HomeMy WebLinkAboutStaff Report 2402-2604CITY OF PALO ALTO
Finance Committee
Special Meeting
Tuesday, April 23, 2024
5:30 PM
Agenda Item
3.Finance Committee to Review and Recommend that City Council Adopt a Resolution
Approving the Fiscal Year 2025 Water Utility Financial Plan, and Increase Water Rates by
Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service
From Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered
and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water
Service) as Recommended by the Utilities Advisory Commission
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Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Utilities
Meeting Date: April 23, 2024
Staff Report: 2402-2604
TITLE
Finance Committee to Review and Recommend that City Council Adopt a Resolution Approving
the Fiscal Year 2025 Water Utility Financial Plan, and Increase Water Rates by Amending Rate
Schedules W-1 (General Residential Water Service), W-2 (Water Service From Fire Hydrants), W-3
(Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water
Service), and W-7 (Non-Residential Irrigation Water Service) as Recommended by the Utilities
Advisory Commission
RECOMMENDATION
Staff recommends the Finance Committee review the Utilities Advisory Commission (UAC)
recommendation and recommend the City Council adopt a resolution (Attachment A) for the FY
2025 Water Utility rates:
1. Approving the Fiscal Year (FY) 2025 Water Utility Financial Plan (Attachment A, Exhibit 1);
and
2. Amending the following rate schedules to reflect increases effective July 1, 2024 (FY 2025)
(Attachment A, Exhibit 2):
a. W-1 General Residential Water service,
b. W-2 Water Service from Fire Hydrants,
c. W-3 Fire Service Connections,
d. W-4 Residential Master-Metered and General Non-Residential Water Service, and
e. W-7 Non-Residential Irrigation Water Service
EXECUTIVE SUMMARY
The City’s water rate schedules consist of a volumetric charge for each CCF (100 Cubic Feet or
748 gallons) of water consumed during the billing period and a monthly service charge for each
customer, based on water meter size. The volumetric charge has two parts: a wholesale
commodity rate (or San Francisco Public Utilities Commission or SFPUC wholesale rate), and a
customer volumetric rate. Water rates are designed to recover the City’s costs of buying and
distributing water while maintaining adequate financial reserves. The customer volumetric rate
and the monthly service charge together are considered the distribution rates; revenue from
those rates pay for the upkeep of Palo Alto’s distribution system. Revenue from the wholesale
commodity rate pays for the City’s cost of buying water from the SFPUC.
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The fiscal year (FY) 2025 Water Utility Financial Plan includes projections of the utility’s costs and
revenues for FY 2024 through FY 2029. The Financial Plan anticipates costs will rise by about 5.9%
per year on average over the next several years. Due to the drought and water conservation
efforts together with near record-setting precipitation and snowpack in the winter of 2022-2023,
the water utility’s sales revenue declined in FY 2023 by $4.864 million or 10% compared with
sales revenue in FY 2021. Funding from the Operations Reserve together with a $3 million
transfer from the Rate Stabilization Reserve to the Operations Reserve offset the revenue
declines. Net of supply cost savings, water sales were $2.4 million lower than forecasted. Demand
recovery is projected to be slow, and as occurred following prior droughts, some conservation is
projected to be permanent.
The Water Utility used available reserves to hold rates flat for two years (FY 2021 and FY 2022)
and manage two years of drought-related sales revenue reductions so far (FY 2022 and FY 2023).
The attached Financial Plan uses reserve funding from the Operations Reserve, Rate Stabilization
Reserve and CIP Reserve together with rate increases to manage the continuing decreased sales
revenue and increasing costs throughout the planning period. While these rate increases can be
perceived as decreasing the benefit of conservation, bills for customers who conserve will be
lower in the future than they would have been without conservation. Without the use of the Rate
Stabilization Reserve in FY 2024 and FY 2025, water distribution rate increases of at least 22%
would be needed in FY 2025. This Financial Plan projects that the Rate Stabilization Reserve will
be exhausted by the end of FY 2026 and begin to be refilled in FY 2029.
Customers have a separate commodity rate for purchased water from the San Francisco Public
Utilities Commission (SFPUC) relative to the rest of the distribution-related portion of the
volumetric rates. This commodity charge was passed-through to customers for a five year period
from July 1, 2020 through June 30, 2024 (Resolution 98441). The commodity rate is currently
$5.21 per hundred cubic feet (CCF) and will increase to $5.55 on July 1, 2024, according to
SFPUC’s February 15, 2024 forecast. The SFPUC will not determine its final wholesale customer
rate for FY 2025 until May or June 2024. The Prop 218 process will be followed to request Council
approval to increase the commodity rate in accordance with SFPUC’s projections on July 1, 2024.
Additionally, a recommendation for Council approval to re-authorize the pass-through provision
for the water commodity charge for another five-year period from 2024 through 20292 for
possible future commodity charge increases during that time period.
BACKGROUND
Every year staff presents the UAC 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 UAC and Council members as they review the budget and rate
recommendations. Each Financial Plan also contains a set of Reserve Management Practices
describing the reserves for each utility and the management practices for those reserves.
All of the City’s potable water comes from the SFPUC’s Hetch Hetchy Regional Water System or
Regional Water System. This same system serves San Francisco and other Bay Area cities. San
1 Resolution 9844 https://www.cityofpaloalto.org/files/assets/public/v/1/city-clerk/resolutions/reso-9844.pdf?t=69020.51
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Francisco operates the system, but as much as two thirds of the water is used outside of San
Francisco by 26 cities, water districts, and private utilities. These agencies, including the City, are
frequently referred to as the “wholesale customers” (as compared to the SFPUC’s “retail
customers” in San Francisco). The Bay Area Water Supply and Conservation Agency (BAWSCA)
represents the water supply and conservation interests of wholesale customers and negotiates
with the SFPUC on their behalf. BAWSCA also ensures contract compliance through regular
review of the SFPUC’s accounting and capital expenditures.2
The Water Utility has two main costs: water supply costs (primarily the cost of water delivered
to Palo Alto from the Regional Water System) and the costs of operating the distribution system
(the system of pipes, pumps, reservoirs, and other infrastructure that carries water to Palo Alto
customers). Both cost components have been increasing and are expected to continue to
increase.
For many years, the largest cost increases have been on the water supply side. This is due
primarily to major capital investments the SFPUC has made since 2010, which were undertaken
partly due to pressure from wholesale customers. The Water System Improvement Program
(WSIP) is a $4.8 billion capital improvement program, one of the largest in the country, to
rehabilitate and seismically strengthen the lower portions of the Regional Water System. One of
the goals is to achieve the capability to return to service within 24 hours after a major earthquake.
Although much of the work is complete, some of the projects are still under construction and
bond financing of WSIP projects over the next several years will continue to drive wholesale rates
up. The program has greatly improved the resiliency of the Hetch Hetchy Regional Water System
but has also led water supply costs to approximately double. Additionally, reduced regional water
demand as a result of drought and drought rebound together with relatively wet weather in 2023
has put upward pressure on wholesale rates. The third driver of wholesale rate increases is the
wholesale customer balancing account; SFPUC used a balance in this account owed to wholesale
customers to hold rates constant for five years and mitigate the need for rate increases during
the drought. However, the account is projected to have a $23.7 million balance owed to the City
of San Francisco by the end of the current fiscal year.
CPAU’s operational costs for the water utility have increased by approximately 6.5% per year
over the last five years; Resource Management, Customer Service, and Operations and
Maintenance costs were the primary reasons for the increase. Capital costs have fluctuated from
year to year and are projected to increase due to construction inflation as well as one-time capital
needs to replace or rehabilitate two reservoirs. This Financial Plan projects increases in capital
and operational costs that align similarly with the City’s Budget and Long-Range Financial
Forecast and average approximately 4% - 6% per year over the next five years.
ANALYSIS
The financial position of the City’s water utility is assessed annually to plan for adequate
revenue to fund operations, in compliance with the cost of service requirements set forth in the
California Constitution (Proposition 218). This includes making long-term projections of market
conditions, the physical condition of the system, and other factors that could affect utility costs,
and setting rates adequate to recover these costs. The current rate proposals are also based on
2 For a video summary of BAWSCA’s activities, see https://vimeo.com/283596665/5619ce2c11
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the cost of service (COS) methodology in the 2019 report by Raftelis Financial Consultants titled
“Proposed FY 2020 Water Rates,” (see Attachment Q3 to staff report 102954), which updated
methodology originally described in the 2012 Palo Alto Water Cost of Service & Rate Study, and
its subsequent updates in 2015
Proposed Actions
1. Increase rates for Rate Schedules W-1 (General Residential Water service), W-2 (Water
Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-
Metered and General Non-Residential Water Service), and W-7 (Non-Residential
Irrigation Water Service); and
2. Transfer up to $3.461 million from the CIP Reserve to the Operations Reserve in FY 2024.
3. Transfer up to $2.069 million from the Rate Stabilization Reserve to the Operations
Reserve in FY 2024.
The FY 2024 Water Utility Financial Plan describes these proposed actions in detail. Tables 1
through 4 below illustrate the current and proposed water distribution rates under the attached
Financial Plan. The rates shown below are exclusive of the commodity rate charged to customers
based on SFPUC supply charges. The commodity rate is currently $5.21 per CCF. SFPUC’s proposed
rate increase in FY 2025 is $5.55 per CCF (6.5% increase); the current rate would increase on
or around July 1, 2024. SFPUC is also proposing to increase the SFPUC meter charge but has not
yet finalized the impacts on that charge.
3 Attachment Q https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports-
cmrs/attachments/attachment-q-6055187-water-cosa.pdf?t=48180.98
4 Staff Report 10295 https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/2019/id-10295-mini-packet-06.04.2019.pdf
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Table 1: Current and Proposed Water Consumption Charges
Current
(7/1/2023)
Proposed
(7/1/2024)
Change
($/CCF)
Change (%)
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 2.72 3.07 0.35 13%
Tier 2 Rates 6.33 7.15 0.82 13%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 3.83 4.32 0.49 13%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 3.83 4.32 0.49 13%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 5.83 6.58 0.75 13%
Table 2 and Error! Reference source not found.Table 3 show the current monthly service charges for rate
schedules W-1, W-4 and W-7.
Table 2: Current and Proposed Monthly Service Charges for Residential W-1
Monthly Service Charge ($/month
based on meter size)
Change
Meter
Size Current
(7/1/2023)
Proposed
(7/1/2024)
$%
5/8” 21.48 24.27 2.79 13%
3/4” 21.48 24.27 2.79 13%
1” 21.48 24.27 2.79 13%
1 ½” 69.38 78.39 9.01 13%
2” 107.32 121.27 13.95 13%
3” 227.48 257.05 29.57 13%
4” 404.56 457.15 52.59 13%
6” 828.27 935.94 107.67 13%
8” 1,523.92 1,722.02 198.10 13%
10” 2,409.29 2,722.49 313.20 13%
12” 3,168.19 3,580.05 411.86 13%
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Table 3: Current and Proposed Monthly Service Charges for W-4 and W-7
Monthly Service Charge ($/month
based on meter size)
Change
Meter
Size Current
(7/1/2023)
Proposed
(7/1/2024)
$%
5/8” 18.78 21.22 2.44 13%
3/4” 25.11 28.37 3.26 13%
1” 37.76 42.66 4.90 13%
1 ½” 69.38 78.39 9.01 13%
2” 107.32 121.27 13.95 13%
3” 227.48 257.05 29.57 13%
4” 404.56 457.15 52.59 13%
6” 828.27 935.94 107.67 13%
8” 1,523.92 1,722.02 198.10 13%
10” 2,409.29 2,722.49 313.20 13%
12” 3,168.19 3,580.05 411.86 13%
Table 4 shows the current and proposed monthly service charges for rate schedule W-3.
Table 4: Current and Proposed Monthly Service Charges for Fire Services (W-3)
Monthly Service Charge ($/month
based on meter size)
Change
Meter
Size Current
(7/1/2023)
Proposed
(7/1/2024)
$%
2” 4.42 4.99 0.57 13%
4” 27.38 30.93 3.55 13%
6” 79.51 89.84 10.33 13%
8” 169.45 191.47 22.02 13%
10” 304.74 344.35 39.61 13%
12” 492.24 556.23 63.99 13%
Bill Impact of Proposal
Table 5 and Table 6 show the impact of the proposed July 1, 2024 rate changes on the median
residential, commercial and irrigation bills including the SFPUC commodity pass-through rate
increase of 6.5% or $5.55 per CCF. The bill increases shown in Table 6 vary by usage because the
SFPUC increase per CCF differs from the distribution rate increases.
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Table 5: Impact of Proposed Water Rate Changes on Residential Bills
ChangeUsage (CCF/mo.)Bill under Current
Rates (7/1/2023)
Bill under Proposed
Rates (7/1/2024)$/mo.%
4 $53.20 $58.75 $5.55 10%
(Winter median) 7 $80.60 $88.69 $8.09 10%
(Annual median) 9 $103.68 $114.09 $10.41 10%
(Summer median)
14 $161.38 $177.59 $16.21 10%
25 $288.32 $317.29 $28.97 10%
Table 6: Impact of Proposed Water Rate Changes on Commercial Bills
ChangeUsage (CCF/mo.)Bill under Current
Rates (7/1/2023)
Bill under
Proposed Rates
(7/1/2024)$/mo.%
Commercial (W-4) (5/8” meters)
(Annual median) 12 $127.26 $139.66 $12.40 10%
(Annual average) 64 $597.34 $652.90 $55.56 9%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 $168.74 $187.56 $18.82 11%
(Summer median) 37 $477.86 $527.20 $49.34 10%
(Winter average) 56 $687.62 $757.67 $70.05 10%
(Summer average) 199 $2,266.34 $2,492.26 $225.92 10%
Projections reflect the expected median quantities of water use to decrease from pre-drought
levels, however, as calls for water conservation continue. Customers who conserve will
experience less of a bill increase than those customers who are not reducing water consumption.
FY 2025 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 7 shows the projected rate adjustments over the next five years and their impact on the
annual median residential water bill for 5/8” customers. These projected rate adjustments
include the impact of the commodity rate increasing consistent with SFPUC’s rate projection from
the February 15, 2024 Wholesale Customer meeting which forecasted a 6.5% in FY 2025 to $5.55
per CCF followed by 1.4% in FY 2026, 5.3% in FY 2027, 7.4% in FY 2028 and 3.6% in FY 2029.
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Table 7: Projected Rate Adjustments, FY 2025 to FY 2029 (5/8” meter)
Fiscal Year FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Water Utility 10%8%11%11%5%
Estimated Monthly Bill $114.09 $123.78 $137.45 $152.35 $160.12
Estimated Bill Impact ($/mo)1 $10.41 $9.69 $13.67 $14.90 $7.77
1) estimated impact on median monthly residential water bill for customers with 5/8” meter,
which is currently $103.68.
Figures 1 and 2 below illustrate the projected increases in the Water Utility’s costs between FY
2024 and FY 2029. Capital shown for FY 2024 includes an average of FY 2024 and FY 2023 and
reflects CIP dollars budgeted in prior years carried forward to FY 2024. Capital costs are increasing
more than supply and operations due to the replacement or rehabilitation of two reservoirs.
