Structure and Revenue Sources ...................................................................... 14
Section 4E: Reserves Structure ................................................................................................... 14
Section 4F: Competitiveness ...................................................................................................... 15
Section 5: Utility Financial Projections ................................................................................. 16
Section 5A: FY 2016 to FY 2026 Cost and Revenue Trends ........................................................ 16
Section 5B: FY 2020 Results ....................................................................................................... 17
Section 5C: FY 2021 Projections ................................................................................................. 18
Section 5D: FY 2022 to FY 2026 Projections .............................................................................. 18
Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 21
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 3 | Page
Section 5F: Alternate Scenarios ................................................................................................. 23
Section 5G: Long-Term Outlook ................................................................................................. 25
Section 6: Details and Assumptions ..................................................................................... 25
Section 6A: Wastewater Treatment Costs ................................................................................. 25
Section 6B: Operations .............................................................................................................. 26
Section 6C: Capital Improvement Program (CIP) ....................................................................... 27
Section 6D: Debt Service ............................................................................................................ 31
Section 6E: Other Revenues ....................................................................................................... 32
Section 7: Communications Plan .......................................................................................... 32
Appendices ......................................................................................................................... 33
Appendix A: Wastewater Collection Financial Forecast Detail .................................................. 34
Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail .......... 36
Appendix C: Wastewater Collection Utility Reserves Management Practices .......................... 37
Appendix D: Map (CPA Wastewater Collection System - Sewer Mains Replaced or
Rehabilitated since 1990) .......................................................................................................... 40
Appendix E: Sample of Wastewater Collection Outreach Materials ......................................... 41
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 4 | Page
SECTION 1: DEFINITIONS AND ABBREVIATIONS
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons. When water usage is used to assess
wastewater charges for commercial customers, it is measured in CCF.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
FOG Fats, oils, and grease. When flushed into the sewer system, these materials
accumulate in parts of the sewer system and create blockages.
O&M Operations and Maintenance
RWQCP Regional Water Quality Control Plant, the wastewater treatment plant owned and
operated by the City of Palo Alto that serves Palo Alto and several surrounding
communities.
UAC Utilities Advisory Commission
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City of Palo Alto’s Wastewater Collection Utility
for the next five years. The Financial Plan provides revenues to cover the costs of operating the
utility safely over that time while adequately investing for the future. It also addresses the
financial risks facing the utility over the short term and long term and includes measures to
mitigate and manage those risks.
SECTION 2A: OVERVIEW OF FINANCIAL POSITION
This Financial Plan projects operations and maintenance, financing and capital program costs in
the Wastewater Collection Utility (including Palo Alto’s share of wastewater treatment costs ) to
rise by an average of approximately 4.3% per year from actual fiscal year (FY) 2020 to forecasted
FY 2026. Staff projects wastewater collection system operations costs to grow at an average of
2.0% annually from actual FY 2020 to forecasted FY 2026. The Regional Water Quality Control
Plant projects wastewater treatment costs, a share of which are allocated to Palo Alto and passed
on to wastewater collection customers, to rise by an average of 7.9% annually during the same
time period.
Capital costs for collection declined in FY 2017 through FY 2019 as capital projects experienced
delays. However, capital spending increased in FY 2020. Capital spending in FY 2021 is expected
to be lower than budgeted, however, these funds will be needed in FY 2022 for sewer main
replacement work. Beginning in FY 2022, a level funding amount will be transferred to the CIP
Reserve each year to make more active use of the reserve. A one-time transfer from the
operations reserve to the CIP Reserve in FY 2021 will allow high priority sewer mains to be
replaced in FY 2022 using the funds from the CIP Reserve. This steady funding to the CIP Reserve
will lead to a gradual increase in available CIP funds through the forecast period as well as stable
funding for CIP projects throughout the collection system. Section 6C: Capital Improvement
Program (CIP) provides more detail. Table 1 below shows the costs of the Wastewater Collection
Utility.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 5 | Page
As approved in the FY 2020 Wastewater Collection Financial Plan, the schedule for main
replacement includes larger sewer main replacement projects every other year instead of smaller
projects annually. This main replacement schedule will allow CPAU to continue to replace
wastewater mains that are in poor condition, while addressing challenges in the current
construction market and optimizing current staffing resources. Additionally, this plan defers the
sewer main replacement project planned for FY 2024 and FY 2026 by one year and reduces the
size of each planned sewer main replacement project to allow for more gradual rate increases
while still prioritizing the highest priority sewer mains for replacement and rehabilitation.
Table 1 shows actual costs in FY 2020 and estimated costs in FY 2021 through FY 2026. In Table
1, “Treatment” reflects Palo Alto’s share of Regional Water Quality Control Plant O&M and
Capital costs. “CIP” includes all capital costs of the collection system (including debt service) for
FY 2020, and FY 2021 and planned contributions from rates to the collection system CIP fund for
subsequent years. “Operations” includes O&M costs for the collection system.
Table 1: Wastewater Collection Expenses for FY 2020 to FY 2026
Expenses
($000)
FY 2020
(actual)
FY 2021
(estimated)
FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Treatment 10,234 10,995 11,154 11,487 12,827 13,632 16,112
Operations 6,023 6,324 6,101 6,277 6,477 6,657 6,789
CIP 5,294 1,359 4,479 4,588 4,722 4,730 4,872
TOTAL 21,550 18,677 21,733 22,352 24,025 25,019 27,774
Table 2 shows the projected overall average rate changes in the current financial plan to ensure
that revenues cover rising costs and the operations and CIP reserves remain within the guideline
ranges. The table also shows the projected rate changes from the FY 2020 Financial Plan. The
current Financial Plan projects lower increases in FY 2022 through FY 2025. In part this is because
the transfers of the CIP Reserve balance of $978K and the Rate Stabilization Reserve balance of
$342K to the Operations Reserve that the FY 2020 Financial Plan projected for FY 2020 and FY
2019, respectively, were not necessary.
The current Financial Plan makes use of the funds from the CIP Reserve and Rate Stabilization
Reserve in future years to lessen the needed rate increases. Additionally, treatment costs were
lower than budgeted in FY 2020. Also, to lower the projected rate changes further while meeting
the most high priority collection system CIP needs, staff lowered CIP budgets for the collection
system by delaying future main replacements and reducing the size of the main replacement
budgets going forward. . In FY 2022 residential customers will see a rate increase in part as a
result of a rebalancing of costs between residential and non-residential customers and in part
because of the overall revenue increase needed to cover rising costs.
This Financial Plan estimates revenue losses and bill delinquencies due to COVID-19 and the
ongoing associated economic effects. The total assumed combined revenue reductions are
approximately $400K in FY 2021 and $960K in FY 2022 and then smaller reductions through FY
2025 with a linear assumption of recovery to pre-pandemic levels by FY 2026. See Section 5D: FY
2022 to FY 2026 Projections for more detailed discussion.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 6 | Page
Rate and bill impacts for individual customer classes are different from the overall percentage
increases shown in Table 2 because of the results of the cost of service study conducted this year.
Section 3: Detail of FY 2022 Rate and Reserves Proposals presents more detail regarding rate and
bill impacts.
Table 2: Proposed / Projected Wastewater Collection Rate Trajectory for FY 2022 to FY 2026
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Current Plan
(FY 2022 Plan)
3%* 3% 5% 5% 5%
Last Plan
(FY 2020 Plan)
6% 6% 6% 6% 4%
* The overall revenue increase is projected to be 3% in FY 2022. However, due to the results of
this year’s cost of service study, commercial and residential rates will increase while restaurant
rates will decrease.
The Operations Reserve was within guideline levels at year end FY 2020 and is projected to
remain within guideline levels throughout the projection period (see more detail in Figure 5).
The Wastewater Collection 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 Wastewater Collection 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.1 Staff also proposes
that the Wastewater Collection 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 this calculation, because of the staggered
1 Each month is calculated based upon 1/12 of the annual budget.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 7 | Page
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 2022 is $3.6 million and the minimum in FY 2022 is $0.7 million. Previously, the
minimum and maximum CIP Reserve guideline levels were 12 and 24 months of budgeted CIP
expenditure, respectively.
Figure 7 shows the projected CIP Reserve balances and guideline levels for FY 2022 through FY
2026. These modifications will make full use of the CIP Reserve to manage fluctuations in capital
investments while stabilizing customer rates.
Staff recommends transferring the Rate Stabilization Reserve balance to the Operations Reserve
in FY 2024. The Rate Stabilization Reserve is used to phase in rate increases over multiple years.
Staff also recommends transferring $2.2 million from the Operations Reserve to the CIP Reserve
in FY 2021 to provide sufficient funding for Sanitary Sewer Replacement 30 while keeping the CIP
Reserve from falling below the minimum in FY 2022 or in any future year during the forecast
period. Table 3 below shows the projected reserve transfers and Appendix C: Wastewater
Collection Utility Reserves Management Practices provides more information about reserve
management practices.
Table 3: Transfers To/(From) Reserves for FY 2021 to FY 2026 ($000)
Reserve FY 2021 FY 2022 FY 2023 to FY 2026
Operations (2,200) - 342
CIP Reserve 2,200 - -
Rate Stabilization - - (342)
Unassigned - - -
Table 4 shows the starting and ending balance in the Operations, CIP and Rate Stabilization
Reserves for FY 2021 through FY 2026. Figure 4 shows the Wastewater Collection utility reserve
balances at year end FY 2020 and projected through FY 2026. Table 4 also shows the projected
reserve transfer and capital program contribution over the forecast period.
2 For example, in this Financial Plan for FY 2022, the 48 month period to use to derive the
annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period
to use to derive the annual average would be FY 2023 through FY 2026 etc.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 8 | Page
Table 4: Operations, Rate Stabilization and CIP Reserves Starting and Ending Balances,
Revenues, Transfers To/(From) Reserves, Expenses, Capital Program Contribution To/(From)
Reserves, and Operations Reserve Guideline Levels for FY 2021 to FY 2026 ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Starting Balance
(1) Operations 5,661 6,188 5,907 5,913 5,642 5,750
(2) Rate Stabilization 342 342 342 342 295 295
(3) CIP 978 3,178 2,559 3,681 3,861 2,461
Revenues
(4) Total Revenue 21,404 21,452 22,359 23,707 25,127 26,606
Transfers
(5) Operations (2,200) - - 47 - 295
(6) Rate Stabilization - - - (47) - (295)
(7) CIP 2,200 - - - - -
Capital Program
Contribution
(8) Operations - (4,350) (4,459) (4,593) (4,730) (4,872)
(9) CIP - 4,350 4,459 4,593 4,730 4,872
Expenses
(10) Total Expenses other than CIP and Debt Service
(18,550) (17,254) (17,764) (19,304) (20,289) (22,901)
(11) Debt Service (128) (129) (129) (129) - -
(12) Planned CIP (1,231) (4,969) (3,337) (4,413) (6,130) (4,251)
Ending Balance
(1)+(4)+(5)+(8)
+(10)+(11)* Operations/Unassigned 6,188 5,907 5,913 5,642 5,750 4,878
(2)+(6) Rate Stabilization 342 342 342 295 295 -
(3)+(7)+(9)+
(12)* CIP 3,178 2,559 3,681 3,861 2,461 3,082
Operations Reserve Guideline Levels
(13) Minimum 2,868 2,756 3,126 3,224 3,105 3,867
(14) Maximum 7,170 6,889 7,815 8,060 7,763 9,667
* Note: The current year, FY 2021, differs from FY 2022 through FY 2026 in that Planned CIP (item
12) is reflected as an expense in the Operations Reserve; the proposal in this Financial Plan for
FY 2022 – FY 2026 reflects Planned CIP (item 12) as an expense in the CIP Reserve and reflects
the capital program contribution as an expense in the Operations Reserve.
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Wastewater Collection Utility in FY 2021 and 2022:
1. Increase overall revenues by 3% with the following customer class changes to reflect the
cost of service adjustments: increase residential rates by 4.7%, increase commercial
quantity rates by approximately 1.5%, and decrease restaurant quantity rates
approximately 2.1%. This is described in more detail in Section 3B: Current and Proposed
Rates; and
2. Approve up to a $4.35 million transfer from the Operations Reserve to the CIP Reserve in
FY 2022. See Section 6C: Capital Improvement Program (CIP) for more details; and
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 9 | Page
3. Approve up to a $2.2 million transfer from the Operations Reserve to the CIP Reserve in
FY 2021. See Section 3D: Proposed Reserve Transfers for more details; and
4. Amend the Wastewater Collection Utility Reserves Management Practices reflected in
Appendix C, Section 5 and described above in Section 2A: Overview of Financial Position.
