HomeMy WebLinkAbout2015-04-07 Finance Committee Agenda Packet Finance Committee
Tuesday, April 7, 2015
Special Meeting
Council Chambers
5:30 PM
Agenda posted according to PAMC Section 2.04.070. Supporting materials are available in
the Council Chambers on the Thursday preceding the meeting.
PUBLIC COMMENT
Members of the public may speak to agendized items. If you wish to address the Committee on any issue that is on this agenda, please complete a speaker request card located on the table at the entrance to the Council Chambers/Council Conference Room, and deliver it to the Clerk prior to
discussion of the item. You are not required to give your name on the speaker card in order to speak
to the Committee, but it is very helpful.
Call to Order
Oral Communications
Action Items
1. Utilities Advisory Committee Recommendation that the City Council Adopt: (1) a
Resolution Approving the Fiscal Year 2016 Water Utility Financial Plan and
Amending the Water Utility Reserve Management Practices; and (2) a Resolution
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) to Increase Average Water Rates by 12
Percent
2. Utilities Advisory Committee Recommendation that the City Council Adopt: 1) a
Resolution Approving the Fiscal Year 2016 Wastewater Collection Financial Plan
and Amending the Wastewater Collection Utility Reserve Management Practices,
and (2) a Resolution Amending Rate Schedules S-1 (Residential Wastewater
Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal),
S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial
Wastewater Collection and Disposal – Industrial Discharger) to Increase Average
Wastewater Collection Rates by 9 Percent
3. Council Adoption of a Resolution Amending the R-1 Residential Refuse Rates for
Fiscal Year 2016 to Cover a New Food Scrap Collection Program and Other
Program Costs, and to Incorporate Structural Changes
1
MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA
PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE.
DURING NORMAL BUSINESS HOURS.
4. Adoption of a Resolution Amending Utility Rate Schedule D-1 (Storm and Surface
Water Drainage) Reflecting a 2.7 Percent Consumer Price Index Rate Increase to
$12.63 Per Month Per Equivalent Residential Unit for Fiscal Year 2016
Future Meetings and Agendas
Adjournment
AMERICANS WITH DISABILITY ACT (ADA)
Persons with disabilities who require auxiliary aids or services in using City facilities, services or
programs or who would like information on the City’s compliance with the Americans with Disabilities
Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance.
Status of Items Requested by the Finance Committee
Referral
Date Item Title Status
2011 Debt Service Policy Update (ASD) In Process Staff to return with an updated policy
2013 Police Services Utilization and Resources Study (PD) Pending
2014
Utilities Department Organizational Assessment (ASD/UTL)
Pending Return with an update on the status of organizational
assessment recommendations
Finance Committee Items Tentatively Scheduled
Meeting
Date Item Title
4/21/2015
HSRAP (CSD)
Animal Shelter Follow-up (CM/Aud)
Gas Financial Plans (Utilities)
Electric Financial Plans (Utilities)
FY 2016-2025 General Fund Long Range Financial Forecast and FY 2014 CAFR Review
(ASD)
Please see Budget Hearing schedule
6/2/2015 Electric Special Project Reserve (Utilities)
9/1/2015 Strategies to Reduce the City's Long-term Pension and Retiree Heathcare Plans
Unfunded Liabilities (ASD)
GASB 68 (ASD)
2 April 7, 2015
MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA
PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE.
DURING NORMAL BUSINESS HOURS.
City of Palo Alto (ID # 5591)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/7/2015
City of Palo Alto Page 1
Summary Title: Water Financial Plan and Rate Proposals
Title: Utilities Advisory Committee Recommendation that the City Council
Adopt: (1) a Resolution Approving the Fiscal Year 2016 Water Utility Financial
Plan and Amending the Water Utility Reserve Management Practices; and (2)
a Resolution 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) to
Increase Average Water Rates by 12%
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee
recommend that the Council:
1. Adopt a resolution (Attachment A) amending the Water Utility Reserve Management
Practices (Attachment B) and approving the fiscal year (FY) 2016 Water Utility Financial
Plan (Attachment C); and
2. Adopt a resolution (Attachment D) Amending Rate Schedules W-1 (General Residential
Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections),
W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7
(Non-Residential Irrigation Water Service).
Executive Summary
The FY 2016 Water Utility Financial Plan includes projections of the utility’s costs and revenues
for FY 2016 through FY 2023. Costs are projected to rise substantially for the next several years
due primarily to increasing water supply costs. As a result, staff projects the need for a 12%
rate increase on July 1, 2015 and 8% rate increases afterward each year through FY 2019.
Costs are increasing by 14% from FY 2015 to FY 2016, and are also projected to increase by
another 15% by FY 2020. These cost increases are mostly due to water supply costs, which are
City of Palo Alto Page 2
increasing by 31% in FY 2016, 9% in FY 2019, and 9% in FY 2020. Staff proposes spreading the
rate increases required to match these costs over several years. This is possible with two
recommended reserves transfers to the Operations Reserve—$2 million from the CIP Reserve
in FY 2015, and $5.5 million from the Rate Stabilization Reserve in FY 2016. This will reduce the
Rate Stabilization Reserve to nearly zero by the end of FY 2016.