Figure 1: Projected FY 2024 and FY 2029 costs
3%2%
8%
$0
$5
$10
$15
$20
$25
$30
$35
Mi
l
l
i
o
n
s
2024
2029
Water Supply Operations Capital
Average Annual % Change
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Figure 2: Percentage of Total Cost Increase From FY 2024 to FY 2029
Attributed to Supply, Capital, and Operations Costs
Water Supply Costs
The cost of water is a major driver for the increase in the Water Utility’s costs (and therefore
rates) in FY 2025. Wholesale water costs are adopted by the SFPUC, and generally have changed
on an annual basis. The SFPUC is currently engaged in a $4.8 billion Water System Improvement
Program (WSIP) for regional projects. As of June 30, 2023, 99.2% of the WSIP regional
construction contracts are complete.6 WSIP will continue to result in large increases in the annual
debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project is
completed, wholesale customers must start paying the debt service costs within 3 to 4 years. For
most of those costs, funded with bond financing, the costs will be paid off over approximately 30
years.
As the SFPUC completes WSIP projects, the SFPUC is pursuing a suite of other capital
improvement work; dam safety improvements and Mountain Tunnel (a critical piece of
infrastructure used to move water from the Hetch Hetchy Reservoir to the Bay Area) repairs are
rate increase drivers during the next 10-year timeframe. Future and in-progress construction
work will require bond funding.
BAWSCA Revenue Bond Refunding
On January 5, 2023, BAWSCA completed the settlement of BAWSCA’s revenue bond series 2023A
51%
19%
30%
Contribution to FY 2024 to FY 2029
Cost Increases by Source
Water Supply Operations Capital
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to refund bonds issued in 2013 at a lower rate. BAWSCA locked-in the bond rates in October 2021
at an all-in true interest rate of 2.06%. The refunding bond transaction will generate
approximately $27.1 million in net present value savings over the term of the bonds, or an
average of approximately $2.5 million of savings per year for all Wholesale Customers, starting
in fiscal year 2022-23. The estimated net present value of savings per year for Palo Alto is
approximately $175,000.
Capital Projects & Reserves
The capital budget includes one-time seismic water system upgrades and/or replacements for
the Park and Dahl reservoirs to improve earthquake resiliency. This work will improve protection
from water loss at these reservoirs in a seismic event.
The attached Financial Plan also updates the transfer proposals due to project cost increases and
available reserve balances. For CIP, the Financial Plan assumes funding from rates will cover
$7.461 million of planned CIP in FY 2024. This figure is the portion of planned CIP in FY 2024 that
will not be paid for through funds collected in prior years (the FY 2024 Capital budget, less funds
available in the Reappropriations and Commitments Reserves at FY 2023 year’s end), shown in
line 13 of Table 9 for FY 2024. This capital budget is projected to be funded by the capital program
contribution of $4 million in FY 2024 together with $3.461 million from the CIP Reserve. Because
withdrawals from the CIP Reserve for use on capital projects require Council action,7 staff
requests Council approval to transfer up to $3.461 million from the CIP Reserve to the Operations
Reserve. The need for each of the transfers will be re-evaluated once the year-end reserve
balances for FY 2024 are known. The capital program contribution is lower than in future years
because reservoir rehabilitation project moved from FY 2024 to FY 2028 which delayed the need
for approximately $6 million of the capital funding by four years. Figure 3 shows the CIP Reserve
year-end balances.
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Figure 3: Actual FY 2023 and Projected Capital Reserve Balances FY 2024 to FY 2029
Figure 4 illustrates the year-end reserve balances for FY 2023 (actual) and projected through FY
2029. Although the CIP Reserve drops below the minimum guideline range in FY 2028, this is
temporary and is due to one-time reservoir replacement as one of the planned reservoir seismic
upgrades. The CIP Reserve returns to within the guideline in the following year and in all future
years. In accordance with the Water Utility Reserves Management Practices Section 5(c)
(included as Appendix C to the attached Financial Plan), the Council may approve a plan to
address a CIP Reserve below the minimum level within one or more years.
Water Utility Operation Reserve levels remain within guideline ranges at year-end FY 2023: the
CIP Reserve ending balance was $6.961 million and the Operations Reserve year-end balance for
FY 2023 was $7.957 million. There is also $6.069 million available in the Rate Stabilization Reserve
at year-end FY 2023. This Financial Plan uses reserve funding (from the Operations Reserve, Rate
Stabilization Reserve and CIP Reserve) together with rate increases to manage the decreased
sales revenue and increasing costs from FY 2025 through FY 2029.
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Figure 4: Actual Reserve Levels for FY 2023 and Projections through FY 2029
Rate Stabilization Reserve
Rate Stabilization Reserve balances are used to buffer the impact of current and anticipated
future rate increases. A transfer of $2.069 million from the Rate Stabilization Reserve to the
Operations Reserve in FY 2024 and $2 million from the Rate Stabilization Reserve to the
Operations Reserve in FY 2025, and in FY 2026 are forecasted. Utilizing the Rate Stabilization
Reserve balances in this manner, along with the cost and revenue projections outlined in
this Financial Plan, is anticipated to minimize the potential water distribution rate increases to
a level lower than they would be otherwise. This approach allows for smoothing of rate increases
across multiple years and ensures ongoing funding of crucial capital projects. This Financial Plan
projects that the Rate Stabilization Reserve will be exhausted by the end of FY 2026 (see line 7 in
Table 9).
$0
$5
$10
$15
$20
$25
$30
$35
$40
FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Actual Projections
Mi
l
l
i
o
n
s
Rate Stabilization
Reserve
Operations
Reserve
Capital Reserve
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Table 9: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending
Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution
To/(From) Reserves Projected for FY 2024 to FY 2029 ($000)
* Planned CIP (item 13) is reflected as an expense in the CIP Reserve and does not include CIP
funded through Reappropriations or Commitments reserves. This will be funded with the $4
million Capital Program Contribution (item 11) and $3.461 million from the CIP Reserve.
Water Bill Comparison with Surrounding Cities
Table 10 compares water bills for residential customers to those in surrounding communities as
of January 2024 (under current the City’s current water rates). Palo Alto customers have some of
the highest monthly bills of the group, although bills for smaller water users are lower than in
some surrounding communities. The bill difference between Palo Alto and neighboring
communities has decreased over the past several years as other agencies invest more in capital
improvement. It is unclear at this time what water rate changes may be implemented in
surrounding communities for FY 2025. The average community rate calculated in the following
table is the mean of the six surrounding communities listed. These communities are the same six
that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas and Electric
industries.
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Table 10: Residential Monthly Water Bill Comparison
Residential monthly bill comparison ($/month)*
As of February 2024
Usage
(CCF/month)
Palo
Alto
Menlo
Park
Mountain
View Hayward Redwood
City
Santa
Clara Los Altos
Average of
Surrounding
Communities
4 $53.20 $65.20 $46.95 $45.17 $64.16 $31.88 $58.71 $52.01
(Winter
median) 7
80.60 91.00 72.69 69.59 86.27 55.79 79.51 75.81
(Annual
median) 9
103.68 108.19 89.85 85.87 112.31 71.73 93.38 93.55
(Summer
median) 14
161.38 155.10 132.75 135.87 180.22 111.58 131.23 141.12
25 288.32 271.23 278.63 245.87 340.49 199.25 233.01 261.41
*Based on the FY 2013 BAWSCA survey, the percentage of SFPUC as the source of potable water supply
was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for
Santa Clara and 100% for Hayward. Los Altos does not receive water supply from SFPUC.
Palo Alto purchases all of its potable water from the SFPUC, whereas some of the other
surrounding communities utilize groundwater or other water sources that currently cost less per
unit. SFPUC has invested approximately $4.8 billion in improvements to the Regional Water
System. Palo Alto benefits from these upgrades through more reliable, higher quality and
seismically resilient water facilities that transport water to the Bay Area.
Changes from Last Year’s Financial Plan
Table 11 shows rate projections from the last two Financial Plans for FY 2023 and FY 2024 as well
as the impact of SFPUC’s wholesale rate increase projections when combined with Palo Alto’s
distribution rate increase.
Table 11: Proposed and Projected Water Revenue Changes for FY 2024 to FY 2028
Projection FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY 2025 Plan (Current)10%8%11%11%5%
FY 2024 Plan 4%3%4%6%-
FY 2023 Plan 3%2%0%--
Table 12 shows the FY 2025 Plan proposed water rate increases across the five-year forecast
period through FY 2029, separated out by increases to commodity revenues to cover the costs of
purchasing water from SFPUC (Table 12 line 1), and by the distribution revenue increases
necessary to pay for the upkeep of Palo Alto’s water distribution system (Table 12 line 2). Key
changes are the commodity increases projected by SFPUC, and for distribution rates, the reduced
water sales in Palo Alto and cost increases both in operating and capital costs over the forecast
period.
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Table 12: Proposed Commodity and Distribution Water Rate Changes FY 2025 to FY 2029
Projection FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
Commodity Rate (SFPUC Wholesale Rate
increases to $5.43 in FY 2025)
7%1%5%7%4%
Distribution Rate 13%14%15%13%6%
Total Rate 10%8%11%11%5%
This plan uses the Rate Stabilization Reserve to stabilize rates while anticipating 6.5% wholesale
water rate increase in FY 2025 and funding needed for critical water CIP budgets.
FISCAL/RESOURCE IMPACT
Estimated revenue for the Water Utility in FY 2025 is projected to increase approximately 10%
($4.9 million) as a result of the proposed rate increases. The FY 2025 Budget is being developed
concurrent with these rates and, depending on the final rates, adjustments to the budget may
be necessary. See the FY 2025 Water Utility Financial Plan for a more comprehensive overview
of the projected cost and revenue changes for the next five years.
STAKEHOLDER ENGAGEMENT
Preliminary proposals were discussed with the Utilities Advisory Commission (UAC) and Finance
Committee in January and February 2024, respectively, and the FY 2025 Financial Plan was
reviewed with the UAC in March 2024. The UAC voted unanimously to recommend that the
Council adopt a resolution approving the financial plan, including the rate increases described in
this staff report and attached resolution. Assuming the Finance Committee supports the
proposed rate adjustments, notification of the potential rate increases will be sent to customers
as required by Article XIIID of the State Constitution (added by Proposition 218) expected in April
2024. The City Council will consider the proposed Financial Plans and amended rate schedules
with the FY 2025 budget, expected in June, at which time the public hearing required by Article
XIIID of the State Constitution will be held.
ENVIRONMENTAL REVIEW
The Finance Committee’s review and recommendation to Council on the FY 2025 Water Financial
Plan and rate adjustments does not meet the definition of a project requiring California
Environmental Quality Act (CEQA) review under Public Resources Code Section 21065 thus no
environmental review is required.
ATTACHMENTS
Attachment A: Water FY 25 Resolution
Attachment A Exhibit 1: Water Financial Plan FY25
Attachment A Exhibit 2: Water Rate Schedule FY25
APPROVED BY:
Dean Batchelor, Director of Utilities
*NOT YET APPROVED* Attachment A
027040424
Resolution No.
Resolution of the Council of the City of Palo Alto Approving the
FY 2025 Water Utility Financial Plan and Reserve Transfers, and
Increasing Water Rates by Amending Rate Schedules W-1
(General Residential Water Service), W-2 (Water Service from
Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential
Master-Metered and General Non- Residential Water Service),
and W-7 (Non-Residential Irrigation Water Service)
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. The
City does this with the goal of providing safe, reliable, and sustainable utility services at
competitive rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and
made part of the Financial Plans.
C. 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.
D. On , 2024, the City Council held a full and fair public hearing
regarding the proposed rate increase and considered all protests against the
proposals.
E. As required by Article XIII D, Section 6 of the California Constitution and
applicable law, notice of the , 2024 public hearing was mailed to all City of Palo Alto
Utilities water customers by , 2024.
F. The City Clerk has tabulated the total number of written protests presented
by the close of the public hearing, and determined that it was less than fifty percent (50%)
of the total number of customers and property owners subject to the proposed water
rate amendments, therefore a majority protest does not exist against the proposal.
The Council of the City of Palo Alto does hereby RESOLVE, as follows:
*NOT YET APPROVED* Attachment A
027040424
SECTION 1. The Council hereby adopts the FY 2025 Water Utility Financial Plan.
SECTION 2. The Council hereby approves a transfer from the Capital Improvement
Program Reserve to the Operations Reserve of up to $3,461,000 in FY 2024 as described in the
FY 2025 Water Utility Financial Plan (Exhibit 1).
SECTION 3. The Council hereby approves a transfer from the Rate Stabilization
Reserve to the Operations Reserve of up to 2,069,000 in FY 2024 as described in the FY 2025
Water Utility Financial Plan (Exhibit 1).
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-1 (General Residential Water Service) is hereby amended to read as
attached and incorporated. Utility Rate Schedule W-1, as amended, shall become effective
July 1, 2024 (Exhibit 2).
SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code,
Utility Rate Schedule W-2 (Water Service from Fire Hydrants) is hereby amended to read
as attached and incorporated. Utility Rate Schedule W-2, as amended, shall become
effective July 1, 2024 (Exhibit 2).
SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule W-3 (Fire Service Connections) is hereby amended to read as attached and
incorporated. Utility Rate Schedule W-3, as amended, shall become effective July 1, 2024
(Exhibit 2).
SECTION 7. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-4 (Residential Master-Metered and General Non-Residential Water
Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-
4, as amended, shall become effective July 1, 2024 (Exhibit 2).
SECTION 8. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-7 (Non-Residential Irrigation Water Service) is hereby amended to read
as attached and incorporated. Utility Rate Schedule W-7, as amended, shall become
effective July 1, 2024 (Exhibit 2).
SECTION 9. The City Council finds as follows:
a. Revenues derived from the water rates approved by this resolution do not exceed
the funds required to provide water service.
b. Revenues derived from the water rates approved by this resolution shall not be used
for any purpose other than providing water service, and the purposes set forth in
Article VII, Section 2, of the Charter of the City of Palo Alto.
*NOT YET APPROVED* Attachment A
027040424
c. The amount of the water rates imposed upon any parcel or person as an incident of
property ownership shall not exceed the proportional cost of the water service
attributable to the parcel.
SECTION 10. 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.