SECTION 3: DETAIL OF FY 2022 RATE AND RESERVES PROPOSALS
SECTION 3A: RATE DESIGN
The Wastewater Collection 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). Current rates are structured based on staff’s annual assessment
of the Wastewater Collection Utility’s financial position, and updated cost, flow (the wastewater
discharge entering the wastewater treatment plant) and strength (the soluble and insoluble
organic and inorganic matters that need to be removed or neutralized for the treatment process
for the utility) information. The proposed rate structure for FY 2022 allocates costs amongst
customer classes according to the results of a new cost study, the City of Palo Alto 2021
Wastewater COS Report, prepared by Raftelis Financial Consultants, Inc. and attached to the
March 16, 2021 Finance Committee Staff Report.
SECTION 3B: CURRENT AND PROPOSED RATES
The current rates were adopted July 1, 2019, when the City increased sewer rates by 7%.
CPAU has three sewer rate schedules applicable to current customers: one for residential
customers (S-1), one for non-residential customers (other than restaurants) (S-2), and one for
restaurants (S-6). Restaurants have a special rate schedule because they discharge higher
concentrations of grease, oil and organic components in their sewage and, therefore, discharge
sewage that is relatively expensive to treat. Residential customers are billed a monthly service
charge , while commercial customers other than restaurants are billed each month based on their
winter month water usage (previous January through March). This closely approximates non-
irrigation water consumption, which represents actual sewer use. CPAU also maintains a rate
schedule for industrial dischargers (S-7), but there are currently no customers required to be on
this rate schedule.
The City did not increase wastewater rates in FY 2021 but with the increases in treatment costs
that are anticipated over the next five years together with needed priority sewer main
replacements, CPAU proposes to increase overall revenues in FY 2022 by 3%. For FY 2023, the
needed increase would also be 3% and then for FY 2024 through FY 2026, revenue is projected to
increase by approximately 5% per year in order to provide needed funding for projected increases
to treatment costs resulting from Regional Water Quality Control Plant improvements and
upgrades, as well as ongoing collection systems capital projects and operations costs. Table 5,
below, summarizes the current and proposed rates for all customer classes. Section 4F:
Competitiveness discusses comparisons with neighboring communities. The analysis
recommended removing the minimum charge from the commercial and restaurant customer
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 10 | Page
classes as the volumetric charge is an equitable way to capture the variability in sewer usage
among non-residential customers.
Over the past 10 years the 15 industrial customers that used to be served by the Wastewater
Collection Utility have either left the system or modified their practices or business such that their
wastewater is similar to the wastewater of other customers in the commercial class. Those
customers accounted for approximately 11% of the estimated wastewater flows. With the
reductions in usage for this group of customers as well as additional reductions in non-residential
usage of the sewer system, residential customers have increased their relative percentage of
wastewater flows while non-residential customers have decreased their relative contributions to
wastewater flows. This is a primary reason for the increases in rates for residential customers
relative to commercial and restaurant customers. Table 5 shows the rate increases for each
customer group including the cost of service adjustments. Currently there are no customers on
the S-7 rate schedule; however, CPAU continues to maintain it in case there is a need for the rate
schedule in the future. This Financial Plan updates the S-7 Industrial rates to reflect the cost of
service adjustments.
Table 5: Current and Proposed Sewer Rates
Current
(as of
7/1/2019)
Proposed
(effective
7/1/2021)
Monthly Service Charges ($/month) $ Change % Change
S-1 (Residential) Service
charge
$41.37 $43.32 $1.95 4.7%
Quantity Rates: $ Change % Change
S-2
(Commercial)
$/CCF 7.97 8.09 0.12 1.5%
S-6 (Restaurant) $/CCF 12.33 12.07 (0.26) (2.1%)
For any future industrial customers, the City maintains the S-7 rate schedule that will charge
the following updated charges for each individual customer:
1) Collection System Operation, Maintenance, and Infiltration Inflow: $4.02 per 100 cubic
feet of metered water use.
2) Advanced Waste Treatment Operations and Maintenance Charge: $1.60 per 100 cubic
feet of metered water use
3) $196.34 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand)
4) $473.38 per 1000 lbs of SS (Suspended Solids)
5) $3,270.92 per 1000 lbs of NH3 (Ammonia)
SECTION 3C: BILL IMPACT OF PROPOSED CHANGES
Table 6 below shows the impact of the proposed July 1, 2020 rate changes on typical customers:
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 11 | Page
Table 6: Impact of Proposed Sewer Changes
Current
(as of
7/1/2019)
Proposed
(effective
7/1/2021)
Change
$/mo. %
Residential $41.37 $43.32 $1.95 4.7%
General Commercial (14 CCF) 111.58 113.26 1.68 1.5%
Restaurant (56 CCF) 690.48 675.92 (14.56) (2.1%)
Based upon the results of the cost of service adjustments, some customers will see higher or
lower increases in their sewer charges. In FY 2022, residential customers will experience
approximately a 4.7% increase in bills. Commercial customers will experience approximately a
1.5% increase in bills and the impacts will vary due to each customer’s utilization of the system.
Restaurant customers will experience bill decreases for the most part and the impacts will vary
due to each customer’s utilization of the system.
SECTION 3C: PROPOSED RESERVE TRANSFERS
In the FY 2017 Financial Plan, staff recommended a $1.95 million transfer from the Rate
Stabilization Reserve in FY 2016. This left a small amount, $342,000, which was originally to be
transferred in FY 2017 to bring the Rate Stabilization Reserve balance to zero.
However, because new main replacement projects were deferred in FY 2017 through FY 2019,
resulting in one-time cost savings, the Operation Reserve ended within the guideline level, and
the transfer was not needed. The Operations Reserve is projected to be within the guideline
range in FY 2021 and FY 2022. However, as the utility experiences treatment cost increases
throughout the forecast period, the Operations Reserve declines to a level closer to the minimum
guideline level. Staff requests approval to transfer the remaining $342,000 in FY 2024. This
transfer will enable CPAU to maintain adequate Operations and CIP Reserve levels while
moderating the pace of increase in Wastewater Collection rates.
Staff also requests approval to transfer $2.2 million from the Operations Reserve to the CIP
Reserve in FY 2021. This is the amount needed in FY 2022 together with the FY 2022 capital
contribution to the CIP Reserve to fund the reduced budget for main replacement project SSR 30
without the CIP Reserve dropping below the minimum during the forecast period.
Appendix A: Wastewater Collection Financial Forecast Detail shows the impact of these transfers
on reserves levels.
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information and to help readers better understand the forecasts in later sections.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 12 | Page
SECTION 4A: WASTEWATER UTILITY HISTORY
The Wastewater Utility commenced operation in 1899 to serve Palo Alto and Stanford. In its first
three decades the system grew to 60 miles of sewers. Raw sewage was discharged into Mayfield
Slough at the edge of the Bay. In the 1930s, at the behest of the State Department of Health, Palo
Alto built the South Bay’s first wastewater treatment plant. At that time the sewer system served
20,500 Stanford and Palo Alto residents and a cannery. The plant was upgraded twice in the
1940s and 1950s to increase capacity.3 At the same time, the postwar population and industrial
boom in the 1950s required rapid expansion of the sewer system. In the first half of the 1960s
Palo Alto’s area doubled, as did wastewater flows, overwhelming the capacity of several of the
utility’s “trunk lines,” which are the largest diameter main sewer lines carrying wastewater to the
treatment plant. This prompted the City, in 1965, to perform the first of its sewer master plans
to identify needed capacity improvements. At that point the Wastewater Utility’s system
comprised more than 150 miles of sewer mains.4
In 1968 the City signed agreements with the Cities of Mountain View and Los Altos to build a new
regional treatment plant, the RWQCP, which is still in operation today. Since 1940 the City had
been providing treatment services to the East Palo Alto Sanitary District through an existing
agreement and was also serving Stanford University by transporting wastewater across the City’s
sewer system to the treatment plant. Both of these organizations became partners in the RWQCP
as well. At the same time the Town of Los Altos Hills became the sixth partner as it signed an
agreement with the City to connect the Town’s sewer system to the City’s sewer system to carry
wastewater to the new RWQCP. The current agreements for the RWQCP extend through 2035.5
In the 1980s the City performed a series of studies of groundwater inflow and infiltration into the
system. The studies found high rates of infiltration, estimating that as much as 40% of the water
going to the RWQCP from Palo Alto’s system was groundwater and stormwater rather than
wastewater.6 In some parts of Palo Alto the land surface had subsided due to groundwater
pumping by the water utility, and though that practice had ceased many years earlier as the water
utility switched to the Hetch Hetchy Regional Water System, parts of the city had already
subsided two to five feet. This subsidence had damaged several parts of the sewer collection
system, leading to reduced slopes for sewer mains that caused reductions in capacity. In response
to these studies the City commenced an accelerated sewer system rehabilitation program.7 At
that point the sewer system comprised over 190 miles of mains.8
A Master Plan study in 1988 recommended a variety of capacity expansions, and in the 1990s the
City completed about half of them. However, a 2004 Master Plan update found that the
accelerated sewer rehabilitation plan started in the early 1990s had substantially reduced
infiltration, easing the capacity problems that had led the to the recommended capacity
3 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pp 2-1
through 2-2
4 Wastewater Collection and Storm Drainage, 1965, Brown and Caldwell Consulting Engineers, pp 4, 6-7, 143
5 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pg 2-2
6 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-2
7 CMR 183:90, Infrastructure Review and Update, March 1, 1990
8 Master Plan of the Wastewater Collection System, December 1988, Camp Dresser & McKee, Inc., pg 1-2
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increases in the 1988 study. Several of the outstanding projects were canceled and replaced with
a different set of projects.9 At the same time the City updated its hydraulic model and developed
greater capacity to do system planning in-house.
SECTION 4B: CUSTOMER BASE
The City of Palo Alto’s Wastewater Collection Utility provides sewer service to the residents and
businesses of Palo Alto. It is distinct from the Wastewater Treatment Utility, which provides
treatment services for surrounding communities in addition to Palo Alto. In effect, the
Wastewater Collection Utility serves as a wholesale customer of the Wastewater Treatment
Utility, and the rates charged by the Wastewater Collection Utility to its retail customers recover
not only collection costs but also Palo Alto’s share of Wastewater Treatment Utility Costs. Nearly
27,633 customers are connected to the sewer collection system, approximately 26,034 (94%) of
which are residential and 1,599 (6%) of which are non-residential. Residential customers pay a
flat fee per dwelling unit for service. Non-residential customers are billed for sewer service based
on their metered winter water usage.
SECTION 4C: COLLECTION SYSTEM
The Wastewater Collection Utility delivers all the wastewater it collects to the Regional Water
Quality Control Plant (RWQCP) operated by the City of Palo Alto under a partnership agreement
with several surrounding communities. Palo Alto is responsible for 35% to 40% of the wastewater
sent to the RWQCP. This Financial Plan does not describe the cost of running the RWQCP in detail
as this cost is contained in the Wastewater Treatment Utility; however since these costs are a
major driver of CPAU’s sewer rates, Section 6A: Wastewater Treatment Costs provides some
discussion of future trends in treatment costs. Treatment costs make up over half of the
Wastewater Collection Utility’s expenses as shown in Table 1 above.
To collect wastewater from its customers and deliver it to the RWQCP, CPAU owns roughly 18,000
sewer laterals (which collect wastewater from customers’ plumbing systems) and 217 miles of
sewer mains (which transport the waste to the treatment plant). These laterals and mains, along
with the associated manholes and cleanouts, represent the vast majority of infrastructure used
to collect wastewater in Palo Alto. CPAU conducts a sewer rehabilitation and replacement
program to replace mains over time as they deteriorate or to increase capacity. For more
discussion of this program, see Section 6C: Capital Improvement Program (CIP). CIP expense
accounts for less than a quarter of the utility’s expenditures.
In addition to CIP, CPAU performs various maintenance activities on the sewer system. These
include inspecting and repairing sewer laterals, responding to sewer overflows, regularly cleaning
sections of the system heavily impacted by fats, oils, and grease (FOG), and building and replacing
sewer laterals for new or redeveloped buildings. The utility also shares the costs of other
operational activities (such as customer service, billing, equipment maintenance, and street
restoration) with the City’s other utilities. These maintenance and operations expenses, as well
9 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-3
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as associated administration, debt service, rent, and other costs, make up approximately another
quarter of the utility’s expenses.