Staff also recommends a change to the Water Utility Reserves Management Practices for the
CIP Reserve to accommodate a change in City budgeting practices for CIP projects.
The UAC reviewed the Water Financial Plan and Rate Projections at its meeting on March 4,
2015 and recommended approval of staff’s recommendation.
Background
Every year staff presents the Finance Committee with Financial Plans for its Electric, Gas, Water,
and Wastewater Collection Utilities and recommends any rate adjustments required to
maintain their financial health. These Financial Plans include a comprehensive overview of the
utility’s operations, both retrospective and prospective, and are intended to be a reference for
UAC and Council members as they review the budget and staff’s rate recommendations.
Each Financial Plan also contains a set of Reserves Management Practices describing the
reserves for each utility and the management practices for those reserves. Staff may propose
amendments to these reserves as part of the Financial Plans.
The Utilities Advisory Commission (UAC) reviewed this proposal at its March 4, 2015 meeting.
Both the UAC and Finance Committee reviewed preliminary financial forecasts and rate
projections for all utilities at their February 4 and March 3, 2015 meetings, respectively.
Discussion
Proposed Actions for FY 2015
When Council adopted the FY 2015 Water Utility Financial Plan, it approved several transfers
between reserves. Funds were transferred out of the Emergency Plant Replacement and Rate
Stabilization Reserve into the newly-created CIP and Operations Reserves. These transfers were
mainly related to setting up the new reserves structure approved as part of that Financial Plan.
Now, staff recommends an additional transfer for FY 2015. The final design for the seismic
strengthening and recoating of some of the reservoirs identified some additional work that may
need to be done at a cost of roughly $2 million. As a result, staff proposes a transfer of $2
million from the CIP Reserve to the Operations Reserve, so that it will have $4 million remaining
at the end of FY 2015.
City of Palo Alto Page 3
Proposed Actions for FY 2016
This year’s Water Utility Financial Plan includes the following proposed actions for FY 2016:
1. Amend the CIP Reserve to accommodate a change in the City’s capital budgeting
practices. These amendments are summarized below, but for a more in-depth
description of the reasons for these amendments, see Section 4C of the Financial Plan:
a. Modify the purpose of the CIP Reserve to enable it to act as a cash flow and
contingency reserve for capital investment projects by amending the Reserves
Management Practices.
b. Transfer funds projected to be released from the Reappropriations Reserve at
the beginning of FY 2016 due to a change in City capital budgeting practices to
the CIP Reserve.
c. Exceed the proposed maximum CIP Reserve guidelines through the end of FY
2017.
2. Transfer $5.5 million from the Rate Stabilization Reserve to the Operations Reserve. This
transfer will enable staff to maintain Operations Reserve levels while spreading the
required rate increases for the water utility over several years.
These proposed actions are described in more detail in the FY 2016 Water Financial Plan
(Attachment B).
In addition, staff proposes to adjust water rates to the levels shown in Tables 1-3, below,
effective July 1, 2015. These changes are projected to increase the system average rate by
roughly 12%. These rate changes are included in the proposed amended rate schedules in
Attachment E.
Staff’s annual assessment of the financial position of the City’s water utility is completed to
ensure adequate revenue to fund operations, in compliance with the cost of service
requirements set forth in the California Constitution (Proposition 218). This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. The
current rate proposals are also based on the cost of service methodology from the 2012 Palo
Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants.
City of Palo Alto Page 4
Table 1: Water Consumption Charges (Current and Proposed)
Current Rates
(7/1/13)
Proposed Rates
(7/1/15)
Change
$/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 4.99 5.70 $0.71 14%
Tier 2 Rates 7.58 8.38 $0.80 11%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 6.15 6.97 $0.82 13%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 6.15 6.97 $0.82 13%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 7.52 8.46 $0.94 13%
Table 2: Current and Proposed Monthly Water Service Charge
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current (7/1/13) Proposed (7/1/15) $/mo %
5/8” 14.67 $16.01 $1.34 9%
3/4” 19.51 $21.48 $1.97 10%
1” 29.18 $32.42 $3.24 11%
1 ½” 53.37 $59.77 $6.40 12%
2” 82.39 $92.60 $10.21 12%
3” 174.29 $196.54 $22.25 13%
4” 309.72 $349.71 $39.99 13%
6” 633.80 $716.24 $82.44 13%
8” 1,165.86 $1,318.01 $152.15 13%
10” 1,843.02 $2,083.89 $240.87 13%
12” 2,423.45 $2,740.37 $316.92 13%
Table 3: Current and Proposed Monthly Fire Service Charges
Meter
Size
Monthly Fire Service Charge
($/month based on meter size) Change
Current (7/1/13) Proposed (7/1/15) $/mo %
2” $3.03 $3.43 $0.40 13%
4” $18.78 $21.21 $2.43 13%
6” $54.55 $61.60 $7.05 13%
8” $116.24 $131.28 $15.04 13%
10” $209.03 $236.09 $27.06 13%
12” $337.65 $381.35 $43.70 13%
Bill Impact of Proposed Rate Changes
City of Palo Alto Page 5
Table 4 shows the impact of the proposed July 1, 2015 rate changes on the median residential
bill. This comparison assumes that customers do not decrease consumption. Historically,
however, customers have looked for ways to conserve after their bills have increased, so not all
customers will experience the same bill increase. The average increase is roughly 12%, but
some customers with very low bills may see slightly higher increases due to slight changes in
the composition of the utility’s costs, and how that affects the first tier and fixed charges under
the cost of service methodology.