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*NOT YET APPROVED* Attachment A
027040424
SECTION 11. The Council finds that the adoption of this resolution approving the FY
2025 Water Financial Plan and Reserve transfers does not meet the California
Environmental Quality Act’s (CEQA) definition of a project under Public Resources Code
Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative
governmental activity which will not cause a direct or indirect physical change in the
environment, and therefore, no environmental review is required. The Council finds that
the adoption of this resolution changing water rates to meet operating expenses, purchase
supplies and materials, meet financial reserve needs and obtain funds for capital
improvements necessary to maintain service is not subject to the California Environmental
Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title
14 of the California Code of Regulations Sec. 15273(a). After reviewing the staff report and
all attachments presented to Council, the Council incorporates these documents herein
and finds that sufficient evidence has been presented setting forth with specificity the
basis for this claim of CEQA exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
WATER UTILITY FINANCIAL PLAN
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FY 2025 WATER
UTILITY
FINANCIAL PLAN
FY 2025 TO FY 2029
Attachment A, Exhibit 1
WATER UTILITY FINANCIAL PLAN
M a r c h 2 02 4 2 | P a g e
FY 2025 WATER UTILITY
FINANCIAL PLAN
FY 2025 TO FY 2029
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 ................................................................................ 10
Section 3: Detail of FY 2024 Rate and Reserves Proposals ..................................................... 10
Section 3A: Rate Design ............................................................................................................. 10
Section 3B: Current and Proposed Rates ................................................................................... 11
Section 3C: Bill Impact of Proposed Rate Changes .................................................................... 14
Section 3D: Proposed Reserve Transfers ................................................................................... 15
Section 4: Utility Overview .................................................................................................. 15
Section 4A: Water Utility History ............................................................................................... 15
Section 4B: Customer Base ........................................................................................................ 16
Section 4C: Distribution System ................................................................................................. 17
Section 4D: Cost Structure and Revenue Sources ...................................................................... 17
Section 4E: Reserves Structure ................................................................................................... 17
Section 4F: Competitiveness ...................................................................................................... 18
Section 5: Utility Financial Projections ................................................................................. 19
Section 5A: Load Forecast .......................................................................................................... 19
Section 5B: FY 2018 to FY 2022 Cost and Revenue Trends ........................................................ 20
Section 5C: FY 2022 Results ....................................................................................................... 21
Section 5D: FY 2023 Projections ................................................................................................ 22
Section 5E: FY 2024 – FY 2028 Projections ................................................................................ 23
Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 24
Section 5G: Alternate scenario .................................................................................................. 25
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Section 5H: Long-Term Outlook ................................................................................................. 25
Section 6: Details and Assumptions ..................................................................................... 26
Section 6A: Water Purchase Costs ............................................................................................. 26
Section 6B: Operations .............................................................................................................. 28
Section 6C: Capital Improvement Program (CIP) ....................................................................... 30
Section 6D: Debt Service ............................................................................................................ 35
Section 6E: Other Revenues ....................................................................................................... 35
Section 6F: Sales Revenues ........................................................................................................ 36
Section 7: Communications Plan .......................................................................................... 36
Appendices ......................................................................................................................... 37
Appendix A: Water Utility Financial Forecast Detail ................................................................. 38
Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 40
Appendix C: Water Utility Reserves Management Practices ..................................................... 41
Appendix D: Description of Water Utility Operational Activities ............................................... 44
Appendix E: Sample of Water Utility Outreach Communications ............................................. 45
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SECTION 1: DEFINITIONS AND ABBREVIATIONS
BAWSCA Bay Area Water Supply and Conservation Agency
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
O&M Operations and Maintenance
RFC Raftelis Financial Consultants, Inc.
SFPUC San Francisco Public Utilities Commission
SFWD San Francisco Water Department
UAC Utilities Advisory Commission
WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the
transmission lines of the Hetch Hetchy Regional Water System.
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City’s Water Utility for FY 2025 through FY 2029.
This Financial Plan provides for revenues to cover the costs of operating the utility safely over
that period while adequately investing for the future. It also addresses the financial risks facing
the utility over the short term and long term and includes measures to mitigate and manage
those risks.
SECTION 2A: OVERVIEW OF FINANCIAL POSITION
The City’s water rate schedules currently consist of a volumetric charge for each CCF (100 Cubic
Feet or 748 gallons) of water consumed during the billing period and a monthly service charge
for each customer, based on water meter size. The volumetric charge has two parts: a wholesale
commodity rate (or San Francisco Public Utilities Commission or SFPUC wholesale rate), and a
customer volumetric rate. Water rates are designed to recover the City’s costs of buying and
distributing water while maintaining adequate financial reserves. The customer volumetric rate
and the monthly service charge together are considered the distribution rates; revenue from
those rates pay for the upkeep of Palo Alto’s distribution system. Revenue from the wholesale
commodity rate pays for the City’s cost of buying water from the SFPUC.
The fiscal year (FY) 2025 Water Utility Financial Plan includes projections of the utility’s costs and
revenues for FY 2024 through FY 2029. Due to the drought restrictions (SFPUC declared a drought
emergency on November 23, 2021 through June 11, 2023 when voluntary conservation
reductions ended) and water conservation efforts together with near record-setting precipitation
and snowpack in the winter of 2022-2023, the water utility’s sales revenue declined in FY 2023
by $4.864 million or 10% compared with sales revenue in FY 2021. Funding from the Operations
Reserve together with a $3 million transfer from the Rate Stabilization Reserve to the Operations
Reserve offset the revenue declines. Water sales, net of supply cost savings, were $2.4 million
lower than forecasted. Staff expects water sales revenue to rebound in FY 2024 and FY 2025.
Demand recovery is projected to be slow and as occurred following prior droughts, some
conservation is projected to be permanent. Overall costs in the Water Utility are projected to rise
on average by about 5.3% per year from Fiscal Year (FY) 2024 to 2029. Operations cost projections
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rise on average by about 4% annually from FY 2024 to 2029, excluding one-time transfers and
debt service. Debt service is expected to decline by 4.5% during this time because one bond is to
be retired in 2026. SFPUC’s FY 2024 wholesale water rate is $5.21 per CCF. On February 15, 2024,
SFPUC estimated its July 1, 2024 rate increase as $5.55/CCF. Section 6A: Water Purchase Costs
includes details. Staff plans to request authorization from the City Council to extend Palo Alto’s
pass-through provision for the SFPUC wholesale rate increase effective July 1, 2024 (see Section
3A: Rate Design for more detail).
Overall, this Financial Plan uses reserve funding (from the Operations Reserve, Rate Stabilization
Reserve and CIP Reserve) together with rate increases to manage the decreased sales revenue
and increasing costs from FY 2024 through FY 2029. While these rate increases can be perceived
as decreasing the benefit of conservation, bills for customers who conserve will be lower in the
future than they would have been without conservation.
Table 1 shows the costs for the Water Utility from FY 2023 through FY 2029. The “CIP” row in
Table 1 includes capital expenditure and increased capital funding for reappropriations and
commitments in FY 2023 and planned contributions from the Operations Reserve to the CIP
Reserve for FY 2024 through FY 2029. This does not include the additional one-time transfers
from the Operations Reserve to the CIP Reserve, shown in Table 4. This also differs from planned
CIP which is shown in line 13 of Table 4, and is reflected as an expense in the CIP Reserve.
Table 1: Expenses for FY 2023 to FY 2029 (Thousand $’s)*
Expenses
($000)
FY 2023
(act.)
FY 2024
(est.) FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Water Purchases 21,744 24,383 26,435 27,505 28,516 30,145 30,892
Operations 21,961 23,679 23,186 24,247 24,406 25,256 26,135
CIP 13,084 4,000 9,000 9,486 9,998 11,790 12,427
TOTAL 56,789 52,062 58,621 61,238 62,921 67,191 69,454
*Note: numbers in are rounded to the nearest thousand dollars.
End of Drought Water Use Restrictions
On November 23, 2021, the SFPUC declared a local water shortage emergency calling for
voluntary system-wide 10% water use reductions.1 In alignment with State requirements, on May
24, 2022, SFPUC adopted a system-wide voluntary water use reduction of 11% compared to
baseline water use during FY 2020, effective July 1, 2022.2 SFPUC serves retail customers in San
Francisco as well as in Palo Alto and 25 other wholesale customers in the Bay Area. The collective
voluntary water purchase cutback level for the wholesale customers was 16% from FY 2020
levels, while Palo Alto’s voluntary water purchase cutback level was 8% from FY 2020 levels.3 The
1 SFPUC Resolution No. 21-0177
2 SFPUC Resolution No. 22-0098
3 During water shortages up to 20% system-wide, the “Tier 1” formula allocates water between retail and wholesale
customers; the “Tier 2” formula then allocates water among wholesale customers in accordance with an agreement
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Palo Alto City Council implemented the water use restrictions in Stage I of the Water Shortage
Contingency Plan on March 7, 2022 and added the water use restrictions in Stage II on June 20,
2022. Additionally, on June 20, 2022, the City Council restricted potable irrigation of ornamental
landscape and lawn to two days per week other than to ensure the health of trees.4
SFPUC’s April 17, 2023 Water Supply Availability Update noted precipitation well above long-
term median levels and all-time record snowpack. On April 11, 2023, the SFPUC adopted a
resolution to rescind its water shortage emergency that became effective on June 10, 2023 when
the State Water Board’s drought emergency regulations expired that required the SFPUC to
implement the drought response actions of its Water Shortage Contingency Plan. Palo Alto’s
water use restrictions track both the State’s regulation and SFPUC’s water use regulation and
also expired on June 10, 2023.
Additionally, Palo Alto’s Stage I water use restrictions were effective through December 20235
and the State’s requirement for no use of drinking water for watering decorative grass in
commercial, industrial and institutional areas remains effective until June 2024.6
The cost of SFPUC water supply is increasing over the forecast period due to increasing debt
service for a series of major capital projects on the Hetch Hetchy Regional Water System or
Regional Water System as well as decreased water demand system-wide and also due to the
draw down of the wholesale customer balancing account. SFPUC’s water supply rates remained
flat from FY 2017 through FY 2022 as SFPUC returned accumulated reserves to customers. On
July 1, 2022, SFPUC increased the supply rate by 15.9% from $4.10 per CCF to $4.75 per CCF of
water delivered to Palo Alto. Again on July 1, 2023, SFPUC increased the supply rate by 9.7% from
$4.75 per CCF to the current rate of $5.21 per CCF. On February 15, 2024, the SFPUC notified Palo
Alto that the wholesale rate is expected to be $5.55 on July 1, 2024 (a 6.5% increase from current
rates). For more information, see Section 6A: Water Purchase Costs. Staff expects SFPUC to
provide a final rate notice around May 2024.
Capital Improvement Program
Staff plans for a water main replacement construction project every other year. Actual capital
costs vary from year to year; however, this Financial Plan continues with a stable annual capital
contribution from the Operations Reserve to the Capital Improvement Program Reserve (CIP
Reserve). Section 6C: Capital Improvement Program (CIP) provides more detail.
Rate Proposal
This Financial Plan projects that the Water Utility will need to implement the rate increases shown
in Table 2 in order to generate sufficient revenues to cover costs and maintain reserves within
among the wholesale customers. The Tier 2 formula considers each agency’s Individual Supply Guarantee (or
equivalent), seasonality of water usage and applies minimum and maximum cutbacks.
4 For more information see https://www.cityofpaloalto.org/Departments/Utilities/Sustainability/Water-
Conservation-and-Drought-Updates
5https://www.cityofpaloalto.org/files/assets/public/v/1/city-clerk/resolutions/resolutions-1909-to-
present/2022/reso-10022.pdf
6https://www.waterboards.ca.gov/press_room/press_releases/2023/pr20230601-decorative-watering.pdf
WATER UTILITY FINANCIAL PLAN
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guideline levels. This Financial Plan also projects that water supply costs will increase 1.4% in FY
2025 and then increase 5.3% in FY 2027, 7.4% in FY 2028 and 3.6% in FY 2029, consistent with
SFPUC staff’s February 15 projection). Staff expects some water conservation measures
implemented during the drought to be permanent while some water sales rebound over the next
3 years. There is little or no expected increase in non-sales revenue, such as interest, connection
fees and capacity fees.
Table 2 shows the rate projections from the previous financial plan for FY 2023, as well as the
expected impact of SFPUC’s expected 6.5% wholesale rate increase when combined with Palo
Alto’s distribution rate increase.
Table 2: Proposed and Projected Water Revenue Changes for FY 2025 to FY 2029
Projection FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY 2025 Plan (Current) 10% 8% 11% 11% 5%
FY 2024 Plan 4% 3% 4% 6% -
Table 3 shows the proposed water rate increases broken out into the needed increases to commodity
revenues, to cover the costs of purchasing water from SFPUC, and separately the distribution revenue
increases to pay for the upkeep of Palo Alto’s water distribution system. Given the uncertainty regarding
drought conditions, the SFPUC wholesale rate forecast is highly uncertain after FY 2025.
Table 3: Proposed Commodity and Distribution Water Rate Changes FY 2025 to FY 2029
Projection FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
Commodity Rate (SFPUC Wholesale Rate) 7% 1% 5% 7% 4%
Distribution Rate 13% 14% 15% 13% 6%
Total Rate 10% 8% 11% 11% 5%
Reserve Changes
The Water Utility’s Rate Stabilization Reserve provides funding to smooth rate increases over
several years. At the end of FY 2023, the balance in the reserve was $6.07 million. The use of the
Rate Stabilization Reserve, together with the cost and revenue projections in this Financial Plan
allow expected CPAU water distribution rates to increase by only 13% in FY 2025 and between 6
- 15% annually from FY 2026 through FY 2029. Without the use of the Rate Stabilization Reserve
in FY 2024 and 2025, water distribution rate increases of at least 22% would be needed in FY
2025. This Financial Plan projects that the Rate Stabilization Reserve will be exhausted by the end
of FY 2026 and begin to be refilled in FY 2029.
Table 4 shows the starting and ending balances for the Operations & Unassigned Reserves
combined, Rate Stabilization Reserve, and CIP Reserve, minimum and maximum Operations
Reserve guideline levels and projected reserve transfers over the forecast period.
This Plan updates the transfer proposals due to project cost and timing changes and available
reserve balances. One-time transfers from the Operations Reserve to the CIP Reserve in FY 2027
through FY 2029 total $14 million and will fund the one-time water reservoir rebuild or
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rehabilitations for the Park and Dahl water reservoirs. In FY 2024, FY 2025 and FY 2026, transfers
from the Rate Stabilization Reserve to the Operations Reserve will manage the trajectory of
future year rate increases. This Financial Plan requests Council approval for the $2.07 million
transfer from the Rate Stabilization Reserve to the Operations Reserve in FY 2024. Staff will
request Council approval for the remaining transfers in future Financial Plans, if needed, once
the year-end FY 2024 reserve balances are known.
Line 10 of Table 4 shows the anticipated CIP Reserve transfers, or capital program contributions,
in FY 2024 through FY 2029 from the Operations/Unassigned Reserve to the CIP Reserve. There
is also approximately $16 million in CIP budgeted in FY 2023 or prior years that is reappropriated
or carried forward from previous years and is currently in the CIP Reappropriations and CIP
Commitments Reserves. See Appendix B: Water Utility Capital Improvement Program (CIP) Detail
for detailed information.
The CIP Reserve aims to stabilize uneven annual funding associated with ongoing CIP projects
including water main replacements scheduled to occur every other year and is a source for one-
time or immediately needed projects. In June 2020, Council approved consistent annual funding
from the Operations to the CIP Reserves (Resolution 9904). This Financial Plan projects a capital
program contribution of approximately $9 million annually, increasing with inflation, (see line 10
of Table 4) from the Operations Reserve to the CIP Reserve based upon actual and projected
revenue and expenses as well as FY 2023 year-end reserve balances (FY 2024 and FY 2025 are
lower because the timeline for one reservoir replacement was moved from FY 2024 to FY 2027).