SECTION 4D: COST STRUCTURE AND REVENUE SOURCES
In FY 2020, treatment costs (capital and operations) represented approximately half of the
Wastewater Collection Utility’s costs (48%), and collection system operations costs represented
a third (27%), while collection system CIP costs accounted for the remainder (25%). Figure 1
shows these expenditures. The utility’s revenue in FY 2020, shown in Figure 2, came primarily
from sewer charges (93%), with the remainder coming mainly from capacity and connection fees
and other sources (7%).
Figure 1: Cost Structure (FY 2020) Figure 2: Revenue Structure (FY 2020)
SECTION 4E: RESERVES STRUCTURE
CPAU maintains six reserves for its Wastewater Collection Utility to manage various types of
contingencies. Below is a summary of these reserves and Appendix C: Wastewater Collection
Utility Reserves Management Practices provides 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 is used to accumulate funds
for future expenditure on CIP projects and a reserve level is anticipated to be maintained
in order to smooth major CIP expenditures every other year. It also acts as a contingency
reserve for unexpected capital costs. This type of reserve is used in other utility funds
(Electric, Gas, and Water) as well.
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• Rate Stabilization Reserve: This reserve is intended to be empty unless one or more large
rate increases are anticipated in the forecast period. In that case, funds can be
accumulated to spread the impact of those future rate increases across multiple years.
This type of reserve is used in other utility funds (Electric, Gas, and Water) as well.
• Operations Reserve: This is the primary contingency reserve for the Wastewater
Collection Utility and is used to manage yearly variances from budget for operational
costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) 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 monthly sewer bills for residential customers compared to what they would be
in surrounding communities. The annual sewer bill for a Palo Alto single family residential
customer is $496.44 under current rates, which is lower than four of the six neighboring
communities. These communities are the same six that Palo Alto compares itself to in the annual
budget across Water, Wastewater, Gas, and Electric industries. In the following tables, “Menlo
Park” refers to the West Bay Sanitary District.
Table 7: Residential Monthly Equivalent Sewer Bill Comparison (FY 2020 Rates) ($)
Palo Alto
Neighboring Communities
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View Los Altos Hayward
41.37 102.00 85.44 44.53 42.90 39.63 35.81
Staff does not currently have information about projected rate increases in neighboring
communities. However, under the current projection in this financial plan, average bills for
residential customers in FY 2026 of $51.68 per month would remain under the current
neighboring community average of $58.38. Table 8 compares the sewer bills for two classes of
non-residential customers to what they would be under surrounding communities’ rate
schedules. Note that other communities often have specific rates for industrial customers that
discharge high intensity wastewater, such as food processors or chemical or electronics
manufacturers, but Palo Alto does not currently have any customers that require these special
rates. Palo Alto is less competitive with surrounding cities with regards to commercial sewer rates
but is not the most expensive jurisdiction. This proposal brings the commercial monthly sewer
bill somewhat closer to the neighboring community average, assuming neighboring communities
do not increase sewer rates. The monthly bill comparison assumes 14 units of water for general
commercial and 56 units of water for restaurants.
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Table 8: Commercial Monthly Sewer Bill Comparison (FY 2020 Rates) ($)
Palo Alto
Neighboring Communities
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View Los Altos Hayward
General
Commercial
111.58 138.04 112.70 74.06 134.12 68.06 81.62
Restaurant 690.48 1,163.68 1,079.68 743.12 614.88 272.26 541.52
SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: FY 2016 TO FY 2026 COST AND REVENUE TRENDS
Figure 3 shows the Wastewater Collection Utility’s actual expenses and revenues for the past five
years and projections through FY 2026. Treatment plant expenses (including CIP and O&M)
assigned to Palo Alto’s Wastewater Collection Utility grew, on average, by 3.9% per year from FY
2016 through FY 2020 and are projected to grow by 7.9% per year on average from FY 2021 to FY
2026. Wastewater collection CIP fluctuated greatly during this time period: reduced investment
in FY 2017 to FY 2019 mainly due to delayed main replacement projects, and increased CIP costs
in FY 2015 and 2016 as capital projects were completed. Collections operations costs decreased
slightly during this timeframe. Wastewater collection CIP costs will continue to fluctuate from
year to year as sanitary sewer replacements occur every other year rather than annually.
However, to mitigate the annual fluctuations and contribute to rate stability for customers, this
financial plan proposes a steady annual capital program contribution to the CIP Reserve. For more
detail see Section 6C: Capital Improvement Program (CIP).
Since the revenue for this utility is very stable, revenue changes closely follow rate changes. The
other large revenue item of note is the continued connection and capacity fees from new
construction. These fees grew dramatically between FY 2010 and FY 2015 and then plateaued.
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Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes
Actual Costs through FY 2020 and Projections through FY 2026
Note: The overall revenue increase proposed in FY 2022 is 3%. Due to the cost of service
adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY
2022, commercial customers will experience a rate increase of approximately 1.5% in FY 2022,
while restaurant customers will receive rate decreases for the most part.
SECTION 5B: FY 2020 RESULTS
Actual revenues for FY 2020 were lower than forecasted revenues in the FY 2020 Financial Plan
($21.8 million actuals vs. $21.9 million projected). This was primarily because sales revenues
were nearly $0.3 million lower than forecasted while other revenue was approximately $0.2
million higher than forecasted. Treatment expenses were approximately $1.5 million lower than
forecasted in the FY 2020 Financial Plan ($10.2 million vs. $11.7 million projected). Collection
system capital and operating costs were approximately $0.5 million higher than expected ($11.3
million actual vs. $11.8 million projected). Table 9 summarizes key reasons for the variances from
forecast.
Table 9: FY 2020, Actual Results vs. FY 2020 Financial Plan Forecast ($000) Net Cost/
(Benefit)
Type of
Change
Sales revenues lower than forecast $281 Revenue decrease
Wastewater treatment costs lower than forecast $(1,499) Cost decrease
Collection System Expenses (Capital and Operations) $463 Cost increase
Net Cost / (Benefit) of Variances $(755)
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SECTION 5C: FY 2021 PROJECTIONS
Staff estimates lower sales revenue for FY 2021 compared to the estimate in the FY 2021 financial
forecast10 ($20.0 million current projection vs. $20.9 million projected in the FY 2021 financial
forecast). Staff projects other revenue from connection and capacity fees and interest to
decrease by approximately $194,000. Treatment cost projections decreased by $1.2 million,
while collection system costs are estimated to be lower overall by $825,000. Table 10
summarizes key variances from the prior forecast.
Table 10: FY 2021, Updated Projections vs. FY 2021 Financial Forecast ($000) Net Cost/
(Benefit)
Type of
Change
Sales revenues lower than forecast $863 Revenue decrease
Interest, connection, capacity fees and other revenues $194 Revenue decrease
Treatment cost reductions $(1,228) Cost decrease
Collection system cost decreases $(655) Cost decrease
Net Cost / (Benefit) of Variances $(825)
SECTION 5D: FY 2022 TO FY 2026 PROJECTIONS
As shown in Figure 3 above (and, in more detail, in Appendix A: Wastewater Collection Financial
Forecast Detail), the Wastewater Collection Utility’s total costs are projected to increase by
approximately 3% per year on average for FY 2021 through FY 2026. Treatment costs make up
the majority of the increase. Capital costs for treatment are increasing at the fastest rate because
the treatment plant is facing the need for major upgrades in coming years, due to aging
equipment and changing environmental regulations. Rehabilitation and replacement of plant
equipment that has been in use for over 40 years is necessary to ensure the city can provide
wastewater treatment operation safely and in compliance with regulatory requirements for the
discharge of treated wastewater 24 hours a day. The costs of the plant are shared among member
agencies, with members expected to see average cost increases of around 8% per year over the
forecast horizon.
Collection system capital expenses were lower than usual in FY 2017 to FY 2019 as sewer main
replacement projects were delayed to enable staff to complete previous year projects, but a
regular annual main replacement cycle resumed in FY 2020. However, underground construction
costs for all utilities have increased significantly. Beginning in FY 2022, capital projects will be
funded from the CIP Reserve instead of from the Operations Reserve. Having these funds in place
will address uneven annual funding associated with ongoing CIP projects.
10 Presented to the Finance Committee, April 21, 2020.
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The capital program contribution will be made annually from the Operations Reserve to the CIP
Reserve ($4.35 million in FY 2022 and future years plus annual inflationary increases) to
adequately fund the CIP budget. $4.35 million 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 2022 through FY 2025 less an allowance for unspent funds and
not including approximately $1.4 million in FY 2022 that is expected to be funded through
reappropriations from FY 2021. Having the capital program contribution in place will address
uneven annual funding associated with ongoing CIP projects, and will be a source for one-time
or immediately needed projects. Without this change, the relative stability of total costs, and
revenues shown in Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes
would fluctuate greatly from year to year as shown below in Figure 4: Wastewater Collection
Utility Expenses, Revenues and Rate Changes.
Figure 4: Wastewater Collection Utility Expenses, Revenues and Rate Changes
Actual Costs through FY 2020 and Projections through FY 2026
Note: The overall revenue increase proposed in FY 2022 is 3%. Due to the cost of service
adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY
2022, commercial customers will experience a rate increase of approximately 1.5% in FY 2022,
while restaurant customers will receive rate decreases for the most part.
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 3.
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This Financial Plan estimates revenue losses and bill delinquencies due to COVID-19 and the
ongoing associated economic effects. So far, the Wastewater Utility has experienced revenue
losses from the wastewater sector of as much as 65% per month during April – June 2020.
Restaurant revenue has increased somewhat to approximately 33% below pre-pandemic levels.
However, because this revenue is approximately 5% of the overall revenue, the impact on
revenues in FY 2020 was outweighed by variations in other revenue categories. For FY 2021, this
plan assumes that the current trend continues at approximately 33% of usage and revenue below
pre-pandemic levels. In FY 2022, revenue losses are also expected in the Commercial category as
winter water use reductions are expected in that customer class. This plan assumes a 10% winter
water use reduction across the commercial category in January – March 2021, which will mean
approximately a 10% revenue reduction in the commercial category in FY 2022. Commercial
revenue is approximately $6.5 million annually, and this revenue reduction is assumed to be
$0.65 million in FY 2022. For both restaurant and commercial revenue losses due to COVID-19,
this plan assumes a linear recovery pattern over the next four years with full recovery by FY 2026.
This Financial Plan also takes into account the sewer bill delinquencies due to COVID-19. The
current balance of delinquent bills greater than 60 days as of 12/17/2020 is $130K. This plan
assumes that bill delinquencies plateau and reduce by half by the end of FY 2021. Similar to the
revenue loss assumption, the plan assumes linear recovery pattern over the next four years with
full recovery by FY 2026.
These revenue losses and bill delinquencies total to approximately $400K in FY 2021 and $960K
in FY 2022 and then smaller reductions through FY 2025 with a linear assumption of recovery to
pre-pandemic levels by FY 2026. These are larger forecasted reductions than what staff
forecasted in May 2020 of approximately $160K or 2% revenue loss in FY 2021, $320K or 4%
revenue loss in FY 2022, $500K or 6% revenue loss in FY 2023 and then declining losses to full
recovery by FY 2026.
The Revenue line in Figure 3 shows that revenues exceeded costs in FY 2019, this replenished
reserves. However, due to increasing treatment and collection costs, annual rate increases of 3%
in FY 2022 and FY 2023 and 5% in subsequent years are required to keep reserves within the
guideline ranges. Figure 5 shows the actuals for FY 2020 and projected reserve levels and Figure
6 shows the relative drop in Operations Reserve from FY 2026 through FY 2029 and the effects
of rate increases to keep the reserve within the guideline levels.
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Figure 5: Wastewater Collection Reserves Projections
SECTION 5E: RISK ASSESSMENT AND RESERVES ADEQUACY
The Wastewater Collection Utility currently has one contingency reserve, the Operations
Reserve. The Operations Reserve remains within the guideline levels throughout the forecast
period. See Figure 6 below. The five-year forecast period is through FY 2026, however, it is in the
subsequent years FY 2027 through FY 2029 that the Operations Reserve dips down close to the
minimum guideline level despite the assumption of 5% rate increases annually from FY 2024
through FY 2031. As costs rise steeply with infrastructure replacement needs both at the RWQCP
and in the collection system, revenue struggles to keep up during that time period which results
in a decreasing Operating Reserve level. This is a key reason why rates need to increase in the
short-term to maintain the gradual rate trajectory and keep the operating reserve within the
guideline range in the longer-term.
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Figure 6: Operations Reserve Adequacy
Staff performs an annual assessment of risks for the Wastewater Collection Utility. Table 11
summarizes the risk assessment calculation for the Wastewater Collection Utility through FY
2026. The risk assessment includes the revenue shortfall that could accrue due to:
1. the maximum observed budget-to-actual variance in one year during the past five years;
and
2. an increase of 10% in treatment costs.
Table 11 summarizes the risk assessment calculation for the Wastewater Collection Utility
through FY 2026. The Operations Reserve is projected to be adequate to manage these levels of
risk over the entire forecast period.
Table 11: Wastewater Collection Risk Assessment
FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Total Revenue ($000) 20,028 20,898 22,202 23,577 25,009
Max. Historical Budget-to-Actual variance 4% 4% 4% 4% 4%
Budget-to-Actual Risk ($000) 801 836 888 943 1,000
Treatment Budget ($000) 11,154 11,487 12,827 13,632 16,112
Treatment Cost Contingency @10% ($000) 1,115 1,149 1,283 1,363 1,611
Total Risk Assessment Value ($000) 1,916 1,985 2,171 2,306 2,612
Projected Operations Reserve Level ($000) 5,907 5,913 5,642 5,750 4,878
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SECTION 5F: ALTERNATE SCENARIOS
The alternate scenario proposed here is for 0% revenue increase in FY 2022.
Table 12: Proposed and Alternate Wastewater Rate Trajectory for FY 2022 to FY 2026
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Current Plan
(FY 2022 Plan)
3%* 3% 5% 5% 5%
Alternate Scenario
(FY 2022 Plan)
0%* 3% 5% 5% 5%
* The overall revenue increase is projected to be 3% in FY 2022 in the current plan and 0% in FY
2022 in the alternate scenario. However, due to the results of this year’s cost of service study,
commercial rates will decrease relative to residential rates.
The reduced revenue in this scenario equates to approximately $600K per year in FY 2022 and
additional cumulative amounts in each subsequent year. In order to balance expenses and
revenues, the alternate scenario assumes the capital contribution to the CIP Reserve is also
reduced by approximately $600K per year to a total of $3.75 million annually. This allows the
Operations Reserve to stay within the guideline levels throughout the forecast period. Figure 7:
Operations Reserve Adequacy below shows the Operations Reserve year-end balances from FY
2020 through FY 2031. Further budget reductions would need to be made to the Collection CIP
to accommodate the reduced funding levels while keeping the CIP Reserve within the guideline
levels. A budget reduction of approximately $1 million during the five year forecast period would
be needed to keep the CIP and Operations Reserves within the guideline range until year end FY
2026. An additional approximately $5.5 million in budget reductions over the 10 year forecast
period would be needed to keep the CIP and Operations Reserves within the guideline range until
year end FY 2031.
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Figure 7: Operations Reserve Adequacy
With the 0% overall revenue increase in the alternate scenario and incorporating the results of
the cost of service analysis, the final customer rates would reflect an increase for residential
customers in FY 2022 and a reduction for most non-residential customers. Table 13: Current
and Proposed Sewer Rates shows the customer rates that result from this scenario.
Table 13: Current and Proposed Sewer Rates
Current
(as of
7/1/2019)
Proposed
(effective
7/1/2021)
Monthly Service Charges ($/month) $ Change % Change
S-1 (Residential) Service
charge
$41.37 $42.09 $0.72 1.7%
Quantity Rates: $ Change % Change
S-2
(Commercial)
$/CCF 7.97 7.83 (0.14) (1.8%)
S-6 (Restaurant) $/CCF 12.33 11.82 (0.51) (4.1%)
For any future industrial customers, the City maintains the S-7 rate schedule that will charge
the following updated charges for each individual customer:
1) Collection System Operation, Maintenance, and Infiltration Inflow: $3.76 per 100 cubic
feet of metered water use.
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2) Advanced Waste Treatment Operations and Maintenance Charge: $1.60 per 100 cubic
feet of metered water use
3) $196.34 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand)
4) $473.38 per 1000 lbs of SS (Suspended Solids)
5) $3,270.92 per 1000 lbs of NH3 (Ammonia)
SECTION 5G: LONG-TERM OUTLOOK
In the longer term (5 to 35 years) the primary factor that could lead to increased costs for the
Wastewater Collection Utility are major upgrades at the RWQCP, a share of which will be
allocated to the utility as part of treatment costs. These upgrades include replacement or
rehabilitation of the parts of the facility that pump raw sewage to the main treatment works (the
headworks), separate out primary sludge (the primary settling tank), process sludge (the bio-
solids facility), and treat wastewater (the fixed film reactors). Upgrades to the laboratories and
operational buildings are planned as well. In addition, the 72-inch regional trunk sewer line
flowing into the plant needs to be evaluated and rehabilitated.
In the future, nutrient limiting regulations for RWQCP discharges are anticipated from the State
due to changes in San Francisco Bay. A response to the proposed regulations was addressed in
the Long Range Facilities Plan in 2012 and will be more fully addressed by a capital project to
upgrade the secondary treatment process, currently in design. The project is in response to aging
equipment as well as the regulations, although replacing the aging equipment is needed
whatever the outcome of the regulations.
SECTION 6: DETAILS AND ASSUMPTIONS
SECTION 6A: WASTEWATER TREATMENT COSTS
Treatment expenses represent the Wastewater Collection Utility’s share of the costs of operating
the RWQCP. Per the partnership agreements between Palo Alto and its partner agencies, these
charges are assessed based on a formula that takes into account the total amount of wastewater
delivered, the amount of organic material in it, its ammonia content, and the total suspended
solids it is carrying. The Wastewater Collection Utility’s assessed share of the RWQCP’s revenue
requirement is projected to be 35% for FY 2022. Mountain View is the other large agency served
by the RWQCP (42% of the revenue requirement estimated for FY 2022) with the smaller agencies
(Stanford, Los Altos, East Palo Alto, and Los Altos Hills) making up the remainder of the flow to
the treatment plant.
Based on detailed project cost projections provided by RWQCP staff, treatment costs are likely
to continue to increase by an average of 5.9% per year from FY 2022 through FY 2031.
Wastewater Treatment Fund costs are increasing due to major plant rehabilitation and rising
salary and benefit costs as well as the attendant allocated charges for centralized city services
needed to support wastewater treatment fund operations. Additional expenses include
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increased water and air permitting fees from the Regional Water Quality Control Board and the
Bay Area Air Quality Management District. Commodity and utility rates to operate the facility are
also anticipated to increase in FY 2022 for gas, and storm rates. Chemical expenses, needed to
adjust water quality and meet permit requirements, are also increasing modestly per the latest
chemical market conditions and procurement contract conditions.
Capital projects, parts, materials and debt are increasing at an average of about 15.1% per year
through 2031 to keep up with ongoing replacement of aging equipment. Larger increases to
capital expenses are expected to begin in FY 2024 in the form of new debt service for major
projects to implement the Plant’s capital program. Major upcoming capital projects include
Primary Sedimentation Tank Rehabilitation, Outfall Line Construction, Secondary Treatment
Upgrades, and Operation Center and Laboratory. Figure 8 below shows the estimated costs of
treatment expenses for Palo Alto.
Figure 8: Palo Alto’s Share of Wastewater Treatment Expenses (Projection & Planned CIP)
SECTION 6B: OPERATIONS
Operations costs include the Customer Service, Distribution Operations, Engineering, and
Allocated Charges categories in Appendix A: Wastewater Collection Financial Forecast Detail.
Debt service, rent, and transfers are also included in this category. Customer Service costs are
primarily related to the call center and collections on delinquent accounts. The Distribution
Operations category includes preventative and corrective maintenance on sewer mains and
laterals, investigation of sewer overflows, regular cleaning of heavily impacted sections of the
sewer system, and services shared with other utilities (such as street restoration and equipment
maintenance). Allocated Charges include the costs of accounting, purchasing, legal, and other
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administrative functions provided by the City’s General Fund staff, as well as shared
communications services and Utilities Department administrative overhead and billing system
maintenance costs.
The financial plan projections align as much as possible with the City’s budget assumptions,
however instead of a ten-year General Fund Long Range Financial Forecast, the City presented a
preliminary forecast focusing on FY 2022 based on the current economic climate and continued
unknown impacts of the COVID-19 pandemic.11 This plan projects operations costs to increase by
2 to 3% per year, on average, over the forecast period. Underlying these projections are
preliminary assumptions for non-salary and benefit cost categories from Palo Alto’s Office of
Management and Budget. For salary and benefit assumptions, this financial plan uses the most
updated wastewater utility budget annual percentage increases applied to the actual 2020
salaries and benefits which averages approximately 4% per year.
SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP)
The Wastewater Collection Utility’s CIP consists of the following programs:
• The Sanitary Sewer Replacement/Rehabilitation (SSR) Program, under which the
Wastewater Collection Utility replaces aging sewer mains.
• Customer Connections, which covers the cost when the Wastewater Collection Utility
installs new laterals or upgrades existing laterals at a customer’s request in response to
development or redevelopment. CPAU charges a fee to these customers to cover the cost
of these projects.
• Ongoing Projects, which covers the cost of replacing deteriorated manholes and sewer
laterals, addressing unplanned replacement needs, performing hydraulic analysis,
replacing antiquated software, as well as the cost of capitalized tools and equipment.
The Sanitary Sewer Replacement and Rehabilitation Program funds the replacement of
deteriorating sewer mains to increase capacity or improve pipe condition in various parts of the
sewer system. The sewer system consists of over 217 miles of mains, and CPAU uses a variety of
tools to establish which sections need to be replaced. The 2004 Master Plan study identified
wastewater mains with capacity deficiency and they have been corrected in past CIP projects.
For condition assessment, maintenance statistics (such as records of the location and number of
sewer overflows on the system) and video recording of sewer mains from a past video inspection
of sewer main project or during regular cleaning can reveal areas with deteriorating pipe. CPAU
uses a structural rating system to grade the pipe defects. The video-inspection data and
maintenance records are used to plan and prioritize sewer main replacement and rehabilitation.
Utilities also coordinates with the Public Works street maintenance program to avoid cutting into
newly repaved streets. A major goal of the replacement program is to minimize sewer overflow
and reduce groundwater and rainwater infiltration. As mains deteriorate they begin to allow
roots into the pipe joints to create blockages, permitting groundwater and rainwater to infiltrate
the system. Some level of infiltration is expected on any sewer system, but if there is too much,
11 Staff Report #11844
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 28 | Page
the combined flow of wastewater and groundwater/rainwater can overwhelm the capacity of
various parts of the sewer system. Reducing infiltration can reduce the need to expand the
system to accommodate increased flow, as well as reducing unnecessary amounts of water to be
treated at the treatment plant. To achieve this goal, deteriorating mains are either replaced with
new HDPE pipe or rehabilitated with a plastic lining when replacement is not feasible. Staff has
been replacing/rehabilitating the mains as needed according to their condition. In addition,
Wastewater Operations’ routine maintenance continues to stay on schedule to minimize sewer
overflows.
Over the last few years, main replacement costs have been increasing for utilities due to
economic activity in the Bay Area causing construction cost inflation. Utilities has not bid a sewer
project since the pandemic began. However, there are no indications of a dip in construction
costs.
Utilities Engineering has been consistently replacing aging sewer mains since the early 90’s. The
proactive replacement program keeps the collection system in good condition. Between 1990
and 2019, 75 miles or 35% of the collection system has been replaced or rehabilitated (the darker
green-colored lines shown in the attached map in Appendix D: Map (CPA Wastewater Collection
System - Sewer Mains Replaced or Rehabilitated since 1990). This is an average of approximately
13,654 feet (~2.6 miles), or 1.2% of the system, of sewer main being replaced or rehabilitated per
year. This is a sustainable replacement rate to keep the system reliable.
Staff undertakes an SSR project every other year however, the FY 2024 and FY 2026 projects are
planned to be deferred in order to lower CIP budgets to relieve the upward pressure on customer
rates due to the ongoing pandemic and associated economic impacts. Each SSR project has
approximately a $4 to $5 million budget to cover design and construction. This project scope and
frequency allows staff to continue replacing wastewater mains that are in poor condition and to
reduce groundwater and rainwater infiltration through cracks or leaking joints.
Staff continues to re-evaluate and re-prioritize the scope of future projects based on the
structural rating system, Wastewater Operations’ feedback and available budget. Part of the
assessment is to evaluate whether a slightly reduced replacement rate would jeopardize the
integrity of the system, since large portions of the mains that have not been replaced or
rehabilitated are located in newer sub-divisions that were developed between 1950 and 1970.