This Financial Plan projects that rate funding is needed to cover $7.461 million of planned CIP in
FY 2024. This figure is the portion of planned CIP in FY 2024 that will not be paid for through
funds collected in prior years (the FY 2024 capital budget, less funds available in the CIP
Reappropriations and Commitments Reserves), shown in line 13 of Table 4 for FY 2023. This
capital budget is projected to be funded by the capital program contribution of $4 million
together with $3.461 million from the CIP Reserve (calculated as the $7.461 million minus $4
million capital program contribution). Withdrawals from the CIP Reserve for use on capital
projects require Council action.7 This Financial Plan therefore requests Council approval to
transfer up to $3.461 million from the CIP Reserve to the Operations Reserve. The need for the
transfer will be re-evaluated once the year-end reserve balances and final CIP spending for FY
2024 are known. Figure 10: Projected CIP Reserve Balances FY 2024 to FY 2029 shows the CIP
Reserve year-end balances.
7 See Section 5(b) of the Water Utility Reserves Management Practices; Appendix C to the attached Water Financial
Plan.
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Table 4: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending
Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution
To/(From) Reserves Projected for FY 2024 to FY 2029 ($000)
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Starting Balance
(1) Operations/Unassigned 7,957 9,180 8,799 10,267 9,333 10,089
(2) Rate Stabilization 6,069 4,000 2,000 - - -
(3) CIP 6,961 3,500 6,679 3,312 7,233 2,190
Revenues
(4) Total Revenue 49,904 55,887 61,743 67,713 74,059 76,834
(5) Transfers In 342 353 363 373 389 400
Transfers
(6) Operations/Unassigned 3,040 2,000 600 (6,100) (6,500) (4,000)
(7) Operating Commitments (971) - - - - -
(8) Rate Stabilization (2,069) (2,000) (2,000) - - 4,000
(9) CIP - - 1,400 6,100 6,500 -
Capital Program Contribution
(10) Operations/Unassigned (4,000) (9,000) (9,486) (9,998) (11,790) (12,427)
(11) CIP 4,000 9,000 9,486 9,998 11,790 12,427
Expenses
(12) Total Expenses other than
CIP (46,341) (49,141) (50,991) (52,157) (54,631) (56,252)
(13) Planned CIP (7,461) (5,821) (14,253) (12,177) (23,334) (6,627)
(14) Transfers Out (1,721) (480) (761) (765) (770) (775)
Ending Balance
(1)+(4)+(5)+(6)
+(10)+(12)+(14) Operations/Unassigned 9,180 8,799 10,267 9,333 10,089 13,869
(2)+(8) Rate Stabilization 4,000 2,000 - - - 4,000
(3)+(9)+(11)+
(13)* CIP 3,500 6,679 3,312 7,233 2,190 7,989
Operations Reserve
Guideline Levels
(15) Minimum 7,901 8,157 8,507 8,700 9,107 9,374
(16) Maximum 15,801 16,314 17,014 17,399 18,214 18,749
* Planned CIP (item 13) is reflected as an expense in the CIP Reserve and does not include CIP funded
through Reappropriations or Commitments reserves.
Cost Savings for Palo Alto from BAWSCA Bond Refunding
In 2013, BAWSCA used bond financing to directly pay a debt the BAWSCA agencies (including
Palo Alto) owed to SFPUC. This lowered the cost of repaying the debt. Since 2013, BAWSCA
agencies, including Palo Alto have been separately paying the debt service for these bonds and
those costs are separate from the wholesale water rate and add about $0.35 to $0.45 per CCF to
the wholesale rate.
On January 5, 2023, BAWSCA completed the settlement of BAWSCA’s revenue bond series 2023A
to refund the 2013A bonds at an even lower rate. BAWSCA locked-in the bond rates in October
2021 at an all-in true interest rate of 2.06%. The refunding bond transaction will generate
approximately $27.1 million in net present value savings over the term of the bonds, or an
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average of approximately $2.5 million of savings per year for all Wholesale Customers, starting
in fiscal year 2022-23.
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following Council action for the Water Utility in FY 2024 and FY 2025:
Adopt a resolution (Attachment A):
1. Approving the Fiscal Year (FY) 2025 Water Utility Financial Plan; and
2. Amending the following rate schedules to reflect increases effective July 1, 2024 (FY
2025): W-1 (General Residential Water service), W-2 (Water Service from Fire
Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and
General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water
Service) (Attachment B)
SECTION 3: DETAIL OF FY 2025 RATE AND RESERVES PROPOSALS
SECTION 3A: RATE DESIGN
The Water Utility’s rates are evaluated and implemented in compliance with the cost of service
requirements and procedural rules set forth in Article XIII D of the California Constitution
(Proposition 218) and applicable statutory law. The City structured current rates based on staff’s
assessment of the financial position of the Water Utility, and updated current rates using the
methodology and rate structures developed by Raftelis Financial Consultants, Inc. (RFC) 8. Staff
plans to update the cost of service study in 1 to 2 years, unless any major changes occur to the
utility’s operations or customer base that would necessitate an earlier study. Before conducting
any new cost of service study, staff will review current water rates and the scope of the study
with the Utilities Advisory Commission (UAC) and Council to determine the City’s policy priorities.
The Water Utility’s rates are based on RFC’s 2019 update to the 2015 cost of service study, which
reviewed the City’s most recent cost of service methodologies and rate structures and declared
both fundamentally sound. With the onset of the COVID-19 pandemic, usage amongst residential
customer classes increased as people worked and stayed at home rather than going to the
workplace. Businesses operations were also affected by the COVID-19 pandemic and their
collective water usage decreased. Additionally, calls for water conservation due to drought
conditions, water use restrictions in Palo Alto, and weather influenced customer water usage
patterns. In order to move toward full cost recovery while minimizing rate impacts in light of
8 RFC has developed 3 cost studies for the City: the March 2012 Palo Alto Water Cost of Service & Rate
Study, a 2015 study reviewing the 2012 methodology and analyzing drought rates entitled, Memorandum:
Proposed Water Rates, and a 2019 Memorandum analyzing the 2015 methodology and rate structure,
titled “Proposed FY 2020 Water Rates”.
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pandemic-related economic challenges, staff recommends a distribution rate increase to all
customer classes of 13%.
SECTION 3B: CURRENT AND PROPOSED RATES
The current rates and surcharges became effective on July 1, 2023. CPAU has five rate schedules:
separately metered residential customers (W-1), commercial and master-metered multi-family
residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in
buildings and private hydrants (W-3), and service to fire hydrant rental meters used for
construction (W-2). All customers pay a monthly service charge based on the size of their inlet
meter. This charge represents meter reading, billing, and other customer service costs, and also
the cost of maintaining the capability to deliver a peak flow for that customer based on their
meter size.
All customers are also charged for each CCF (one hundred cubic feet) of water used. Separately
metered residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF
for a 30-day billing period) charged at the first-tier price per CCF, and all additional units charged
a higher tier price per CCF. Commercial customers, including most multi-family customers, pay a
uniform price for each CCF used. A separate rate per CCF exists for separately metered irrigation
service.
Water rates are composed of two general types of costs: commodity and distribution. For July 1,
2024, staff proposes to increase the SFPUC wholesale water rate in accordance with SFPUC’s rate
notice in May 2024 (expected to be 6.5%) and to increase distribution rates by 13%.
Customers have a separate commodity rate for purchased water from SFPUC relative to the rest
of the distribution-related portion of the volumetric rates. California Government Code Section
53756 (established by AB-3030) became effective January 1, 2009. This section of the Code
authorizes public agencies providing water, sewer, and garbage services to adopt automatic pass-
through rate adjustments to account for increases in wholesale water charges or wastewater
treatment charges, as well as inflation. Pass-throughs must be adopted via the Proposition 218
process and can be effective for up to five years without additional Prop 218 authorization. In
2019 Palo Alto used the Prop 218 process and the Council adopted the pass-through process
effective July 1, 2019 through June 30, 2024 pursuant to Resolution 9844. The separate
commodity charge passed-through SFPUC rate increases to customers. All customers pay this
separate commodity rate, currently $5.21 per CCF, for each unit of water in addition to the
volumetric rate that is applicable for their customer class. The rates shown below are in addition
to the pass-through commodity rate charged to Palo Alto’s customers based on SFPUC supply
charges. This year, Palo Alto staff plan to utilize the Prop 218 process to request Council approval
to increase the commodity rate on July 1, 2024 while also asking Council approval to re-authorize
the pass-through provision for the water commodity charge for another five-year period from
July 1, 2024 through June 30, 2029 for use with commodity charge increases in future years. For
further information and details about the proposed commodity rate, see Section 6A: Water
Purchase Costs.
Distribution rates cover all the costs to deliver water within the City, such as operations,
maintenance, metering, billing, and capital improvements. Through annual Council approvals,
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the water utility provides steady funding to the CIP Reserve, which reflects actual fluctuations in
CIP expenditures (money spent on actual projects in a given year). Previously, CIP expenditures
were reflected in the Operations Reserve. In this way, although CIP expenditures fluctuate from
year to year, staff projects the capital program contribution to the CIP reserve to remain fairly
constant over the next five years. An exception to this is the one-time reservoir replacement
costs that will be partly funded through one-time transfers from the Operations Reserve to the
CIP Reserve. Once these reservoirs are replaced or rehabilitated, these costs will no longer be
included in the ongoing CIP budget needs for the water utility. More detail regarding reserve
transfers is in Section 3D: Proposed Reserve Transfers. Operations costs are discussed in Section
6B: Operations, below.
Table 5 shows the current and proposed consumption charges, which are distribution rates.
Table 5: Current and Proposed Water Distribution Charges
Current
(7/1/2023)
Proposed
(7/1/2024)
Change
($/CCF) Change (%)
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 2.72 3.07 0.35 13%
Tier 2 Rates 6.33 7.15 0.82 13%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 3.83 4.32 0.49 13%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 3.83 4.32 0.49 13%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 5.83 6.58 0.75 13%
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Table 6 and Table 7 show the current monthly service charges for rate schedules W-1, W-4 and W-7. These
monthly service charges are also considered distribution rates.
Table 6: Current and Proposed Monthly Service Charges for Residential W-1
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current
(7/1/2023)
Proposed
(7/1/2024) $ %
5/8” 21.48 24.27 2.79 13%
3/4” 21.48 24.27 2.79 13%
1” 21.48 24.27 2.79 13%
1 ½” 69.38 78.39 9.01 13%
2” 107.32 121.27 13.95 13%
3” 227.48 257.05 29.57 13%
4” 404.56 457.15 52.59 13%
6” 828.27 935.94 107.67 13%
8” 1,523.92 1,722.02 198.10 13%
10” 2,409.29 2,722.49 313.20 13%
12” 3,168.19 3,580.05 411.86 13%
Table 7: Current and Proposed Monthly Service Charges for W-4 and W-7
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current
(7/1/2023)
Proposed
(7/1/2024) $ %
5/8” 18.78 21.22 2.44 13%
3/4” 25.11 28.37 3.26 13%
1” 37.76 42.66 4.90 13%
1 ½” 69.38 78.39 9.01 13%
2” 107.32 121.27 13.95 13%
3” 227.48 257.05 29.57 13%
4” 404.56 457.15 52.59 13%
6” 828.27 935.94 107.67 13%
8” 1,523.92 1,722.02 198.10 13%
10” 2,409.29 2,722.49 313.20 13%
12” 3,168.19 3,580.05 411.86 13%
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Table 8 shows the current and proposed monthly service charges for rate schedule W-3.
Table 8: Current and Proposed Monthly Service Charges for Fire Services (W-3)
Meter
Size
Monthly Service Charge ($/month
based on meter size) Change
Current
(7/1/2023)
Proposed
(7/1/2024) $ %
2” 4.42 4.99 0.57 13%
4” 27.38 30.93 3.55 13%
6” 79.51 89.84 10.33 13%
8” 169.45 191.47 22.02 13%
10” 304.74 344.35 39.61 13%
12” 492.24 556.23 63.99 13%
SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES
Table 9 shows the impact of the proposed July 1, 2024 rate changes on the median residential
bill. The system average increase is projected to be 10 percent, but some customers will see
higher or lower increases due to changes in the composition of the customer’s utilization of the
system over time, as well as changes in the utility’s costs. Table 9 shows the impact of the
proposed July 1, 2024 rate changes on the median commercial bill.
Table 9: Impact of Proposed Water Rate Changes on Residential Bills
Usage (CCF/mo.) Bill under Current
Rates (7/1/2023)
Bill under Proposed
Rates (7/1/2024)
Change
$/mo. %
4 $53.20 $58.75 $5.55 10%
(Winter median) 7 $80.60 $88.69 $8.09 10%
(Annual median) 9 $103.68 $114.09 $10.41 10%
(Summer median) 14 $161.38 $177.59 $16.21 10%
25 $288.32 $317.29 $28.97 10%
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Table 10: Impact of Proposed Water Rate Changes on Commercial Bills
Usage (CCF/mo.) Bill under Current
Rates (7/1/2023)
Bill under Proposed
Rates (7/1/2024)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 $127.26 $139.66 $12.40 10%
(Annual average) 64 $597.34 $652.90 $55.56 9%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 $168.74 $187.56 $18.82 11%
(Summer median) 37 $477.86 $527.20 $49.34 10%
(Winter average) 56 $687.62 $757.67 $70.05 10%
(Summer average) 199 $2,266.34 $2,492.26 $225.92 10%
SECTION 3D: PROPOSED RESERVE TRANSFERS
A transfer of approximately $2.07 million in FY 2024, $2 million in FY 2025 and $2 million in FY
2026 from the Rate Stabilization Reserve to the Operations Reserve will mitigate the need for
distribution rate increases. See Table 4 above, row 8, for a summary of the projected reserve
transfers out of the Rate Stabilization Reserve. This meets the requirement in the Water Utility
Reserves Management Practices that states if there are funds in the Rate Stabilization Reserve at
the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the
withdrawal of all funds from this reserve by the end of the Financial Planning Period. Note that
in FY 2029, this Financial Plan replenishes the Rate Stabilization Reserve with $4 million.
Section 2A: Overview of Financial Position describes the proposed transfers to and from the CIP
Reserve. Table 4 shows the proposed capital program contributions in row 11.
This Financial Plan projects one-time transfers from the Operations Reserve to the CIP Reserve
to fund reservoir work for the upcoming Dahl and Park reservoir replacement or rehabilitation
costs. These one-time transfers total $14 million between FY 2026 and FY 2028, which is equal to
the total estimated cost of replacing the two reservoirs. Table 4 shows these one-time transfers
from the Operations Reserve to the CIP Reserve on line 9. Additionally, Section 4E: Reserves
Structure and Appendix A: Water Utility Financial Forecast Detail shows details of reserves levels.
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It provides general background
information and helps readers better understand the forecasts in Section 5: Utility Financial
Projections and Section 6: Details and Assumptions.
SECTION 4A: WATER UTILITY HISTORY
The Water Utility was established on May 9, 1896, two years after the City was incorporated.