The costs for Customer Connections and on-going Projects are projected to remain steady
through the end of the forecast period. Actual expenses for these projects fluctuate annually
depending on how many defective laterals and manholes are discovered during routine
maintenance, as well as how much development and redevelopment is going on that prompts
the replacement or upgrade of sewer laterals. It is worth noting that property owners pay a fee
for sewer lateral replacement or expansion during redevelopment, so when the number of
projects increases, so does fee revenue.
Table 14 displays projected CIP spending for the 5-year financial forecast period.
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Table 14: Projected CIP Spending
Aside from Customer Connections, the CIP plan for FY 2022 to FY 2026 is funded by sewer rates
and capacity fees. Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP)
Detail shows the details of the plan.
Figure 9 below shows the projected CIP Reserve balances from FY 2022 through FY 2026. Figure
10 below shows the projected CIP expenditures fluctuating from year to year with the staggered
main replacement schedule relative to the more steady projected capital program contributions.
In FY 2022, the capital program contribution to the CIP Reserve is $4.35 million. The capital
program contribution would increase with inflation at a projected level of 3% annually. Appendix
A: Wastewater Collection Financial Forecast Detail shows the amount of the rate-funded CIP
Reserve contributions under “Uses of Funds” or considered expenses for FY 2022 through FY
2026.
Project Category
Current
Budget*
Spending,
Curr. Yr
Remain.
Budget**Committed FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Sewer Rehab/Augmentation 2,550 (1,469) 1,081 - 4,130 300 1,950 3,850 1,650
Ongoing Projects 1,389 (328) 1,061 - 1,050 1,575 1,100 1,126 1,150
Customer Connections 346 (51) 295 - 450 450 450 450 450
TOTAL 4,285 (1,848) 2,437 - 5,630 2,325 3,500 5,426 3,250
*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).
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 30 | Page
Figure 9: Projected CIP Reserve Balances FY 2022 to FY 2026
Figure 10: Projected CIP Expenditure, and Projected Capital Program Contribution, FY 2022 to
FY 2026 ($000)
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 31 | Page
SECTION 6D: DEBT SERVICE
The Wastewater Collection Utility currently pays its share of one bond issuance, the 1999 Utility
Revenue Bonds, Series A, which is due to be retired in 2024. This $17.7 million issuance
refinanced various earlier Storm Drain, Wastewater Treatment, and Wastewater Collection
Utility bond issuances. The Wastewater Collection Utility’s share of the issuance was roughly $1.9
million. This amount represented the second refinancing of the remaining principal of a 1990
bond issuance, which itself was a refinancing of a 1985 issuance that financed a variety of
improvements to the sewer system. The cost of debt service for the Wastewater Collection
Utility’s share of this bond issuance for the financial forecast period is roughly $129,000 per year
as shown in Table 15 below.
Table 15: Wastewater Collection Utility Debt Service ($000)
FY 2022 FY 2023 FY 2024
1999 Utility Revenue Bonds, Series A 129 129 129
The 1999 Utility Revenue Bonds include two covenants stating that 1) the Wastewater Collection
Utility will maintain a debt coverage ratio of 125% of debt service, and 2) that the City will
maintain “Available Reserves”12 equal to five times the annual debt service. The current financial
plan maintains compliance with both covenants throughout the forecast period. Table 16, below,
shows compliance with the first covenant. Due to the small size of the annual debt service
payment for these bonds, the Wastewater Collection Utility’s Operations Reserve alone more
than satisfies the second covenant at more than 30 times annual debt service throughout the
forecast period.
Table 16: Debt Service Coverage Ratio ($000)
FY 2022 FY 2023 FY 2024
Revenues 20,015 20,886 22,190
Expenses (Excl. CIP
and Debt Service)
15,412 15,899 17,406
Net Revenues 4,604 4,987 4,784
Debt Service 129 129 129
Coverage Ratio 3581% 3864% 3701%
The Wastewater Collection Utility’s reserves (but not its net revenues) are also considered
security for the Storm Drain and Wastewater Treatment Utilities’ shares of the debt service on
the 1999 bonds. Throughout the term of the bonds there remains a small risk that the
Wastewater Collection Utility’s reserves could be called upon to make a debt service payment on
behalf of one of those utilities if it cannot meet its debt service obligations. Staff does not foresee
this occurring based on the current financial condition of those utilities. If the Wastewater
Collection Utility’s reserves were used this way, any amounts advanced would have to be repaid
by the borrowing utility.
12 Available Reserves as defined in the 1999 Utility Revenue Bonds included reserves for the Water, Wastewater
Treatment, Wastewater Collection, Refuse, Storm Drain, Electric, and Gas Utilities
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February 2021 32 | Page
SECTION 6E: OTHER REVENUES
Other revenues are from capacity and connection fees and income from interest and transfers
in. These revenues fluctuate from year to year. This plan forecasts other revenues using the
average of the past five years for FY 2022 increasing by inflation annually through the forecast
period.
SECTION 7: COMMUNICATIONS PLAN
In FY 2022, the communications strategy for the wastewater collection utility will address the
following primary areas: infrastructure upgrades, increasing wastewater treatment costs,
maintenance and operations related to safety, and how these necessary activities impact the
rates this year. Communication about wastewater rate adjustments will highlight the important
infrastructure and operations upgrades that are occurring at the Regional Water Quality Control
Plant (RWQCP) as well as increased capital improvement projects (CIP) to improve our
wastewater collection utility services. These infrastructure upgrades are necessary to replace
aging wastewater collection mains and sanitary sewer treatment equipment at the RWQCP. This
is important for functional as well as safety reasons.
Staff update the utilities website with information on the progress of wastewater projects to
keep customers apprised of the status and accomplishments of CIP projects. Customers can find
project schedules, maps, overview of the work being done, and project manager contact
information at www.cityofpaloalto.org/utilityprojects. Promotional activities about wastewater
infrastructure upgrades, operations, safety, CPAU and customer responsibilities for wastewater
system maintenance, include the use of bill inserts, ads in local print publications, email
newsletters and social media.
An important communications topic for the wastewater utility is avoiding sewer back-ups due to
FOG (fats, oil and grease) and trash being dumped down drains and toilets. Safety topics are
emphasized year-round. Staff continues with the outreach goal of educating customers about
the utility’s gas-sewer line cross-bore inspection program, including the importance of calling
CPAU prior to clearing sewer lines in the event of a sewer back-up.
While print materials and website pages feature prominently, CPAU is increasing the outreach
emphasis on more direct communication with customers, including through use of social media,
email newsletters, digital ads and videos. Aside from the year 2020 COVID-19 shelter-in-place
public health order, staff typically attend community safety and emergency preparedness events
and neighborhood meetings, and we continually seek out new opportunities to do so. One
example of a new residential outreach opportunity is through providing information on the Cool
Blocks curriculum.
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February 2021 33 | Page
APPENDICES
Appendix A: Wastewater Collection Financial Forecast Detail
Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail
Appendix C: Wastewater Collection Utility Reserves Management Practices
Appendix E: Map (CPA Wastewater Collection System - Sewer Mains Replaced or Rehabilitated
since 1990)
Appendix E: Sample of Wastewater Collection Outreach Materials
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APPENDIX A: WASTEWATER COLLECTION FINANCIAL FORECAST DETAIL
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
1
2 % CHANGE IN RETAIL RATE 9.0% 9.0% 0.0% 11.0% 7.0% 0.0% 3.0% 3.0% 5.0% 5.0% 5.0%
3 PROJECTED CHANGE IN RETAIL SALES REVENUE 1,317 1,421 - 1,916 1,359 - 612 630 1,082 1,136 1,193
4
5 RETAIL SALES REVENUE 15,648 17,126 17,420 19,342 20,335 19,996 20,015 20,886 22,190 23,565 24,997
6 CONNECTION AND CAPACITY FEES 794 1,047 549 594 686 752 767 787 810 835 860
7 OTHER / TRANSFERS IN 321 355 328 545 394 398 406 416 429 442 455
8 INTEREST 475 (88) 19 446 406 258 263 270 278 286 295
9 TOTAL SOURCES OF FUNDS 17,238 18,441 18,316 20,928 21,820 21,404 21,452 22,359 23,707 25,127 26,606
10
11 PURCHASES/CHARGES OF UTILITIES (TREATMENT)8,770 8,391 9,559 9,843 10,234 10,995 11,154 11,487 12,827 13,632 16,112
12 ALLOCATED CHARGES (CIP&OPERATING)1,816 1,388 634 1,414 1,122 1,002 1,005 1,022 1,047 1,078 1,123
13 CUSTOMER SERVICE (22) 345 283 304 300 308 320 332 344 354 360
14 DISTRIBUTION OPERATIONS 2,635 2,759 2,720 2,855 3,461 3,948 3,690 3,820 3,960 4,079 4,146
15 ENGINEERING (OPERATING)347 292 345 329 339 348 361 374 388 399 406
16 DEBT SERVICE 129 128 128 128 128 128 129 129 129 - -
17 RENT 293 300 310 320 332 251 256 262 270 278 287
18 OTHER/ TRANSFERS OUT 233 323 359 364 467 467 467 467 467 467 467
19 CAPITAL PROGRAM CONTRIBUTION^4,985 1,332 2,955 2,932 5,165 1,231 4,350 4,459 4,593 4,730 4,872
20 TOTAL USES OF FUNDS 19,185 15,258 17,294 18,489 21,550 18,677 21,733 22,352 24,025 25,019 27,774
21
22 INTO / (OUT OF) RESERVES (1,946) 3,183 1,022 2,439 271 2,727 (281) 6 (318) 108 (1,168)
23
24 ENDING COMMITMENTS & REAPPROPRIATIONS 11,088 1,922 1,268 5,732 4,775 4,775 4,775 4,775 4,775 4,775 4,775
25 ENDING PLANT REPLACEMENT RESERVE - - - - - - - - - - -
26 ENDING CIP RESERVE 978 978 978 978 978 3,178 2,559 3,681 3,861 2,461 3,082
27 ENDING RATE STABILIZATION RESERVE 342 342 342 342 342 342 342 342 295 295 -
28 ENDING OPERATIONS RESERVE 3,211 6,393 7,415 5,390 5,661 6,188 5,907 5,913 5,642 5,750 4,878
29 UNASSIGNED RESERVES - - - - - - - - - - -
30
31 SHORT TERM RISK ASSESSMENT VALUE 1,444 1,524 1,652 1,758 1,837 1,900 1,916 1,985 2,171 2,306 2,612
32
33 OPERATIONS RESERVE GUIDELINES
34 MIN (60 DAYS TREATMENT/O&M EXP)2,238 2,319 2,469 2,667 2,624 2,868 2,756 3,126 3,224 3,105 3,867
35 TARGET (105 DAYS TREATMENT/O&M EXP)3,916 4,059 4,322 4,668 4,592 5,019 4,823 5,470 5,642 5,434 6,767
36 MAX (150 DAYS TREATMENT/O&M EXP)5,594 5,798 6,174 6,669 6,559 7,170 6,889 7,815 8,060 7,763 9,667
37 ^Capital Program Contribution represents level amount of CIP funding from the Operations Reserve to the CIP Reserve beginning in FY 2022
Fiscal Year
Wastewater Collection Financial Detail
($'000)
Actual Projected
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WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 36 | Page
APPENDIX B: WASTEWATER COLLECTION 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 2022 FY 2023 FY 2024 FY 2025 FY 2026
SEWER SYSTEM REHABILITATION AND AUGMENTATION (SSR/A) PROGRAM
WC-11000 SSR/A - Project 24 - - - - - - - - - -
WC-12001 SSR/A - Project 25 - - - - - - - - - -
WC-13001 SSR/A - Project 26 - - - - - - - - - -
WC-14001 SSR/A - Project 27 - - - - - - - - - - -
WC-15001 SSR/A - Project 28 692,891 (492,891) - (117,224) 82,776 - - 300,000 300,000 300,000 -
WC-16001 SSR/A - Project 29 3,740,820 (1,740,820) - (1,352,249) 647,751 - - - - - -
WC-17001 SSR/A - Project 30 221,000 129,000 - - 350,000 - 4,130,000 - - -
WC-19001 SSR/A - Project 31 - - - - - - - 1,650,000 3,550,000 -
WC-20000 SSR/A - Project 32 - - - - - - - - 1,650,000
Subtotal, Sewer Rehab./Augmentation 4,654,711 (2,104,711) - (1,469,473) 1,080,527 - 4,130,000 300,000 1,950,000 3,850,000 1,650,000
ONGOING PROJECTS
WC-13002 Fusion & Gen. Equip./Tools 27,894 185,000 - (32,191) 180,703 - 50,000 50,000 50,000 50,000 50,000
WC-15002 WW System Improvements 205,952 94,048 - (171,210) 128,791 - 200,000 200,000 200,000 200,000 200,000
WC-99013 Sewer / Manhole Rehab.- 876,000 - (124,491) 751,509 - 800,000 1,325,000 850,000 875,500 900,000
Subtotal, Ongoing Projects 233,846 1,155,048 - (327,891) 1,061,003 - 1,050,000 1,575,000 1,100,000 1,125,500 1,150,000
CUSTOMER CONNECTIONS (FEE FUNDED)
WC-80020 Sewer System Extensions 16,846 329,154 - (50,845) 295,155 - 450,000 450,000 450,000 450,000 450,000
Subtotal, Customer Connections 16,846 329,154 - (50,845) 295,155 - 450,000 450,000 450,000 450,000 450,000
GRAND TOTAL 4,905,403 (620,509) - (1,848,209) 2,436,685 - 5,630,000 2,325,000 3,500,000 5,425,500 3,250,000
Funding Sources
Connection/Capacity Fees 750,000 - 600,000 600,000 600,000 600,000 600,000
Funded by Rates and Other Revenue (1,370,509) - 5,180,000 1,875,000 3,050,000 4,975,500 2,800,000
CIP-RELATED RESERVES DETAIL
6/30/2020
Actual
6/30/21
(Unaudited)
Reappropriations & Commitments 4,905,403 2,436,685
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
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APPENDIX C: WASTEWATER COLLECTION UTILITY RESERVES
MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Wastewater
Collection 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, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015
to FY 2019 would be 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 Wastewater Collection 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 Wastewater Collection
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 Wastewater
Collection 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.