Voters of the 750-person community approved a $40,000 bond to buy local, private water
companies who operated one or more shallow wells to serve the nearby residents. The city grew
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and the well system expanded until nine wells were in operation in 1932. Palo Alto began
receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these
sources.
A 1950 engineering report noted, “the capricious alternation of well waters and the San Francisco
Water Department water…has made satisfactory service to the average customer practically
impossible”. By 1950, only eight wells were still in operation. Despite this, groundwater
production increased in the 1950s leading to lower groundwater tables and water quality
concerns. In 1962, a survey of water softening costs to CPAU customers determined that CPAU
should purchase 100% of its water supply needs from the SFWD. CPAU signed a 20-year contract
with SFWD, and CPAU’s wells were placed in standby condition. The SFWD later became known
as the SFPUC. Since 1962 (except for some very short periods) CPAU’s entire supply of potable
water has come from the SFPUC.
As the city grew, so did the number of mains in the water system, while existing sections of the
system continued to age. In the mid-1980s, the number of breaks in cast iron mains installed
during the 1940s and earlier started to accelerate. In FY 1994, to combat deterioration of older
sections of the system, CPAU performed an analysis of cost-effective system improvements and
increased the rate of main replacement from one mile per year to three. CPAU began a plan to
replace 75 miles of deficient mains within 25 years.
In 1999, a study of system reliability concluded that the distribution system needed major
upgrades to provide adequate water supply during a natural disaster. This ultimately resulted in
the $40 million Emergency Water Supply and Storage Project, completed in 2013, which involved
a new underground reservoir in El Camino Park, the siting and construction of several emergency
supply wells, and the upgrade of several existing wells and the Mayfield pump station. Upon
completion, the City began to focus reliability efforts on its system of water storage reservoirs
and transmission lines in the Foothills.
At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in
consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy Regional
Water System, which crosses two major fault lines between the Sierras and the Bay Area. That
evaluation concluded that major upgrades to the system were required for improved seismic
resilience. This planning process culminated in the SFPUC’s $4.8 billion Water System
Improvement Project (WSIP), which is ongoing. This has resulted and will continue to result in
large increases in the annual debt service costs assigned to wholesale customers like Palo Alto.
After SFPUC completes each WSIP project, wholesale customers must start paying the debt
service costs within 3 to 4 years. Wholesale customers will pay off the majority of those costs,
funded with bond financing, over approximately 30 years. The SFPUC continues to evaluate its
aging system for other needed infrastructure improvements; future major improvements include
dam safety and Mountain Tunnel repairs.
SECTION 4B: CUSTOMER BASE
CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a
handful of residential customers not in Palo Alto (primarily in Los Altos Hills). There are
approximately 20,200 customers connected to the water system. Approximately 17,300 (86%) of
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these are separately metered residential customers and approximately 2,900 (14%) of these are
commercial, master-metered residential, irrigation, and fire service customers.
Judging from seasonal consumption patterns, Palo Alto’s customers collectively use between
35% and 50% of the water for irrigation, and that consumption is heavily weather dependent. It
also varies significantly by season. As a result of these two factors, there is significant variability
in the amount of water demanded from the system month to month and year to year.
SECTION 4C: DISTRIBUTION SYSTEM
To deliver water to its customers, CPAU owns and operates roughly 236 miles of mains (which
transport the water from the SFPUC meters at the city’s borders to the customer’s service laterals
and meters), eight wells (to be used in emergencies), five water storage reservoirs (also for
emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow
and demand (due to fire suppression, heavy usage times, etc.). These represent the vast majority
of the infrastructure used to distribute water in Palo Alto.
SECTION 4D: COST STRUCTURE AND REVENUE SOURCES
Figure 1 shows that in FY 2023, 38% of the
Water Utility’s costs were for water
commodity purchases, 39% were for
operations and maintenance costs, and
the remaining 23% were for capital
investment. Staff projects these
percentage distributions to remain similar
over the forecast period.
The Water Utility’s revenue comes mainly from the sale of water, with the rest coming from
capacity and connection fees, interest on
reserves, and other sources. About 18% of
the utility’s revenues come from fixed
service charges, though most of the
utility’s costs are fixed. Appendix A: Water
Utility Financial Forecast Detail provides
more detail on the utility’s cost and
revenue structures.
SECTION 4E: RESERVES STRUCTURE
CPAU maintains six reserves for its Water
Utility to manage various types of contingencies. The descriptions below summarize these
reserves; see Appendix C: Water Utility Reserves Management Practices for more detailed
definitions and guidelines for reserve management:
Figure 1: Cost Structure (FY 2023)
38%
39%
23%
Supply
Operations
Capital
Figure 2: Revenue Structure (FY 2023)
18%
76%
6%Fixed ServiceCharge Sales
Revenue
Volumetric Charge
Sales Revenue
Other Revenue
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• Reserve for Commitments: A reserve equal to the utility’s outstanding contract liabilities
for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
• Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including the
General Fund, have a Reappropriations Reserve.
• Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate
funds for future expenditure on CIP projects, as well as to manage cash flow for ongoing
capital projects. This reserve can also act as a contingency reserve for the CIP. This type
of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well.
• Rate Stabilization Reserve: This reserve is intended to be empty unless the city
anticipates one or more large rate increases in the forecast period. In that case, funds can
be accumulated to spread the impact of those future rate increases across multiple years.
This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection)
as well.
• Operations Reserve: This is the primary contingency reserve for the Water Utility, and is
used to manage yearly variances from the budget for operational water supply costs. This
type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as
well.
• Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and
funds in this reserve are assigned or returned to Water Utility ratepayers by the end of
the first fiscal year of the next financial planning period.
SECTION 4F: COMPETITIVENESS
Table 11 compares the current water bills for single-family residential customers in Palo Alto with
those of neighboring communities. While Palo Alto is among the highest monthly bills among
these communities, the difference between Palo Alto’s bills and those of the surrounding cities
has decreased in recent years as other agencies have increased their capital investments.
Additionally, bills for smaller water users in Palo Alto are lower than in some neighboring
communities. These comparison cities are the ones that Palo Alto compares itself to in the annual
budget across all industries.
Table 11: Single-Family Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of February 2024
Palo
Alto
Menlo
Park
Mountain
View Hayward Redwood
City
Santa
Clara Los Altos
Average of
Surrounding
Communities
4 $53.20 $65.20 $46.95 $45.17 $64.16 $31.88 $58.71 $52.01
(Winter median) 7 80.60 91.00 72.69 69.59 86.27 55.79 79.51 75.81
(Annual median) 9 103.68 108.19 89.85 85.87 112.31 71.73 93.38 93.55
(Summer median)
14 161.38 155.10 132.75 135.87 180.22 111.58 131.23 141.12
25 288.32 271.23 278.63 245.87 340.49 199.25 233.01 261.41
* Based on the FY 2013 BAWSCA survey, the percentage of SFPUC as the source of potable water supply was 100%
for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for Santa Clara and 100%
for Hayward. Los Altos does not receive water supply from SFPUC.
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SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: LOAD FORECAST
Figure 3 shows 48 years of water consumption history in Palo Alto. Despite population growth,
average water use has trended downward over time. This is due to significant water use
reductions particularly during drought periods, such as 1976-77, 1988-92 and 2014-17, and 2021-
23. During these periods, customers invested in efficient equipment and modified their behavior
to achieve water reduction goals. These reductions persisted even after the droughts ended.
Additionally, water sales decreased during the 2007-2009 recession and drought and again during
the 2014-2017 drought. Water usage returned to pre-drought levels in 2018 after the drought.
However, the Covid-19 pandemic led to an increase in water use in Palo Alto in 2020-21. During
the months affected by pandemic impacts, but prior to Governor Newsom’s Executive Order N-
10-21 calling on Californians to voluntarily reduce water use 15% from 2020 levels, (March 2020
– June 2021), overall water sales increased approximately 3-6% from recent years. Because
weather was also dry during the same time period, which also tends to increase water sales,
pandemic-related sales impacts are not able to be determined with specificity. During FY 2022
and FY 2023 water use restrictions due to drought also reduced water demand. Staff will continue
to monitor water sales and will recommend adjustments in next year’s financial plan as needed.
Figure 3: Historical Palo Alto Water Purchases (Rolling 12-Month)
0
1
2
3
4
5
6
7
8
9
10
FY 197
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CCF
(Mil
l
i
o
n
s
)
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Figure 4 shows the FY 2025 Financial Plan water purchases forecast, compared to the projected
water purchases in the FY 2024 Financial Plan.
Figure 4: Projected Palo Alto Water Purchases
Actual water purchases in FY 2023 were 4,210,399 CCF, about 4.1% lower than projected in the
FY 2024 Financial Plan and 10.6% lower than actual water purchases in FY 2022. This forecast
begins with the most recent water purchases and assumes a drought recovery over three years
back to the pre-drought long-term trend (average annual decrease of 1.1% observed from FY
2002 to FY 2021). The current forecast for FY 2024 is 4,322,676 CCF and 4,437,947 CCF in FY 2025.
SECTION 5B: FY 201 9 TO FY 202 3 COST AND REVENUE TRENDS
Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs
have changed during the last five years as well as how staff projects they will change over the
next five years.
The annual expenses for the Water Utility rose by 3.2% annually on average between FY 2019
and FY 2023. The increases were primarily related to operations costs. SFPUC held its wholesale
water rate at $4.10 from July 2016 to June 2022 and then increased the rate to $4.75 on July 1,
2022. At the same time that prices increased in FY 2023, customers used less water and the
utility’s overall purchase costs remained fairly flat over this time period growing at an average of
0.6% annually from FY 2019 to FY 2023. Section 6A: Water Purchase Costs contains a more in-
depth discussion of water purchase costs. Operations costs other than purchased water and CIP
increased by about 6.5% annually from FY 2019 to FY 2023, primarily due to increases in allocated
costs, rent, one-time transfers out for capital projects, resource management, engineering and
customer service. CIP costs have generally increased but fluctuated down in certain years. In FY
2024 there is $16 million of CIP Reappropriations and Commitments budgeted in previous years
and carried over to FY 2024. One reservoir replacement is being moved from FY 2024 to FY 2027
which is the reason a lower capital contribution is expected to be needed in FY 2024. Section 6B:
WATER UTILITY FINANCIAL PLAN
M a r c h 2 02 4 21 | P a g e
Operations contains more detail regarding operations costs and Section 6C: Capital Improvement
Program (CIP) provides more detail regarding CIP costs.
Figure 5: Water Utility Expenses, Revenues, and Rate Changes:
Actual Expenses through FY 2023 and Projections through FY 2029 (Including SFPUC’s rate
increase of 6.5% in the “Water Supply” cost bar)
* Note: in Figure 5, Capital Investment in the projected years reflects one-time transfers from
the Operations Reserve to the CIP Reserve, the annual capital program contribution to the CIP
Reserve, as well as increases in CIP Reappropriations and Commitments.
SECTION 5C: FY 202 3 RESULTS
Actual sales revenues for FY 2023 were 7.3% lower than projected in the FY 2024 Financial Plan
($42.6 million vs. $45.9 million). Water losses also increased in FY 2023 and water purchase
volume was only 4.1% below forecasted. Correspondingly, actual FY 2023 water purchase costs
were 4.1% lower than forecast. During the first half of FY 2023, Palo Alto implemented voluntary
water use restrictions due to ongoing drought conditions as well as a drought declaration by the
SFPUC, Palo Alto’s water supplier. During the winter of 2022-2023 the drought ended due to very
wet weather. Other revenues were 5.4% lower than forecasted in the FY 2024 Financial Plan
primarily due to reductions in transfers in.
In FY 2022, unrealized gains/losses were separated out from the operations reserve into a
separate reserve. There was a subsequent accounting adjustment to the year-end FY 2022
operations reserve balance to also remove unrealized gains/losses from prior years from the
Operations Reserve and reflect those in the unrealized gains/losses reserve. This reduced the
operations reserve by $0.7 million. Additionally, operating expenses were higher than expected
due to a transfer out to the capital projects fund. CIP related costs for FY 23 including CIP
reappropriations and commitments totaled $25.8 million in the FY 2024 Financial Plan estimate
for FY 2023 and the actual spending plus pending CIP reappropriations and commitments for FY
2023 is $26.1, a difference of $0.3 million or 1%.
3%1%0%0%5%5%10%8%11%11%5%
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
FY 201
9
FY 202
0
FY 202
1
FY 202
2
FY 202
3
FY 202
4
FY 202
5
FY 202
6
FY 202
7
FY 202
8
FY 202
9
Actuals Projected
Mil
l
i
o
n
s
Capital*
Opera�ons
Water Supply
Debt Service
Revenue
Rate Changes
WATER UTILITY FINANCIAL PLAN
M a r c h 2 02 4 22 | P a g e
Table 12 summarizes the variances from forecast.
Table 12: FY 2023, Actual Results vs. Financial Plan Forecast Net Cost/
(Benefit) ($000)
Type of
change
Lower sales revenues $3,336 Lower revenues
Lower other revenue $148 Lower revenues
Capital-related costs including CIP
reappropriations/commitments $292 Cost increase
Water purchases lower than expected $(939) Cost decrease
Expense higher than expected $677 Cost increase
Accounting adjustment to Operations Reserve $671 Cost increase
Net Cost / (Benefit) of Variances $4,185
SECTION 5D: FY 202 4 PROJECTIONS
Staff estimates sales revenues in FY 2024 to be $2.6 million or 4.5% lower than forecasted in the
FY 2024 Financial Plan as a result of reductions in water use due to drought and drought rebound.
Of this total, about $1.3 million is reduction in distribution sales revenue. Staff currently
estimates water sales volumes to be 9.6% lower than the FY 2024 Financial Plan forecast, which
had assumed some drought recovery in FY 2024. This puts additional upward pressure on water
rates. Staff expects other revenue to be higher than forecasted in the FY 2024 Financial Plan by
$0.2 million in FY 2024 primarily due to increases in income based on the most recent year.
Revenue reductions are offset by approximately $1.1 million in lower water purchase costs also
resulting from the lower sales forecast.
The allocated cost forecast decreased by $0.4 million while transfers out increased due to an
expected one-time transfer true-up in FY 2024. The estimate for resource management costs
increased by 0.2 million, while operations and maintenance and engineering cost estimates
decreased by $0.6 million. Total operations and maintenance costs other than water purchases
increased by $1.4 million. Table 13 summarizes the changes.
The FY 2024 Financial Plan estimated a 5-year capital project budget for FY 2024 through FY 2028
of $54.7 million (not including carry-forward budgets from prior years). This budget increased
1.2% in the current Financial Plan to $55.3M. The FY 2024 capital budget in the FY 2024 Financial
Plan was $13.0 million, including allocated costs; in the FY 2025 Financial Plan, the FY 2024 capital
budget is $7.5 million. This reduction is because the reservoir tank replacement/rehabilitation
construction completion date was delayed to FY 2028 to allow time for additional analysis and
project phasing. This delayed the capital funding need. Additionally, the FY 2024 budgeted $2.9
million for ongoing projects in FY 2024 and based upon current estimates, the CIP
Reappropriations and Commitments reserve funding will cover more of this budget and only $1.6
million is expected to need to be recovered from rate funding in FY 2024 (a difference of $1.3
million). Additional CIP-related costs increased in the current Financial plan including CIP
allocated overhead and unallocated salaries and benefits together increased $0.85 million in FY
2024.
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In addition to the items described above and shown in Table 13, operating commitments grew
by $1 million, and CIP-Commitments and Reappropriations together grew by $3.9 million and
both of those reduced the Operations Reserve FY 23 year-end balance.
Table 13: FY 2024 Change in Projected Results, 2024 Forecast vs 2025 Forecast ($000) Net Cost/ (Benefit) Type of Change
Sales Revenue $2,545 Revenue decrease
Other Revenue $(195) Revenue decrease
Water Purchases ($1,064) Cost savings
Capital costs (project, allocated, and unallocated
salaries and benefits) ($6,748) Cost deferral
Other Operating Costs $1,359 Cost decrease
Net Cost / (Benefit) of Variances ($4,102)
SECTION 5E: FY 2025 – FY 2029 PROJECTIONS
On average the Water Utility’s costs projected to increase by 4.3% annually from FY 2025 through
FY 2029 (see Figure 5 and Table 14).
Table 14: Average Annual Percentage Cost Change for Water Utility Expenses
Water Utility Expense Average annual percentage
cost change FY 2025 – FY 2029
Capital Program Contribution 8.4%
Operations (other than debt service) 4.2%
Water Supply 4.0%
Debt Service (4.5%)
Total 4.3%
This plan anticipates that water supply costs will increase 4.3% annually on average over the
forecast period FY 2025 – FY 2029. Staff projects operations costs other than debt service to
increase by 4.2% annually on average and capital contributions to the CIP Reserve to increase
8.4% on average each year. While staff has revised future CIP costs upwards to reflect the higher
construction costs seen in recent projects, there is still uncertainty with regard to the utility’s
future costs for water main replacements. See Section 6: Details and Assumptions for more detail
on the costs that make up these projections, as well as the various assumptions underlying the
projections. Debt service costs are declining during the FY 2025 – FY 2029 time period because
the 2011 Utility Revenue Refunding Bond, Series A, is scheduled to be retired in 2026.
Both the FY 2024 and current Financial Plans utilize all of the $6.06 million in the Rate Stabilization
Reserve by the end of FY 2026 to stabilize rates and cover operational and capital costs.
As shown in Table 3, the Water Utility requires distribution rate increases between 6% and 13%
per year through FY 2029 to provide sufficient revenues to fund annual expenses for the
distribution system. The overall average system rate increase needed with SFPUC’s projected
rate increase is 10% per year through FY 2029.
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Figure 6 shows reserves trends based on these cost and revenue projections. The figure shows
the transfers from the Rate Stabilization Reserve to the Operations Reserve in FY 2023 through
FY 2026 and that the fund is able to return $4 million to the Rate Stabilization Reserve in FY 2029.
Staff expects the Operations Reserve, the main contingency reserve, to be within the target range
throughout the forecast period, and that this reserve will be adequate to meet all identified risks,
as discussed in Section 5F: Risk Assessment and Reserves Adequacy.
Figure 6: Water Utility Reserves
Actual Year End Reserve Levels for FY 2023 and Projections through FY 2029
SECTION 5F: RISK ASSESSMENT AND RESERVES ADEQUACY
The Water Utility’s main contingency reserve is the Operations Reserve, and this Financial Plan
projects the Operations reserve to remain within the guideline levels throughout the forecast
period, as shown in Figure 7. Staff will consider funds in the Operations Reserve in excess of the
maximum to be unassigned. Staff projects the Operations Reserve to exceed both the minimum
reserve level and the short-term risk assessment level throughout the forecast period.
$0
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Figure 7: Operations Reserve Adequacy
Table 15 summarizes the risk assessment calculation for the Water Utility through FY 2029. The
risk assessment includes the revenue shortfall of 14% that could accrue due to lower than
forecasted sales revenue.
Table 15: Water Risk Assessment ($000)
FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Total Non-Commodity
Revenue $30,103 $34,958 $39,878 $44,609 $46,680
Max. Revenue Variance,
Previous Ten Years 14% 14% 14% 14% 14%
Risk of Revenue Loss $2,884 $3,349 $3,820 $4,273 $4,471
Total Risk Assessment Value $2,884 $3,349 $3,820 $4,273 $4,471
SECTION 5G: ALTERNATE SCENARIO
There is no alternate scenario included in this Financial Plan.
SECTION 5H: LONG-TERM OUTLOOK
CPAU has put its Water Utility on strong footing by investing in its distribution system
infrastructure and emergency water facilities over the last 20 years. The Water System Master
Plan, completed in FY 2016, evaluated the current state of the distribution system and
determined the necessary rate of main replacement in the next 20 years. This study factored in
seismically vulnerable mains as well as deteriorating mains. In addition, CPAU’s water supplier,
the SFPUC, has replaced and seismically strengthened its water transmission infrastructure,
which will benefit Palo Alto and all Hetch Hetchy Regional Water System customers over the long
term.
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The opportunities for CPAU’s Water Utility to obtain additional supplies over the long term may
be in alternative water supplies such as recycled water, groundwater, and water from Valley
Water. Staff have analyzed these alternatives in the past and analyzed them again most recently
in the 2017 Water Integrated Resource Plan.9 Some of these alternatives may provide cost
savings or increased drought protection. For example, in November, 2019, the City of Palo Alto
entered into an agreement with Valley Water and the City of Mountain View that will provide (1)
funding for a salt removal facility at the Regional Water Quality Control Plant in Palo Alto to
improve the quality of non-potable recycled water used in Palo Alto and Mountain View, (2) a
transfer of treated wastewater from Palo Alto to Valley Water for use in the county south of
Mountain View, and (3) Palo Alto and Mountain View will have a future option to request new
potable or non-potable water supply from Valley Water, if needed.
Climate change may begin to present challenges for the Water Utility over the next 20 to 40
years. Availability of water from SFPUC’s Regional Water System may change with changing
seasonal precipitation patterns. Water consumption patterns may change. Consumption could
increase due to drier weather or decrease as customers become even more focused on water
conservation. Droughts may become more frequent. The risk of wildfire in the foothills could
increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level
rise could result in greater exposure of utility infrastructure to inundation, possibly resulting in
higher maintenance and replacement costs. As part of the Sustainability/Climate Action Plan,
CPAU is currently working on a Climate Change Adaptation Roadmap that will begin to assess
some of these risks.
Palo Alto staff is in the process of developing a One Water supply plan to enhance and preserve
Palo Alto’s potable water supply. The Palo Alto City Council approved a Contract with Carollo
Engineers for this work in June 2022 (Staff Report #13434). The One Water Plan will be used as
an adaptable water supply plan for implementing a One Water portfolio over a 20-year planning
horizon. This work aims to address how Palo Alto can mitigate the impact of future uncertainties
such as severe multi-year drought, changes in climate, water demand and regulations through
integrated water resources supply planning. More information is available on the One Water
webpage.
SFPUC recently conducted a study of long-term vulnerabilities of the Regional Water System in
partnership with The Water Research Foundation. The Long-Term Vulnerability Assessment
covers the risks associated with potential climate change in the context of effects from other
drivers of change.
SECTION 6: DETAILS AND ASSUMPTIONS
SECTION 6A: WATER PURCHASE COSTS
CPAU purchases all of its potable water supplies from the SFPUC, which owns and operates the
Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water from
9 2017 Water Integrated Resource Plan: https://www.cityofpaloalto.org/civicax/filebank/documents/56088
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the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation Agency
(BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA member
agencies.
On February 15, 2024 SFPUC notified BAWSCA that it expects the FY 2025 Wholesale Water Rate
to be $5.55/CCF (an increase of between 6.5% from the current rate of $5.21/CCF. Additionally,
SFPUC disclosed that it is updating the fixed monthly service charges to reflect new meter types
being installed and update the charges for all existing meters.
SFPUC cited three main drivers for the rate increase – growth in capital spending, continued low
water sales volumes, and the draw down of the balancing account. Capital costs are rising due to
increased debt service on existing and newly-issued bonds. Water sales volumes are uncertain
due to uncertainty about the amount that customers will rebound from drought and
unpredictable weather conditions affecting water usage patterns. During FY 2017 through FY
2021, the balancing account for SFPUC’s wholesale customers built up an over-collection of
revenue due to wholesale customer revenues exceeding costs. There are several reasons
contributing to this: SFPUC sold more wholesale water than its sales projection, there were cost
savings in the wholesale revenue requirement due to the SFPUC’s debt refinancing, and
BAWSCA’s annual review of the wholesale revenue requirement resulted in credits applied to the
balancing account. However, during the drought years of FY 2022 and FY 2023 and during the
current year, SFPUC has been returning the over-collection in the balancing account. SFPUC’s
estimated balance in the balancing account at the end of FY 2024 is $19.4 million owed to retail
customers and the projection includes a deferral of up to $10 million of this to be paid back in
future years.
The Hetch Hetchy Regional Water System begins with a system of reservoirs and tunnels in the
high Sierra in Tuolumne County and water is transported by a gravity-fed pipeline to the Bay
Area. Currently, the SFPUC is in the midst of a $4.8 billion bond-financed capital improvement
program (the Water System Improvement Program, or WSIP) to seismically retrofit the facilities
that transport water to the Bay Area. As of June 30, 2023, 99.2% of the WSIP regional
construction contracts are complete.10 This has resulted and will continue to result in large
increases in the annual debt service costs assigned to wholesale customers like Palo Alto. After
each WSIP project is completed, wholesale customers must start paying the debt service costs
within 3 to 4 years. The currently estimated WSIP completion date is February 7, 2027, as
adopted by the SFPUC in April of 2022. In large part because of these WSIP-related debt service
costs, the SFPUC’s wholesale water rate increased from $1.43 per CCF in FY 2009 to $5.21 per
CCF currently. Figure 8 shows the SFPUC’s actual wholesale water rate since FY 2009 and SFPUC’s
projected rates for FY 2025through FY 2029. Note that the wholesale water rate decreased in FY
2014, but the apparent rate decrease is due to a debt the BAWSCA agencies owed to SFPUC being
10 Fourth Quarter FY 2022 - 2023 WSIP Regional Quarterly Report,
https://sfpuc.org/sites/default/files/documents/WSIP_Quarterly%20Report_FY2022-23_Q4.pdf
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directly paid by the BAWSCA agencies via bond financing, which lowered the cost of repaying the
debt (described in more detail in Section 2A: Overview of Financial Position).
Figure 8: Historical and Projected SFPUC Wholesale Water Rate
Parts of SFPUC’s system not included in the WSIP will also need rehabilitation after the WSIP is
completed, and some of these projects are already included in the SFPUC’s rate projections, such
as additional Transmission, Supply, Storage and Treatment system upgrade projects, and dam
safety work slated to occur during the next 10 years. The SFPUC is also conducting condition
assessments of other “up-country” facilities, located in the Sierras, in the coming years. Estimates
from 2021 are that $1.8 billion will be needed between FY 2019 and FY 2028 primarily for these
non-WSIP projects, but if these assessments identify other facilities that need replacement, it
may result in additional rate increases as new debt is issued to finance the projects.
SFPUC coordinates the development of wholesale rate adjustments with its annual budget
process and will decided on the final rate increase around May 2024 and be effective around July
1, 2024. SFPUC provides written notice to Palo Alto 30 days before the Commission meeting to
increase wholesale rates, and the rate adjustment will be effective no sooner than 30 days after
the Commission adopts the wholesale rate (the 2018 Amended and Restated Water Supply
Agreement Section 6.03.A. describes the details of budget coordinated rate adjustments). Staff
will request Council approval to extend the pass-through provision for the wholesale rate
(commodity charge) for another five years from July 1, 2024 through June 30, 2029.
SECTION 6B: OPERATIONS
CPAU’s Water Utility operations include the following activities:
• Administration, a category that includes charges allocated to the Water Utility for
administrative services provided by the General Fund and for Utilities Department
administration, as well as debt service and other potential transfers. Additional detail on
Water Utility debt service is provided in Section 6D: Debt Service
• Customer Service
$-
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• Engineering work for maintenance activities (as opposed to capital activities)
• Operations and Maintenance of the distribution system; and
• Resource Management
Appendix D: Description of Water Utility Operational Activities includes detailed descriptions of
the work associated with each of these activities.
From FY 2019 to FY 2023, overall operations costs increased 6.5% per year on average. Resource
Management costs increased at 13.5% per year on average while customer service increased by
8.8% and administration increased 7.8%. Operations and Maintenance increased 6.1% annually
on average. Transfers have varied from year to year, but staff expect transfers to remain
relatively stable through the forecast period.
Staff anticipates inflationary increases for all operations costs with underlying assumptions for
salary and benefit costs, consumer price index, and other cost projections that align as much as
possible with the City’s Long Range Financial Forecast.11 This plan anticipates operations costs to
increase by 4% per year, on average, over the forecast period. For salary and benefit assumptions,
this Financial Plan uses estimated annual percentage increases applied to the actual FY 2023
salaries and benefits of 6% in FY 2024 and 4% per year in FY 2025 through FY 2029. These
percentage estimates may change as the budget is refined and finalized this fiscal year.
11 Finance Committee Staff Report #2307-1773 December 5, 2023,
https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment
/?historyId=5b63b0b2-ba53-4346-94a2-c2a2858f2915
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Figure 9: Historical and Projected Operational Costs
SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP)
The Water Utility’s CIP consists of the following types of projects:
• One-time projects, or large, non-recurring replacement of system assets (such as
reservoir rehabilitation).
• Water main replacement, which represents the ongoing replacement of aging water
mains and the services associated with those mains, as well as seismically vulnerable
mains located in areas where soil is prone to liquefaction.
• Ongoing projects, which represent the cost of replacing aging and under-recording
meters and degraded boxes and covers, minor replacements of various types of
distribution system equipment, and the cost of capitalized tools and equipment.
• Customer connections, which represents the cost when the Water Utility installs new
services or upgrades existing services at a customer’s request in response to
development or redevelopment. CPAU charges a fee to these customers to cover the
cost of these projects.
Table 16 shows the FY 2024 projected budget and the five-year CIP spending plan, although these
figures are preliminary pending ongoing budget discussions.
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Table 16: Budgeted Water Utility CIP Spending ($000)
This budget does not include allocated overhead, estimated to be $0.7 million in FY 2024 and
escalating at 4% annually thereafter as shown in the table below. This budget also does not
include unallocated salaries and benefits, which are CIP-related salaries and benefits not included
in the project budgets, estimated to be $0.8 million annually. Allocated overhead and unallocated
salaries and benefits are added to the capital budget.