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February 2021 38 | 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)13 CIP budget, for
48 months of budgeted CIP expenses14
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 Wastewater Collection Utility
Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the
Financial Planning Period.
13 Each month is calculated based upon 1/12 of the annual budget.
14 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the
annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period
to use to derive the annual average would be FY 2023 through FY 2026 etc.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 39 | 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 Wastewater Collection 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 105 days of O&M and commodity expense
Maximum Level 150 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 Wastewater Collection 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 Wastewater Collection
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
Wastewater Collection 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 Wastewater Collection 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 2020, 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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APPENDIX D: MAP (CPA WASTEWATER COLLECTION SYSTEM - SEWER
MAINS REPLACED OR REHABILITATED SINCE 1990)
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 41 | Page
APPENDIX E: SAMPLE OF WASTEWATER COLLECTION OUTREACH
MATERIALS
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 37 | Page
APPENDIX C: WASTEWATER COLLECTION UTILITY RESERVES
MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Wastewater
Collection 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, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015
to FY 2019 would be 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 Wastewater Collection 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 Wastewater Collection
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 Wastewater
Collection 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 D
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February 2021 38 | 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)13 CIP budget, for
48 months of budgeted CIP expenses14
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 Wastewater Collection Utility
Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the
Financial Planning Period.
13 Each month is calculated based upon 1/12 of the annual budget.
14 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the
annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period
to use to derive the annual average would be FY 2023 through FY 2026 etc.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2021 39 | 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 Wastewater Collection 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 105 days of O&M and commodity expense
Maximum Level 150 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 Wastewater Collection 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 Wastewater Collection
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
Wastewater Collection 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 Wastewater Collection 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 2020, 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.
APPENDIX A: WASTEWATER COLLECTION UTILITY RESERVES
MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Wastewater
Collection 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, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015
to FY 2019 would be 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 Wastewater Collection 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 Wastewater Collection
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 Wastewater
Collection 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 E
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
Resolutionbased on the levels of CIP expense budgeted for that year.
Minimum Level 20% of the maximum CIP Reserve guideline
level 12 months of budgeted CIP expense
Maximum Level Average annual (12 month)1 CIP budget, for
48 months of budgeted CIP expenses224
months of budgeted CIP expense
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added or removed from to that reserve as
a result of a change in contractual commitments related to CIP projects. Any other
additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level:
i) Funds held in the Reserve for Commitments may be counted as part of the CIP Reserve
for the purpose of determining compliance with the CIP Reserve minimum guideline
level.
ii)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. If, at any time, the CIP
Reserve reaches its maximum level, no funds may be added to this reserve. If there are
funds in this reserve in excess of the maximum level staff must propose to transfer these
funds to another reserve or return them to ratepayers in the next Financial Plan. Staff
1 Each month is calculated based upon 1/12 of the annual budget.
2 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the
annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period
to use to derive the annual average would be FY 2023 through FY 2026 etc.
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 Wastewater Collection Utility
Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the
Financial Planning Period.
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Wastewater Collection 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 105 days of O&M and commodity expense
Maximum Level 150 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 Wastewater Collection 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 Wastewater Collection
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
Wastewater Collection 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 Wastewater Collection 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 2020, 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.
RESIDENTIAL WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-1-1 Effective 7-1-202119
dated 7-1-20198 Sheet No S-1-1
A. APPLICABILITY:
This schedule applies to each Occupied Domestic Dwelling unit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Per Month
Each Occupied Domestic Dwelling unit ................................................................................
$41.3743.32
D.SPECIAL NOTES:
1. Any dwelling unit being individually served by a Water, Gas, or Electric Meter will be
considered continuously occupied.
2.For two or more Occupied Domestic Dwelling units served by one Water Meter, the monthlyWastewater charge will be calculated by multiplying the current Wastewater rate by thenumber of dwelling units.
3.Each developed separate lot shall have a separate service lateral to a sanitary main ormanhole.
{End}
Attachment F
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL UTILITY RATE SCHEDULE S-2
CITY OF PALO ALTO UTILITIES Issued by the City Council
Supersedes Sheet No S-2-1 Effective 7-1-202119
dated 7-1-20198 Sheet No S-2-1
A. APPLICABILITY: This schedule applies to all commercial establishments other than those served under Utility Rate
Schedule S-1 (Residential Wastewater Collection and Disposal), Rate Schedule S-6 (Restaurant Wastewater Collection and Disposal) or Rate Schedule S-7 (Commercial Establishments Wastewater Disposal – Industrial Discharger). B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Minimum Charge per connection per month ............................................................. $41.37 2. Quantity Rates, per 100 cubic feet (See Section D.1)............................................. $8.097.97 D. SPECIAL NOTES: 1. The monthly charge for the quantity rate set forth in Section C.2 of this rate schedule will be based upon the average Water usage for the months of January, February and March, and applied in the following July. If a Water Meter is identified as exclusively serving irrigation landscaping, such Meter will be exempted from Wastewater charge calculations. Customers without an applicable usage history will be rebuttably presumed to have usage of 4.8 ____ ccf per month charged at the Residentialminimum monthly charge per occupied domestic dwelling unit (Utility Rate Schedule S-1) until such time as such usage may reasonably be established by the City of Palo Alto Utilities Department. 2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City and the Customer.
{End}
RESTAURANT WASTEWATER COLLECTION AND DISPOSAL UTILITY RATE SCHEDULE S-6
CITY OF PALO ALTO UTILITIES Issued by the City Council
Supersedes Sheet No S-6-1 Effective 7-1-202119
dated 7-1-20198 Sheet No S-6-1
A. APPLICABILITY: This schedule applies to all restaurants. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Minimum charge per connection per month ......................................................... $41.37 2. Quantity Rates, per 100 cubic feet of monthly metered Water usage ....................... $
12.0712.33 D. SPECIAL NOTES: 1. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City and the Customer. {End}
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL – INDUSTRIAL DISCHARGER
UTILITY RATE SCHEDULE S-7
CITY OF PALO ALTO UTILITIES Issued by the City Council
Supersedes Sheet No S-7-1 Effective 7-1-202119
dated 7-1-20198 Sheet No S-7-1
A. APPLICABILITY: This schedule applies to any establishment requiring sampling of industrial discharges in excess
of 25,000 gallons per day, or special discharge monitoring, as defined in Rule and Regulation 23, Section CD. B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Collection System Operation, Maintenance, and Infiltration Inflow:
$4.022.15 per 100 cubic feet of metered water use. 2. Advanced Waste Treatment Operations and Maintenance Charge: $1.6051 per 100 cubic feet of metered water use
3. $196.34247.56 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4. $473.38596.62 per 1000 lbs of SS (Suspended Solids) 5. $3,270.923,983.85 per 1000 lbs of NH3 (Ammonia) 6. $ 14,781.25 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc) D. SPECIAL NOTES: 1. Water usage will be determined as defined in Rule and Regulation 23, Section CD. If a Water Meter is identified as exclusively serving irrigation landscaping, such Meter will be exempted from Wastewater charge calculations. 2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City of Palo Alto and the Customer. 3. Charges for large discharges will be determined on the basis of sampling as outlined in Utilities Rule and Regulation 23, Section CD. However, for purposes of arriving at an accurate flow estimate, discharge Meters, if installed, can be utilized to measure outflow for billing purposes. Annual charges will be determined and allocated monthly for billing purposes. {End}
2021 Wastewater COS Report
January 11, 2021
CITY OFPALO ALTO
0
CITY OF
PALO
ALTO
~ RAFTELIS
Attachment G
445 S Figueroa Street, Suite 1925 Los Angeles, CA 90071 www.raftelis.com
January 11, 2021
Mr. Eric Keniston
City of Palo Alto
250 Hamilton Avenue
Palo Alto, CA 94301
Subject: Wastewater Collection Utility Cost of Service and Rate Study
Dear Mr. Keniston,
Raftelis is pleased to provide this wastewater cost of service study report (Report) to the City of Palo Alto (City).
This study involved a comprehensive review of the City’s wastewater rate structure and the calculation of cost of
service-based wastewater rates. This report summarizes key findings and recommendations related to the rates
necessary for the City to meet its obligations.
We are confident that the calculated rates are fair and equitable for the City’s customers and compliant with
Proposition 218 requirements. This report includes an executive summary, cost of service analysis based on city
budget and cost projections, and rate derivation for the wastewater utility.
It was a pleasure working with you and we wish to express our thanks for the support you, Ms. Lisa Bilir, Mr. Eric
Wong and other City staff provided during the study. If you have any questions, please do not hesitate to call me at
(626) 583-1894.
Sincerely,
Raftelis
Sudhir Pardiwala, P.E. Michael Hicks
Executive Vice President Associate Consultant
~ RAFTELIS
Table of Contents
1. Background .............................................................................................. 1
1.1.1. Objectives of Study ........................................................................................................ 1
1.1.2. System Overview ........................................................................................................... 1
2. Cost of Service Methodology ........................................................................ 3
2.1.1. LOADING (Mass Balance) ........................................................................................... 3
2.1.2. Functionalization of Costs ............................................................................................. 5
2.1.3. Revenue Requirement ................................................................................................... 8
2.1.4. Unit Cost Derivation ..................................................................................................... 8
2.1.5. Allocation of Cost to Customer Classes .......................................................................... 9
3. Rate derivation ........................................................................................ 11
3.1.1. Residential Rates ......................................................................................................... 11
3.1.2. Non-Residential Rates ................................................................................................. 11
3.1.3. Proposed Rates Schedule ............................................................................................. 12
3.1.4. Customer Impacts ....................................................................................................... 12
List of Tables
Table 2-1: Mass Balance Analysis ...............................................................................................................5
Table 2-2: O&M Expense Allocation – FY 2021-2022 .............................................................................7
Table 2-3: Revenue Requirement ................................................................................................................8
Table 2-4: Customer Class Data ..................................................................................................................8
Table 2-5: Unit Cost Derivations ................................................................................................................9
Table 2-6: Allocation of Costs to Customer Classes ................................................................................10
Table 3-1: Residential Rate Derivation .....................................................................................................11
Table 3-2: Non-Residential Rate Derivation for FY 2021-2022 .............................................................12
Table 3-3: S-1 Residential Customer Impacts ..........................................................................................12
Table 3-4: S-2 Commercial Customer Impacts ........................................................................................13
Table 3-5: S-6 Restaurant Customer Impacts ...........................................................................................13
This page intentionally left blank to facilitate two-sided printing.
WASTEWATER COS REPORT 1
1. Background
1.1.1. OBJECTIVES OF STUDY
The City of Palo Alto (City) engaged Raftelis to update the City’s cost of service (COS) methodology and wastewater
rate structure to ensure continued compliance with Proposition 218. This report documents the assumptions,
methodologies, analyses, and proposed rates developed in the study.