Table 17: Allocated Overhead and Unallocated CIP Salaries and Benefits
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
Allocated Overhead $651,736 $677,806 $704,918 $733,115 $762,439 $792,937
Unallocated CIP Salaries
and Benefits $770,000 $770,000 $770,000 $770,000 $770,000 $770,000
The Water Main Replacement (WMR) program funds the replacement of deteriorating water
mains or water mains in liquefaction zones. The water system consists of over 236 miles of mains,
approximately 2,000 fire hydrants, and over 20,000 metered service connections spanning 9
pressure zones over a 26 square mile service area. In recent years, CPAU has replaced many miles
of the most leak-prone and deteriorated pipes. Since the CIP program started in the early 1990s,
61 miles or 26% of water mains have been replaced. CPAU continues to pursue a pipe
replacement program of mains that are subject to recurring breaks based on maintenance
history, and 11.6 miles of mains that were identified in the 2015 water system study. CPAU also
coordinates with the Public Works street maintenance program to avoid cutting into newly
repaved streets. The main replacement schedule in this Financial Plan will allow CPAU to replace
these mains on schedule.
Costs for the water main replacement program are increasing for a variety of reasons:
• Fire flow requirements for larger diameter pipe.
• CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs
for this material are slightly higher, though lifecycle costs are lower, and the material
performs better. Joints in distribution mains are the most likely place for failure, and
sections of HDPE pipe are fused together rather than connected with fittings. In the
long run, this will reduce water losses and maintenance costs.
• To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along
with the water mains with new HDPE services. In the past, the existing services were
Project Category Current Budget*FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
One Time Projects 2,866 300 300 7,000 7,900 1,000
Water Main Replacement 11,488 425 9,407 472 10,450 525
Ongoing Projects 6,680 2,656 2,019 2,087 2,220 2,273
Customer Connections 1,072 961 989 1,019 1,100 1,100
TOTAL 22,106 4,342 12,715 10,578 21,670 4,898
*Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year
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reconnected, regardless of the material. This new practice costs more in the short run,
but will provide long term benefits.
• Lastly, material, fuel, and labor costs have escalated due to inflation, leading to higher
bids.
These factors have created some uncertainty in future water main replacement costs. As bids for
recent projects have consistently come in higher over the last few years, future main replacement
project budgets have been increased to reflect expected bid estimates. If the cost of water main
replacement continues to rise at its current levels, budgets may need to be revised further. In
1993, the long-term water main replacement program focused on replacing the oldest and most
degraded parts of the system. Then in 2015, CPAU initiated a master planning process that was
completed in FY 2016 to evaluate the current state of the distribution system and determine the
necessary rate of main replacement in the next 20 years. This study factored in seismically
vulnerable mains as well as deteriorating mains. Mains with recurring maintenance issues are
added to projects as they are identified. Preparing for the future, CPAU is in the process of
evaluating the utility’s asbestos cement pipe (ACP) water mains. Over half the mains in the
system are ACP. The ACP pipe has performed very well, but CPAU wants to verify its life
expectancy and plan for its future replacement in over the next 30 years.
This Financial Plan addresses these challenges in a way that will allow CPAU to meet its main
replacement needs. This Financial Plan includes approximately $8.5 million every other year for
main replacement construction, assuming inflation of 5.4% annually on the main replacement
budget. Staff anticipates that larger main replacement construction projects every other year will
attract more contractors to bid on the larger projects and alleviate the burden of insufficient
inspection coverage.
Included in the one-time project budget are seismic water system upgrades and/or replacement
for the Park and Dahl Tanks, two water distribution storage reservoirs, located in the Palo Alto
Foothills. This work will improve protection from water loss and damage to these storage tanks
during seismic events. Significant earthquake damage could lead to a loss of water for firefighting,
sanitation, and domestic and commercial drinking water uses. A rupture and failure of the
storage tanks during an earthquake could cause property damage, mudslides, and environmental
damage. Staff contracted with an engineering specialist and investigated and analyzed the
structural integrity and condition of the Park Tank Reservoir. The engineering specialist
recommended a full roof replacement of the Park Tank Reservoir in addition to a seismic retrofit
of the tank. Staff solicited proposals for an engineering firm to prepare plans and cost estimates
for the seismic retrofit and roof replacement of Park Tank and to perform a condition assessment
of Dahl Tank. If full tank replacement is needed for either Dahl or Park Tank, the estimated cost
for design and construction of Dahl and Park reservoirs is approximately $7 million each in FY
2027 and FY 2028. The cost to replace tank roofs and seismically retrofit the tanks is
approximately $4 million per tank.
Staff prepared and solicited bids for a capital improvement project for a seismic improvement of
the California and Page Mill Turnouts, two water receiving stations from the San Francisco Public
Utilities Commission’s water distribution system, and the City awarded the contract in FY 2023.
The Page Mill Turnout work was completed in September 2023. The California Turnout work
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started in January 2024 and is anticipated to be completed in May 2024.The California Turnout
work involves replacement of all the water piping and valving in the City of Palo Alto’s water
utility vault on California Avenue and a replacement of the vault roof.
Ongoing projects are expected to cost approximately $4.7 million on average annually for FY 2024
and FY 2025 for the purchase of generators and security cameras at the water pumping facilities.
However, this CIP category will then reduce to between $2.0 and $2.3 million annually through
the end of the forecast period. Actual expenses fluctuate annually depending on how many
defective meters are discovered and replaced during routine maintenance.
For customer connections, expenses also fluctuate annually depending on how much
development and redevelopment is going on that prompts the replacement or upgrade of water
services. Property owners pay a fee for water service replacement or expansion during
redevelopment, so when the number of projects go up (meaning higher costs for this activity), so
does fee revenue.
Aside from customer connections, the CIP plan for FY 2024 to FY 2029 is funded by revenue from
utility rates and capacity fees. Appendix B: Water Utility Capital Improvement Program (CIP)
Detail shows the details of the plan.
Figure 10 below shows the projected CIP Reserve balances from FY 2024 through FY 2029. Figure
11 below shows the projected CIP expenditure fluctuating from year to year with the staggered
main replacement schedule and one-time reservoir replacements/rehabilitations, relative to the
steadier capital program contributions to the CIP Reserve. This Financial Plan projects a $4 million
capital program contribution to the CIP Reserve in FY 2024 and approximately a $9 million capital
program contribution to the CIP Reserve annually from FY 2025 through FY 2027 and
approximately $12 million in FY 2028 and FY 2029. Additionally, this Financial Plan includes a
request for Council approval to transfer up to $3.461 million out of the CIP Reserve to the
Operations Reserve to pay for estimated CIP in FY 2024. Appendix A: Water Utility Financial
Forecast Detail shows the amount of the capital program contributions under “Expenses” for FY
2024 through FY 2029.
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Figure 10: Projected CIP Reserve Balances FY 2024 to FY 2029
Figure 11: Projected CIP Expenditure,and Projected Capital Program Contribution, FY 2024 to
FY 2029
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SECTION 6D: DEBT SERVICE
The Water Utility’s annual debt service is roughly $3.2 million per year, which is offset by a federal
subsidy of approximately $300K to $430K annually. The debt service is associated with two bond
issuances, one requiring payments through 2026, the other through 2035. CPAU is in compliance
with all covenants on both bonds.
The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance
construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new
wells, and rehabilitation of existing wells and tanks) which will be retired by 2035. As part of the
‘Build America’ bond program, there is an interest payment subsidy from the Federal
Government of 33 to 35%.
The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be
retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond
issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital
improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8
million.
Table 18 shows the cost of debt service for the Water Utility’s share of these bond issuances for
the financial forecast period:
Table 18: Water Utility Debt Service ($000)
FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028
2009 Water Revenue Bond, Series
A (net of subsidy) 2,158 2,181 2,201 2,225 2,251 2,280
2011 Utility Revenue Refunding
Bond, Series A 656 654 656 0 0 0
Total 2,814 2,835 2,857 2,225 2,251 2,280
Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available
Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available Reserves
shall be at least 5 times the maximum annual debt service. Note that “Available Reserves,” as
defined for both bonds, include the reserves for the Gas and Electric systems, not just the Water
system. This Financial Plan maintains compliance with these covenants throughout the forecast
period, as shown in Appendix A: Water Utility Financial Forecast Detail.
SECTION 6E: OTHER REVENUES
The Water Utility receives most of its revenues from sales of water. The next largest source in FY
2023 was service connection fee revenue, which represented 38% of revenue from sources other
than water sales; interest income represented 35% of revenue from sources other than water
sales, and grants represented 16% of revenue from sources other than water sales. The
remainder consisted of a variety of miscellaneous charges and transfers.
Connection fees are charged to new developments that need new or replacement service
connections, while capacity fees are charged to development that put additional demands on the
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water distribution system. Revenue from these sources fluctuate from year to year. In FY 2023,
capacity fee revenue was almost as low as it was in FY 2022, which was the lowest level in any of
the prior ten years. Service Connection fee revenue also continued at a low level similar to the
level seen in FY 2022. Staff estimates this decrease is due to more tenant improvements permits
rather than new service connection permits where the improvements are inside the buildings
and the utility infrastructure remains the same. This financial plan forecasts connection fee and
capacity fee revenue using the most recent year recorded amounts increasing at an average of
3% per year in subsequent years. Connection and capacity fee revenue is reflected in the
Operations Reserve.
Other revenue sources are projected to stay stable through the forecast period, though interest
income fluctuates depending on changes in interest rates. Some uncertainty also exists related
to the Federal government’s commitment to continuing to pay the interest subsidy on the Build
America Bonds.
SECTION 6F: SALES REVENUES
Staff based the sales revenue projections on the load forecast in Section 5A: Load Forecast and
the projected rate changes shown in Figure 5. Precipitation can vary substantially, and this can
affect revenues substantially. In dry, non-drought years customers use more water, increasing
revenues, and in wet years they use less. It is difficult to predict customer usage recovery from
drought together with impacts from weather from year to year. Staff will continue to monitor
these patterns and adjust projections accordingly in subsequent financial plans.
SECTION 7: COMMUNICATIONS PLAN
The FFY 2025 Water Utility communications strategy covers these primary areas: cost drivers
and cost containment measures, efficiency programs and services, capital improvement and
maintenance for infrastructure safety and reliability. The City of Palo Alto Utilities (CPAU)
communication methods include use of the utilities website, utility bill inserts, messaging on
utility bills and MyCPAU online account management platform, email newsletters, print and
digital ads in local publications, social media, community messaging platforms, and through
direct mailings of the Home Water Reports and online WaterSmart portal.
A Water Utility rate increase is necessary because the year-end operations reserve is near the
minimum guideline due to the drought. Water sales were much lower than forecasted as a result
of CPAU encouraging conservation during the drought. These water use reductions impact water
rates because the primarily fixed costs of the system are spread among fewer units of water sales.
Expenses are also higher than forecasted. Market economics have continued to drive up labor
and material costs for construction projects. As a not for profit public utility, CPAU must recover
its costs primarily through revenue generated by rates. Any increased supply costs are passed
through rates to CPAU customers, including for capital improvement. The cost to deliver water
supply to Palo Alto and for CPAU to distribute water to customers is high, as it includes
maintaining and replacing water infrastructure, customer service, billing, and administration.
WATER UTILITY FINANCIAL PLAN
M a r c h 2 02 4 37 | P a g e
CPAU’s communication about Water Utility rates will focus on the costs passed down from Palo
Alto’s water supplier, the San Francisco Public Utilities Commission (SFPUC), capital improvement
and infrastructure upgrades, and what CPAU is doing to keep costs down. Maintaining water
pipes, mains, and service connections is necessary to prevent leaks, which cost the utility and
rate payers money, and prevents damage to infrastructure which could exacerbate safety and
reliability concerns in the long term.
CPAU promotes water use efficiency programs and easy water-saving behaviors to aid in our
water saving efforts and help customers keep utility costs low. Messaging reinforces that
although rates may increase, efficient usage can help customers avoid seeing a significant water
cost increase on the utility bill. The City is also exploring opportunities to expand use of
alternative water supplies through the development of a One Water Plan for that purpose to
further reduce demands on potable water supplies.
Staff maintain a dedicated webpage12, to provide an overview on all utility rates costs to the
utility, updates to financial forecasts and proposed rate changes. While print materials such as
bill inserts and ads feature prominently, CPAU is exploring additional ways to communicate
directly to customers utilizing unique programs like the relatively new WaterSmart portal and
Home Water Reports. Staff continue to maintain an active presence in social media and are
expanding outreach through citywide email newsletters. Staff attend community outreach
events and host educational workshops on these related topics.
APPENDICES
Appendix A: Water Utility Financial Forecast Detail
Appendix B: Water Utility Capital Improvement Program (CIP) Detail
Appendix C: Water Utility Reserves Management Practices
Appendix D: Description of Water Utility Operational Activities
Appendix E: Sample of Water Utility Outreach Communications
12 https://www.cityofpaloalto.org/Departments/Utilities/Customer-Service/Utilities-Rates
APPENDIX A: WATER UTILITY FINANCIAL FORECAST DETAIL
Appendix A (continued)
WATER UTILITY FINANCIAL PLAN
M a r c h 2 02 4 40 | P a g e
APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
WATER UTILITY FINANCIAL PLAN
M a r c h 2 02 4 41 | P a g e
APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Water Utility Financial
Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal years
covered by the Financial Plan. For example, for the Water Utility Financial Plan delivered in
conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers to the
Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets as the
difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital assets
(net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Water Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in Section 4
(Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Water Utility’s Capital Improvement
Program (CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves and shall be
returned to ratepayers or assigned a specific purpose as described in Section 8 (Unassigned
Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to the total
remaining spending authority for all contracts in force for the Water Utility at that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal to the
amount of all remaining capital and non-capital budgets, if any, that will be re-appropriated to the
following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090.
Section 5. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capital
contingencies. Staff will manage the CIP Reserve according to the following practices:
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.
WATER UTILITY FINANCIAL PLAN
M a r c h 2 02 4 42 | P a g e
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: If, at the end of any fiscal year, the minimum guideline is not met, staff shall
present a plan to the City Council to replenish the reserve. The plan shall be delivered by the end
of the following fiscal year, and shall, at a minimum, result in the reserve reaching its minimum
level by the end of the next fiscal year. For example, if the CIP Reserve is below its minimum level
at the end of FY 2017, staff must present a plan by June 30, 2018 to return the reserve to its
minimum level by June 30, 2019. In addition, staff may present, and the Council may adopt, an
alternative plan that takes longer than one year to replenish the reserve, or that does so in a
shorter period of time.
d) Maximum Level: If there are funds in this reserve in excess of the maximum level staff must
propose in the next Financial Plan to transfer these funds to another reserve, return the funds to
ratepayers, or designate a specific use of the funds for CIP investments that will be made by the
end of the next Financial Planning Period. Staff may also seek City Council to approve holding
funds in this reserve in excess of the maximum level if they are held for a specific future purpose
related to the CIP.
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held to
manage the trajectory of future year rate increases. Withdrawal of funds from the Rate
Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization Reserve
at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the
withdrawal of all funds from this Reserve by the end of the next Financial Planning Period. The
Council may approve exceptions to this requirement, when proposed by staff to provide greater
rate stabilization to customers.
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves described
in Section 3-Section 6 above will be included in the Operations Reserve unless this reserve has reached
its maximum level as set forth in Section 7(d) below. Staff will manage the Operations Reserve
according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period based on the levels of Operations
and Maintenance (O&M) and commodity expense forecasted for that year in the Financial Plan.
13 Each month is calculated based upon 1/12 of the annual budget.
14 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual
average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use
to derive the annual average would be FY 2022 through FY 2025 etc.
WATER UTILITY FINANCIAL PLAN
M a r c h 2 02 4 43 | P a g e
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations Reserve
are lower than the minimum level set forth above, staff shall present a plan to the City Council to
replenish the reserve. The plan shall be delivered within six months of the end of the fiscal year,
and shall, at a minimum, result in the reserve reaching its minimum level by the end of the
following fiscal year. For example, if the Operations Reserve is below its minimum level at the end
of FY 2014, staff must present a plan by December 31, 2014 to return the reserve to its minimum
level by June 30, 2015. In addition, staff may present, and the Council may adopt, an alternative
plan that takes longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower than the
target level, any Financial Plan created for the Water Utility shall be designed to return the
Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no funds may
be added to this reserve. Any further increase in the Water Utility’s Fund Balance shall be
automatically included in the Unassigned Reserve described in Section 8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water Utility’s Fund
Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned Reserve at
the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to
assign them to a specific purpose or return them to the Water Utility ratepayers by the end of the first
fiscal year of the next Financial Planning Period. For example, if there were funds in the Unassigned
Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY 2021,
the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the
end of FY 2016. Staff may present an alternative plan that retains these funds or returns them over a
longer period of time.
WATER UTILITY FINANCIAL PLAN
M a r c h 2 02 4 44 | P a g e
APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES
This appendix describes the activities associated with the various operational activities referred to in
Section 6B: Operations of this Financial Plan.
Administration: Accounting, purchasing, legal, and other administrative functions provided by the City’s
General Fund staff, as well as shared communications services, CPAU administrative overhead, and billing
system maintenance costs. This category also includes Water Utility debt service and rent paid to the
General Fund for the land associated with reservoirs and various other facilities.
Customer Service: This category includes the Water Utility’s share of the call center, meter reading,
collections, and billing support functions. Billing support encompasses staff time associated with bill
investigations and quality control on certain aspects of the billing process. It does not include maintenance
of the billing system itself, which is included in Administration. This category also includes CPAU’s key
account representatives, who work with large commercial customers who have more complex
requirements for their water services.
Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small portion of
their time is spent assisting with distribution system maintenance.
Operations and Maintenance: This category includes the costs of a variety of distribution system
maintenance activities, including:
• investigating reports of damaged mains or services and performing emergency repairs;
• testing and operating valves;
• monitoring water quality and reservoir levels;
• monitoring the status of the different pressure zones;
• flushing water at hydrants and other closed end points of the system;
• building and replacing water services for new or redeveloped buildings; and
• testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities, including:
• the Field Services team (which does field research of various customer service issues);
• the Cathodic Protection team (which monitors and maintains the systems that prevent corrosion
in metal tanks and reservoirs); and
• the General Services team (which manages and maintains equipment, paves and restores streets
after gas, water, or sewer main replacements, and provides welding services)
Resource Management: This category includes water procurement, contract management, water
resource planning, interaction with BAWSCA, the SFPUC, and Valley Water, and tracking of legislation and
regulation related to the water industry.
M a r c h 2 02 4 45 | P a g e
APPENDIX E: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-1 Effective 7-1-20243
dated 7-1-20232 Sheet No W-1-1
A. APPLICABILITY:
This schedule applies to separately metered single-family residential dwellings receiving Water
Service from the City of Palo Alto Utilities.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Water Service.
C. RATES:
Per Meter
Monthly Service Charge: Per Month
For meters 5/8-inch to 1 inch .................................................................................... $ 24.2721.48
For 1 1/2 inch meter .................................................................................................. 78.3969.38
For 2-inch meter ........................................................................................................ 121.27107.32
For 3-inch meter ........................................................................................................ 257.05227.48
For 4-inch meter ........................................................................................................ 457.15404.56
For 6-inch meter ........................................................................................................ 935.94828.27
For 8-inch meter ........................................................................................................1,722.021,523.92
For 10-inch meter ......................................................................................................2,722.492,409.29
For 12-inch meter .......................................................................................................3,580.053,168.19
Per Hundred
Cubic Feet
Volumetric Rates: (To be added to Service Charge, applicable to all pressure zones.) Per Month
Commodity Rate:
Water Delivery Charge from SFPUC ......................................................................... $ 5.555.21
Distribution Rate:
Tier 1 usage ........................................................................................................................$ 3.072.72
Tier 2 usage (All usage over 100% of Tier 1) .......................................................................7.156.33
Attachment A, Exhibit 2
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-2 Effective 7-1-20243
dated 7-1-20232 Sheet No W-1-2
Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable commodity rate for Tier 1 and Tier
2 Water usage when the City Council has determined that a Water reduction level is in effect for the
City as described in Section D.4. The drought surcharges in the table below are measured in dollars
per hundred cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Tier 1 0.20 0.43 0.64
Tier 2 0.58 1.21 1.85
Temporary Service – Developers
Temporary unmetered service to residential
subdivision developers, per connection ........................................................................ $ 6.00
D. SPECIAL NOTES:
1.Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a Customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2.Commodity Rate
The Commodity Charge is based on the water delivery rate per the San Francisco Public
Utility Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Term
Contract. The Commodity Charge will be passed through automatically via periodic rate
adjustments to account for increases in wholesale water charges, as well as inflation. The
pass-through period will be effective for fiscal years 20250 through 20294, inclusive.
Customers will be provided notice of any adjustments via their billing statements or by any
other mailing by CPAU to the customer’s regular billing address.
Attachment A, Exhibit 2
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-3 Effective 7-1-20243
dated 7-1-20232 Sheet No W-1-3
3.Calculation of Usage Tiers
Tier 1 Water usage shall be calculated and billed based upon a level of 0.2 ccf per day
rounded to the nearest whole ccf, based on Meter reading days of Service. As an
example, for a 30-day bill, the Tier 1 level would be 0 through 6 ccf. For further
discussion of bill calculation and proration, refer to Rule and Regulation 11.
4. Drought Surcharge
During period of Water shortage or restrictions on local Water use, the City Council may,
by resolution, declare the need for citywide Water conservation at the 10/15%, 20% or
25% level. While such a resolution is in effect, a drought surcharge will apply. The
purpose of the drought surcharge is to recover revenues lost as a result of reduced
consumption.
{End}
Attachment A, Exhibit 2
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-2-1 Effective 7-1-20243
dated 7-1-20232 Sheet No W-2-1
A. APPLICABILITY:
This schedule applies to all Water taken from fire hydrants for construction, maintenance, and
other uses in conformance with provisions of a Hydrant Meter Permit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Water Service.
C. RATES:
1. Monthly Service Charge.
METER SIZE
5/8 inch ........................................................................................................................... $ 50.00
3 inch ........................................................................................................................... 125.00
2. Volumetric Rate: (per hundred cubic feet)
Commodity Rate:
Water Delivery Charge from SFPUC ................................................................ $ 5.555.21
Distribution Rate: .................................................................................................................$ 4.323.83
4. Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable Commodity rate when the City
Council has determined that a Water reduction level is in effect for the City as described in
Section D.6. The drought surcharges in the table below are measured in dollars per hundred
cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.26 0.53 0.77
Attachment A, Exhibit 2
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-2-2 Effective 7-1-20243
dated 7-1-20232 Sheet No W-2-2
D. SPECIAL NOTES:
1. Monthly charges shall include the applicable monthly Service Charge in addition to usage billed at
the commodity rate.
2. The Commodity Charge is based on the water delivery rate per the San Francisco Public Utility
Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Term Contract. The
Commodity Charge will be passed through automatically via periodic rate adjustments to account
for increases in wholesale water charges, as well as inflation. The pass-through period will be
effective for fiscal years 20250 through 20294, inclusive. Customers will be provided notice of
any adjustments via their billing statements or by any other mailing by CPAU to the customer’s
regular billing address.
3. Any person or company using a hydrant without first obtaining a valid Hydrant Meter Permit shall
pay a fee of $50.00 for each day of such use in addition to all other costs and fees provided in this
schedule. A hydrant permit may be denied or revoked for failure to pay such fee.
4. A Meter deposit of $750.00 may be charged any applicant for a Hydrant Meter Permit as a
prerequisite to the issuance of a permit and Meter(s). A charge of $50.00 per day will be added for
delinquent return of hydrant Meters. A fee will be charged for any Meter returned with missing or
damaged parts.
5. Any person or company using a fire hydrant improperly or without a permit, or who draws Water
from a hydrant without a Meter installed and properly recording usage shall, in addition to all other
applicable charges be subject to criminal prosecution pursuant to the Palo Alto Municipal Code.
6. During period of Water shortage or restrictions on local Water use, the City Council may, by
resolution, declare the need for citywide Water conservation at the 10/15%, 20% or 25% level.
While such a resolution is in effect, a drought surcharge will apply. The purpose of the drought
surcharge is to recover revenues lost as a result of reduced consumption.
{End}
Attachment A, Exhibit 2
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-3-1 Effective 7-1-20234
dated 7-1-20232 Sheet No W-3-1
A. APPLICABILITY:
This schedule applies to all public fire hydrants and private fire Service connections.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Water Service.
C. RATES:
1. Monthly Service Charges
Public Fire Hydrant .................................................................................................... $ 5.00
Private Fire Service:
2-inch connection .......................................................................................................$ 4.994.42
4-inch connection .......................................................................................................30.93 27.38
6-inch connection ....................................................................................................... 89.84 79.51
8-inch connection .......................................................................................................191.47 169.45
10-inch connection .....................................................................................................344.35 304.74
12-inch connection .....................................................................................................556.23 492.24
2. Commodity (To be added to Service Charge unless Water is used for fire extinguishing or
testing purposes.)
Per Hundred Cubic Feet
All water usage ..........................................................................................................$ 10.00
D. SPECIAL NOTES:
1. Service under this schedule may be discontinued if Water is used for any purpose other
than fire extinguishing or testing and repairing the fire extinguishing facilities. Using
hydrants and fire Services for other purposes is illegal and will be subject to the
commodity charge as noted above, fines, and criminal prosecution pursuant to the Palo
Alto Municipal Code.
2. For a combination Water and fire Service, the Water Service schedule shall apply.
Attachment A, Exhibit 2
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-3-2 Effective 7-1-20234
dated 7-1-20232 Sheet No W-3-2
3. Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire
Services.
4. Repairs and testing of fire extinguishing facilities are not considered unauthorized use of
Water if records and documentation are supplied by the Customer.
{End}
Attachment A, Exhibit 2
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-4-1 Effective 7-1-20243
dated 7-1-20232 Sheet No W-4-1
A. APPLICABILITY:
This schedule applies to Water Services to non-residential buildings, and multi-family residential
dwellings served through a Master-Meter.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Water Service.
C. RATES:
Per Meter
Monthly Service Charge Per Month
For 5/8-inch meter .................................................................................... $ 21.22 18.78
For 3/4-inch meter .................................................................................... 28.37 25.11
For 1-inch meter .................................................................................... 42.66 37.76
For 1 ½-inch meter .................................................................................... 78.39 69.38
For 2-inch meter .................................................................................... 121.27 107.32
For 3-inch meter .................................................................................... 257.05 227.48
For 4-inch meter .................................................................................... 457.15 404.56
For 6-inch meter .................................................................................... 935.94 828.27
For 8-inch meter ....................................................................................1,722.02 1,523.92
For 10-inch meter ....................................................................................2,722.49 2,409.29
For 12-inch meter ....................................................................................3,580.05 3,168.19
Per Hundred
Cubic Feet
Volumetric Rates: (to be added to Service Charge, applicable to all pressure zones) Per Month
Commodity Rate:
Water Delivery Charge from SFPUC ...................................................... $ 5.55 5.21
Distribution Rate: ........................................................................................... 4.323.83
Attachment A, Exhibit 2
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-4-2 Effective 7-1-20243
dated 7-1-20232 Sheet No W-4-2
Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable commodity rate when the City
Council has determined that a Water reduction level is in effect for the City as described in Section
D.3. The drought surcharges in the table below are measured in dollars per hundred cubic feet
(ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.26 0.53 0.77
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a Customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2. Commodity Rate
The Commodity Charge is based on the water delivery rate per the San Francisco Public
Utility Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Term
Contract. The Commodity Charge will be passed through automatically via periodic rate
adjustments to account for increases in wholesale water charges, as well as inflation. The
pass-through period will be effective for fiscal years 20250 through 20294, inclusive.
Customers will be provided notice of any adjustments via their billing statements or by any
other mailing by CPAU to the customer’s regular billing address.
3. Drought Surcharge
During period of Water shortage or restrictions on local Water use, the City Council may,
by resolution, declare the need for citywide Water conservation at the 10/15%, 20% or
25% level. While such a resolution is in effect, a drought surcharge will apply. The
purpose of the drought surcharge is to recover revenues lost as a result of reduced
consumption.
{End}
Attachment A, Exhibit 2
NON-RESIDENTIAL IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-7-1 Effective 7-1-20243
dated 7-1-20232 Sheet No W-7-1
A. APPLICABILITY:
This schedule applies to non-residential Water Service supplying dedicated irrigation Meters.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Water Services.
C. RATES:
Per Meter
Monthly Service Charge Per Month
For 5/8-inch meter .................................................................................... $ 21.2218.78
For 3/4-inch meter .................................................................................... 28.3725.11
For 1-inch meter .................................................................................... 42.6637.76
For 1 1/2 inch meter .................................................................................... 78.3969.38
For 2-inch meter .................................................................................... 121.27107.32
For 3-inch meter .................................................................................... 257.05227.48
For 4-inch meter .................................................................................... 457.15 404.56
For 6-inch meter .................................................................................... 935.94 828.27
For 8-inch meter ....................................................................................1,722.02 1,523.92
For 10-inch meter ....................................................................................2,722.49 2,409.29
For 12-inch meter ....................................................................................3,580.05 3,168.19
Per Hundred
Cubic Feet
Volumetric Rates: (to be added to Service Charge, applicable to all pressure zones) Per Month
Commodity Rate:
Water Delivery Charge from SFPUC ........................................................... $ 5.55 5.21
Distribution Rate: ..................................................................................................... 6.585.83
Attachment A, Exhibit 2
NON-RESIDENTIAL IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-7-2 Effective 7-1-20243
dated 7-1-20232 Sheet No W-7-2
Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable commodity rate when the City
Council has determined that a Water reduction level is in effect for the City as described in Section
D.3. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.53 1.25 2.02
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a Customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2. Commodity Rate
The Commodity Charge is based on the water delivery rate per the San Francisco Public
Utility Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Term
Contract. The Commodity Charge will be passed through automatically via periodic rate
adjustments to account for increases in wholesale water charges, as well as inflation. The
pass-through period will be effective for fiscal years 20250 through 20294, inclusive.
Customers will be provided notice of any adjustments via their billing statements or by any
other mailing by CPAU to the customer’s regular billing address.
3. Drought Surcharge
During period of Water shortage or restrictions on local Water use, the City Council may,
by resolution, declare the need for citywide Water conservation at the 10/15%, 20% or
25% level. While such a resolution is in effect, a drought surcharge will apply. The
purpose of the drought surcharge is to recover revenues lost as a result of reduced
consumption.
{End}
Attachment A, Exhibit 2