The mission of the City is to provide safe, reliable, environmentally sustainable, and cost-effective services. To ensure
that the City can fulfill its mission effectively this study has been prepared with the following major objectives:
1. Ensure revenue sufficiency to meet the operation and maintenance (O&M) and capital needs of the City’s
wastewater utility.
2. Ensure that rates are fair, equitable, and reflect the costs of providing services.
3. Plan for rate and revenue stability to prevent rate spikes, preserve the overall financial health of the utility,
and maintain adequate operating and capital reserves under varying demand conditions.
Wastewater rates are designed to recover the City’s costs to collect and treat wastewater (sewage). Wastewater
collection and treatment costs are increasing due to planned infrastructure upgrades at the Regional Water Quality
Control Plant (RWQCP). The existing plant is past its design lifetime and requires upgrades to meet stricter
environmental standards. In addition to this, the cost to replace sewer mains in the City’s wastewater collection
system has also increased.
1.1.2. SYSTEM OVERVIEW
The City’s sewer system collects wastewater from Palo Alto residents and delivers it to the RWQCP for treatment.
The City operates the RWQCP; however, the costs of the RWQCP are shared with five other agencies that receive
treatment services from the RWQCP (Stanford, East Palo Alto Sanitary District, Los Altos Hills, Los Altos, and
Mountain View).
The Wastewater Utility has two main costs: collection system costs and Palo Alto’s share of RWQCP costs. Both
cost components have been increasing and are expected to continue to increase.
The RWQCP has been in operation since 1934. Aging equipment, new regulatory requirements, and the transition
towards full sustainability will require the rehabilitation or replacement of much existing RWQCP infrastructure.
The City has seen increases in operational costs in recent years, and debt service for the plant is expected to increase
substantially as a major rehabilitation and replacement plan adopted in 2012 (Long Range Facilities Plan) is
implemented.
Collection system costs are also increasing, though not as significantly as treatment costs. These increasing costs are
primarily driven by increases in capital costs. The cost of underground projects to replace aging sewer mains has
nearly doubled since 2008.
Operational costs have also increased (e.g., salaries and benefits and overhead), but more slowly than treatment and
collection infrastructure-related costs.
2 CITY OF PALO ALTO
The City’s current wastewater retail customers are divided into three customer classes: S-1 Residential, S-2
Commercial, and S-6 Restaurant. S-1 Residential is the largest customer class, comprising most of the City’s retail
customers.
City staff provided overall revenue projections based on expense and reserve level projections. These projections
recommend an increase to the overall revenue generated by wastewater rates for FY 2021 – 2022 of 3%. Additionally,
in order to keep each customer’s wastewater rates in alignment with the cost of serving that customer and reflect
changing system use, certain rates are recommended for small rate adjustments while keeping overall revenue levels
of the enterprise stable.
WASTEWATER COS REPORT 3
2. Cost of Service Methodology
This section of the Report discusses the allocation of O&M expenses and capital costs to the appropriate functional
categories, allocating each functional category into cost components consistent with industry standards, the
determination of unit costs, and calculation of costs by customer class.
To allocate the cost of service among the different customer classes, costs first need to be allocated to appropriate
functional categories and each functional category must be allocated to cost causation components. The following
sections describe our allocations for the City’s wastewater system.
The total cost of wastewater service is analyzed by system function in order to equitably distribute costs of service to
the various classes of customers. For this analysis, wastewater utility costs of service are developed consistent with
the guidelines for allocating costs detailed in the Water Environment Federation (WEF) Manual of Practice No. 27,
Financing and Charges for Wastewater Systems, 2018.
The wastewater COS analysis consists of the following major steps, as outlined below:
1. Estimate residential and non-residential customer flow and strength through a mass balance around the
treatment plant
2. Functionalize O&M and capital costs into functional categories such as collection, treatment, customer
service and general
3. Allocate each functional category into cost causation components such as flow and strength
4. Develop customer class characteristics by cost causation component
5. Calculate the unit cost causation component rates by dividing the total cost in each cost causation component
in Step 3 by the customer class characteristics in Step 4
6. Calculate the cost by customer class by multiplying the unit costs in Step 5 by the customer class
characteristics in Step 4
2.1.1. LOADING (MASS BALANCE)
Wastewater customers do not generally have meters installed on their sewer connection. This stands in contrast to
water connections, which are usually metered. A wastewater COS analysis consequently requires the estimation of
loadings (i.e., flow and strength) for each customer class.
To determine the wastewater flows from different customer classes, Raftelis reviewed the water use records of the
City from March 2019 to February 2020 and the volume of wastewater receive at the treatment plant during this
period. To avoid any temporary impacts of the ongoing pandemic, Raftelis used the time period indicated above
instead of the fiscal year data.
In the City, there are four classes of customers: (i) Residential (S-1), (ii) Commercial (S-2), (iii) Restaurant (S-6) and
Industrial Discharger (S-7). Currently there are no Industrial Discharger customers in the City. Therefore, all non-
residential customers other than restaurants are classified as Commercial.
4 CITY OF PALO ALTO
Loading is a combination of flow and strength. Flow is the volume of wastewater discharge, while strength is a
three-component measurement (COD, TSS and NH31) of the concentration of soluble and the insoluble organic and
inorganic matters that will be removed or neutralized in the treatment process.
To estimate residential wastewater loading, a mass balance analysis is conducted by taking the total flow and strength
of the wastewater entering the RWQCP from the City’s collection system and reducing that loading by (i) inflow and
infiltration and (ii) the loading of the City’s non-residential customers.
Inflow and infiltration (I&I) is water that enters the wastewater collection system via a mechanism other than
intentional customer discharges via their sewer connection. Sources of I&I include rainwater, run-off, and
groundwater intrusions. I&I varies among wastewater systems. Based upon the mass balance calculation using
metered water use in the winter months (January, February, and March) to estimate sewer use for residential and
commercial customers as well as annual water usage data to estimate sewer use for restaurant customers, Palo Alto’s
I&I is estimated to represent about 29% of its total influent.
The loadings for commercial customers are estimated based on metered water use in the winter months by the City’s
commercial customers.2 The loadings for restaurant customers are estimated based on metered, year-round billed
water use by the City’s restaurant customers.3
Table 2-1 shows the total annual units of flow and strength for each customer class based on the results of the mass
balance analysis. The results were compared with industry averages to verify the calculation and assumptions used
in the mass balance. Over the last several years, multiple droughts and strong conservation messages have reduced
water use and wastewater flows but did not affect the amount of solids and biological materials in the discharge.
Current residential wastewater flows, based on the mass balance, are 4.8 ccf (one hundred cubic feet) per month per
EDU, or 46 gallons per capita per day. The 4.8 ccf number is calculated by taking 1,489,989 ccf of residential flow
divided by 26,034 residential customers, divided by 12 months, and the 46 gallons per capita per day is calculated by
taking 1,489,989 ccf of residential flow divided by population estimate of 66,649 and converted to gallons per day by
multiplying by 748 gallons per ccf and 365 days per year. This amount of flow results in much higher concentrations
as compared to the wastewater flow used in the City’s 2009 rate study. The increased concentration thus results in
an increased strength of discharges into the sewage system. To ensure that the total strength loadings influent to the
wastewater treatment plant match the total generated by all classes, the analysis began with the existing assumptions
based on the City’s 2009 rate study for strength measurements and then increased each proportionally for each
customer class in relation to reduced flows as shown below.
1 COD is Chemical Oxygen Demand, TSS is Total Suspended Solids, and NH3 is Ammonia.
2 Water consumption during winter months is used as a proxy for wastewater system use because during the wet winter
months (January, February and March) water delivered to a customer is primarily for interior use of the business (and
discharged to the sewer system) rather than used for landscape maintenance purposes. Because water use in March 2020
was extremely atypical as a result of the onset of the COVID-19 emergency, this analysis considered water use in January
2020, February 2020, and March 2019.
3 Restaurants have relatively low outdoor water use, but often have widely varying customer loads (and water use) during
the year for seasonal and other reasons. Therefore, this analysis was based on twelve months of water usage from March
2019 through February 2020. This analysis also uses a return factor on restaurant annual water use of 95% due to the
assumption that restaurants use a small amount of water for outdoor watering.
WASTEWATER COS REPORT 5
Strength Assumption from 2009 Study
Revised Strength Assumptions
As stated above, the estimated residential wastewater flow is 4.8 ccf (one hundred cubic feet) per month per EDU,
or 46 gallons per capita per day (gpcd). The results for estimated residential wastewater flow falls within what Raftelis
considers likely to be a reasonable indication of indoor water use and wastewater discharge for the City.
Table 2-1: Mass Balance Analysis
March 2019 – February
2020 Flow COD TSS NH3
(ccf) (lbs/yr) (lbs/yr) (lbs/yr)
City Influent 3,338,235 13,253,263 5,938,962 750,185
Less: I&I (29 %) 968,088 755,394 755,394 0
Net Influent 2,370,147 12,497,869 5,183,568 750,185
S-2: Commercial 800,056 3,243,257 1,096,734 244,518
S-6: Restaurant 80,102 1,432,575 507,851 13,261
Non-Residential Loading 880,158 4,675,832 1,604,586 257,779
Net Residential Loading 1,489,989 7,822,036 3,578,982 492,406
2.1.2. FUNCTIONALIZATION OF COSTS
After determining the utility’s revenue requirements, the next step in a COS analysis is to functionalize its operating
and capital costs. The functions of the utility are collection, treatment, customer service and general. Each of the
costs of the utility can be classified into these functions.
The City’s O&M budget, is categorized as follows:
» Allocated Charges
» Distribution System - Administration
» Engineering
» Operation and Maintenance
» Administration
» Customer Service
» Rates / Field Services / Utility Billing
Customer Class COD mg/l TSS, mg/l Ammonia, mg/l
S-1 440 210 26
S-2 340 120 24
S-6 1,500 555 13
Customer Class COD mg/l TSS, mg/l Ammonia, mg/l
S-1 841 385 53
S-2 649 220 49
S-6 2,865 1,016 27
6 CITY OF PALO ALTO
» Transfers
» Treatment
The City’s capital costs are functionalized into collection and treatment depending on the type of project.
For operating and capital costs, each function is then assigned an allocation to cost causation components, expressed
as a percentage for each cost causation component. The cost causation components are:
» Flow
» COD
» TSS
» NH3
» Customer
» General
Here “customer” costs are costs that are incurred on a per-customer basis, while “general” components are costs that
cannot be specifically allocated to one of the other cost causation components.
Table 2-2 shows the O&M expenses for FY 2021-2022 including the function and allocation to each cost causation
component. Raftelis allocated each of these costs based on their functions and based on discussion with City staff
regarding the costs related to each of the cost causation components.
The second half of Table 2-2 shows the dollar amounts for each cost causation component based on the allocation
percentages shown in the first half of the table. The total collection system percent allocation, shown in the third line
from the end, is the proportion of each cost causation component based on total O&M expenses.
Capital costs are categorized as collection or treatment. Collection capital costs are allocated entirely to flow while
treatment costs (capital and O&M) are allocated based on the current methodology that Palo Alto uses to charge its
partner agencies. This methodology was developed by the City’s treatment plant staff to meet USEPA requirements.
Actual projected treatment costs for the coming year are then allocated based on these percentages. All treatment
costs are allocated to Flow at 34% and COD, TSS and NH3 at 22% each.
WASTEWATER COS REPORT 7
Table 2-2: O&M Expense Allocation – FY 2021-2022
O&M Budget Function Flow COD TSS NH3 Customer General TOTAL
Allocated Charges4 General 100.0% 100.0%
Distribution System -
Administration Collection 100.0% 100.0%
Engineering Collection 100.0% 100.0%
Operation and
Maintenance Collection 100.0% 100.0%
Administration General 100.0% 100.0%
Customer Service Customer 100.0% 100.0%
Rates / Field
Services / Utility
Billing
Customer 100.0% 100.0%
Transfers5 General 100.0% 100.0%
Treatment Treatment 34.0% 22.0% 22.0% 22.0% 100.0%
O&M Budget Function Flow COD TSS NH3 Customer General TOTAL
Allocated Charges General $0 $0 $0 $0 $0 $1,005,426 $1,005,426
Distribution System -
Administration Collection $448,262 $0 $0 $0 $0 $0 $448,262
Engineering Collection $361,475 $0 $0 $0 $0 $0 $361,475
Operation and
Maintenance Collection $3,241,907 $0 $0 $0 $0 $0 $3,241,907
Administration General $0 $0 $0 $0 $0 $0 $0
Customer Service Customer $0 $0 $0 $0 $274,967 $0 $274,967
Rates / Field
Services / Utility
Billing
Customer
$0 $0 $0 $0 $45,474 $0 $45,474
Transfers General $0 $0 $0 $0 $0 $723,370 $723,370
TOTAL -
COLLECTION
SYSTEM
$4,051,644 $0 $0 $0 $320,441 $1,728,797 $6,100,882
% O&M Allocation -
Collection Only 66% 0% 0% 0% 5% 28% 100%
Treatment Treatment $3,140,163 $2,031,870 $2,031,870 $2,031,870 $0 $0 $9,235,774
Grand Total $7,191,807 $2,031,870 $2,031,870 $2,031,870 $320,441 $1,728,797 $15,336,656
4 Includes allocated general and administrative salaries and benefits, utilities administration direct charges and General
Fund administrative and overhead expenses to the Wastewater Collection Utility.
5 Includes rent, enterprise transfers and other transfers.
8 CITY OF PALO ALTO
2.1.3. REVENUE REQUIREMENT
Revenue requirements for FY 2021-2022 are shown below. Table 2-3 shows the City’s total revenue to be recovered
from rates in FY 2021-2022. This figure is calculated by subtracting revenue offsets (or miscellaneous, non-rate
revenues) and adjustments from the revenue requirements, which includes O&M expenses, rate funded capital costs,
and debt service payments. The City’s total revenue requirement is allocated into Operating and Capital costs, which
will later be allocated into each cost causation component. Additional details are shown in subsequent sections. The
O&M and capital expenses and revenue offsets data is based on the City’s financial plan for FY 2021-2022.
Table 2-3: Revenue Requirement
FY 2021-2022 Operating Capital Total
Revenue Requirements
O&M Expenses - Collection $6,100,882 $6,100,882
O&M Expenses - Treatment $9,235,774 $9,235,774
Debt Service $128,566 $128,566
Rate Funded Capital - Collection $4,350,000 $4,350,000
Rate Funded Capital - Treatment $1,917,840 $1,917,840
Subtotal Revenue Requirements $15,336,656 $6,396,406 $21,733,062
Less: Revenue Offset
Interest Plus Unrealized Gain or Loss $263,125 $263,125
Other $370,730 $370,730
Connection Fees $306,499 $306,499
Capacity Fees $460,950 $460,950
Reimbursement from Other Funds $35,515 $35,515
Bad Debt $(12,288) $(12,288)
Subtotal Revenue Offset $657,082 $767,449 $1,424,531
Adjustments
Cash from Reserves ($707,651) ($707,651)
Subtotal Adjustments $0 ($707,651) ($707,651)
Revenue to be Recovered from Rates $14,691,795 $6,336,609 $21,016,183
2.1.4. UNIT COST DERIVATION
Table 2-4 shows the flow, strength, and accounts data for each customer class as set forth in the mass balance in
Table 2-1. This is based on customer data provided by the City for March 2019 through February 2020.
Table 2-4: Customer Class Data
Customer Class Flow
(ccf)
COD
(lbs/yr)
TSS
(lbs/yr)
NH3
(lbs/yr)
Customer
Count
Residential 1,489,989 7,822,036 3,578,982 492,406 26,034
Non-Residential
S-2: Commercial 800,056 3,243,257 1,096,734 244,518 1,437
S-6: Restaurant 80,102 1,432,575 507,851 13,261 162
TOTAL 2,370,147
12,497,869 5,183,568 750,185 27,633
Table 2-5 shows the unit cost derivation for all cost causation components. Operating expenses, which total
approximately $15.3 million (from Table 2-3), are allocated based on the O&M expense allocation shown in Table
WASTEWATER COS REPORT 9
2-2 and are broken into their respective categories for collection ($6.1 million) and treatment ($9.2 million). The total
cost is multiplied by each cost causation component’s allocation percentage to determine the dollar amount. A
similar process is used to calculate the capital expenses for each cost causation component.
General costs are reallocated in proportion to the remaining costs. The final adjusted COS, after reallocating costs
related to the fixed charge, is divided by each unit of service (ccf/year for flow, lbs/year for strength and number of
bills for customer costs) to determine the unit cost for each cost causation component. The units of service are derived
from Table 2-4. A similar process is carried out for the treatment section to derive the unit costs for each of their cost
causation components.
Table 2-5: Unit Cost Derivations
Development
Unit Cost
Collection
Flow COD TSS NH3 Customer General TOTAL
Operating Cost $3,615,271 $0 $0 $0 $285,929 $1,542,601 $5,443,800
Capital Cost $4,418,769 $0 $0 $0 $0 $0 $4,418,769
Total COS $8,034,039 $0 $0 $0 $285,929 $1,542,601 $9,862,569
Allocation of
General Costs
$1,489,587 $0 $0 $0 $53,014 ($1,542,601
)
$0
Adjusted COS $9,523,626 $0 $0 $0 $338,943 $0 $9,862,569
Units of Service 2,370,147 12,497,869 5,183,568 750,185 331,596
(ccf/yr) (lbs/yr) (lbs/yr) (lbs/yr) (Bills)
Unit Cost
Collection
$4.02 $0.00 $0.00 $0.00 $1.03
(ccf) (Bill/mo)
Development
Unit Cost
Treatment
Flow COD TSS NH3 Customer General TOTAL
Operating Cost $3,140,163 $2,031,870 $2,031,870 $2,031,870 $0 $0 $9,235,774
Capital Cost $652,066 $421,925 $421,925 $421,925 $0 $0 $1,917,840
Total Cost of
Service
$3,792,229 $2,453,795 $2,453,795 $2,453,795 $0 $0 $11,153,614
Units of Service 2,370,147 12,497,869 5,183,568 750,185 331,596
(ccf/yr) (lbs/yr) (lbs/yr) (lbs/yr) (Bills)
Unit Cost
Treatment
$1.60 $0.20 $0.47 $3.27 $0.00
(ccf) (lb) (lb) (lb)
2.1.5. ALLOCATION OF COST TO CUSTOMER CLASSES
The next step in the COS analysis is to proportionately allocate costs to the different customer classes. The unit costs
derived in Table 2-5 are multiplied by each customer class’s flow, strength, and accounts data shown in Table 2-4 to
determine the cost allocation for each class. For example, to determine the Residential Flow costs, the Residential
flow of 1,489,989 ccf is multiplied by the Collection and Treatment Flow unit cost of $4.02 per ccf and $1.60 per ccf,
respectively, to get $8,370,990 (note there are slight differences due to rounding of more decimal places).
10 CITY OF PALO ALTO
Table 2-6 shows the allocation of costs to each customer class and a comparison between the total proposed COS
amount and the projected FY 2021-2022 revenue at current rates.
Table 2-6: Allocation of Costs to Customer Classes
Customer
Class Flow COD TSS NH3 Customer Total
Current
Rates
Revenue
S-1
Residential $8,370,990 $1,535,756 $1,694,217 $1,610,622 $319,330 $13,530,914 $12,924,319
Non-
Residential
S-2:
Commercial $4,494,839 $636,772 $519,172 $799,799 $17,626 $6,468,207 $6,482,022
S-6:
Restaurant $450,026 $281,268 $240,407 $43,375 $1,996 $1,017,062 $1,031,313
Total - COS $13,315,855 $2,453,795 $2,453,795 $2,453,795 $338,943 $21,016,183 $20,437,654
3. Rate derivation
This section describes the derivation of the FY 2021-2022 wastewater rates based on the COS analysis. All calculated
rates are rounded up to the nearest penny.
3.1.1. RESIDENTIAL RATES
S-1 Residential customers are relatively homogenous, and many agencies charge a fixed charge to residential
customers for simplicity and ease of understanding. The proposed residential rates ($43.32 per residential dwelling
unit) were calculated by dividing the revenue requirement for residential customers ($13,530,914) by the total number
of residential dwelling units served by the wastewater utility (26,034), and dividing that by 12 to calculate the monthly
cost of service rate.
Residential customers are charged a fixed rate per residential dwelling unit. We propose to retain the current fixed
rate structure for residential customers. Table 3-1 shows the calculation of the FY 2021-2022 Residential wastewater
rate and a comparison to the current rate.
Table 3-1: Residential Rate Derivation
Wastewater Rates
Calculation
Revenue
Required
Dwelling
Units COS Rates Current
Rates Difference
Monthly Service Charge
S-1: Residential $13,530,914 26,034 $43.32 $41.37 4.7 %
Residential monthly service charges must increase by 4.7% as updated usage and strength data reveal a gap needed
to cover the cost to serve all customers from the prior study. Residential flow estimates have increased relative to
commercial and restaurant flow since the prior study and this is the primary reason for the difference between current
rates and the rates in accordance with the COS to the residential class.
3.1.2. NON-RESIDENTIAL RATES
Commercial customers are not very homogenous in that their flow can vary significantly. We propose to retain the
current water-use-based rate structure for these customers. Each S-2 Commercial customer is charged a monthly
charge during each fiscal year that is based on their average winter water usage in ccf for the preceding months of
January, February, and March. Winter water consumption is used because during the winter months less water is
used by customers for landscape maintenance, so winter water use is more proportional to sewer use. S-6 Restaurant
Customers are charged based on actual metered water usage in a billing period, since restaurants generally have
minimal landscaping but have water usage that can vary dramatically from month to month based on customer
volume.
The S-2 Commercial and S-6 Restaurant customer class flow and strengths loadings are outlined in Table 2-1. Table
3-2 shows the calculation of the FY 2021-2022 commercial and restaurant wastewater rates and a comparison to the
current rates.
Table 3-2: Non-Residential Rate Derivation for FY 2021-2022
Wastewater
Rates
Calculation
Revenue
Required Water Use COS Rates Current
Rates Difference
Volume Charge ($/CCF) *
S-2: Commercial $6,468,207
800,056
$8.09 $7.97 1.5%
S-6: Restaurant $1,017,062 84,318 $12.07 $12.33 -2.1 %
*Note: We recommend elimination of the minimum charge for S-2 and S-6 customers going forward. S-2 customers
should be billed only a volume charge based upon the average water usage for the months of January, February and
March and applied through the year starting in the following July (so their monthly rate is the same for each month
of the twelve-month billing year). This is done because the “rainy and cool” winter months are the period when
water use is best correlated to sewer use and when fluctuations in water use due to landscape needs is minimized.
For S-6 customers, the volume charge is based each month on metered water use during the prior metered-read
period. For new S-2 and S-6 customers, without an applicable usage history, the City will presume to have use of 4.8
ccf per month, the estimated residential wastewater flow per EDU, until such time as usage may reasonably be
established by the City Utilities Department.
3.1.3. PROPOSED RATES SCHEDULE
For FY 2021-2022, a 3% increase in overall revenues is proposed based on the City staff’s calculations of revenues
based on expenses and reserve needs. As shown in Tables 3-1 and 3-2, residential and commercial rates will increase,
and restaurant rates will decrease, as a result of the COS analysis which allocates costs consistent with industry
methodology so that customers pay in proportion to service received.
Rates for any future industrial customers will be calculated using the unit costs shown in Table 2-5 and loadings of
that customer.
3.1.4. CUSTOMER IMPACTS
Table 3-3 shows the customer monthly bill impacts for S-1 Residential Customers in FY 2021-2022 of the proposed
COS adjustments.
Table 3-3: S-1 Residential Customer Impacts
Customer Class Current
Bill
Proposed
Bill $ Difference
S1: Residential $41.37 $43.32 $1.95
Table 3-4 shows the customer monthly bill impacts for S-2 Commercial customers with average winter consumption
at varying ranges.
Table 3-4: S-2 Commercial Customer Impacts
Average
Winter Usage
per month
Current
Bill
Proposed
Bill $ Difference
10 CCF $79.70 $80.90 $1.20
20 CCF $159.40 $161.80 $2.40
40 CCF $318.80 $323.60 $4.80
60 CCF $478.20 $485.40 $7.20
Table 3-5 shows the customer monthly bill impacts for S-6 Restaurant customers with varying metered water usages.
Table 3-5: S-6 Restaurant Customer Impacts
Usage per month Current
Bill
Proposed
Bill $ Difference
10 CCF $123.30 $120.70 ($2.60)
20 CCF $246.60 $241.40 ($5.20)
40 CCF $493.20 $482.80 ($10.40)
60 CCF $739.80 $724.20 ($15.60)