Table 4: Impact of Proposed Water Rate Changes on Residential Bills
Usage
(CCF/month)
Bill under
Existing Rates
Bill under
Proposed Rates
Change
$/mo. %
4 34.63 38.81 4.18 12%
(Winter median) 7 52.19 58.59 6.40 12%
(Annual median) 9 67.35 75.35 8.00 12%
(Summer median) 14 105.25 117.24 11.99 11%
25 188.63 209.40 20.77 11%
Table 5 shows the impact of the proposed July 1, 2015 rate changes on various representative
commercial customer bills. As with residents, this comparison assumes that customers do not
decrease consumption.
Table 5: Impact of Proposed Water Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current
Rates
Bill under
Proposed
Rates
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 88.47 99.65 11.18 13%
(Annual average) 64 408.27 462.09 53.82 13%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 121 136 15 13%
(Summer median) 37 332 373 41 12%
(Winter average) 56 474 534 59 12%
(Summer average) 199 1,550 1743 193 12%
Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 6 shows the projected rate adjustments over the next five years and their impact on the
median residential water bill. As discussed above, for FY 2016 staff is proposing to pass a large
increase in the SFPUC wholesale rate through to customers, and also slightly increase water
distribution rates. Staff projects the need for 8% rate increases through FY 2019, with increases
at the rate of inflation afterward.
City of Palo Alto Page 6
Table 6: Proposed/Projected Water Rate Adjustments, FY 2016 to FY 2020
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Water Utility 12% 8% 8% 8% 3%
Estimated Bill Impact ($/mo)* $8.15 $6.37 $6.79 $7.24 $2.88
* estimated impact on median residential water bill, which is currently $67.35.
Table 7 shows the proposed and projected rate adjustments in the context of the other
proposed and projected utility rates.
Table 7: Rate Adjustments, All Utilities, FY 2016 Proposed, FY 2017 to FY 2020 Projected
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Electric 0% 6% 6% 1% 1%
Gas1 0% 7% 4% 4% 4%
Wastewater 9% 9% 9% 9% 6%
Water 12% 8% 8% 8% 3%
Refuse2 9% 9% 8% 2% to 3% 2% to 3%
Storm Drain3 2.7% 2% to 3% 2% to 3% 2% to 3% 2% to 3%
Total Bill
Change4
(%) 6% 8% 7% 5% 3%
($/mo) $14.73 $18.91 $18.53 $14.39 $9.55
(1) Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates will vary monthly
with wholesale market fluctuations
(2) No forecast available past FY 2018, inflationary increases assumed.
(3) Storm Drain Rates increase annually by CPI; existing rates sunset in June 2017 unless reauthorized by a majority
vote of property owners.
(4) Change in estimated median residential bill, $230.76 as of June 30, 2014
The main driver for the increase in the water utility’s costs (and therefore rates) over the next
several years is the cost of water. Wholesale water costs are projected to rise 30% in FY 2016
and 9% per year in FY 2019 and FY 2020 as the SFPUC issues debt to finance the SFPUC’s Water
System Improvement Program (WSIP) (no substantial changes are projected in FY 2017 and FY
2018). The City will also see a $1 million increase in operating costs for a capital lease for
emergency generators for wells and pump stations. Aside from that, the City’s operating and
CIP costs are projected to rise roughly 2% to 4% annually over that time. The Water Utility
Financial Plan assumes the current drought ends in early 2016, but includes projections for
alternate scenarios under which the drought extends for an additional one or two years.
Last year, staff discussed uncertainty in the forecasts of capital costs for the water utility in
coming years. Water main replacement costs have risen substantially in recent years, and it is
possible higher CIP expenditures will be required in the future. The Financial Plan includes rate
projections for an alternate scenario in which higher CIP spending is required. Staff is in the
process of completing a master plan for the water distribution system, and expects better
City of Palo Alto Page 7
information about future main replacement costs when that plan is completed. It is currently
expected to be completed in May 2015.
Commission Review and Recommendation
The UAC reviewed this proposal at its March 4, 2015 meeting. Staff noted at that meeting that
the March 4, 2015 proposal incorporated comments made by the UAC at its February 4, 2015
meeting regarding customer consumption levels after the drought ends. Staff also noted that
the rate projection had changed since the February 4, 2015 meeting as a result of updated
wholesale water rate projections from the SFPUC. The UAC approved the proposal unanimously
with minimal discussion. One Commissioner acknowledged the fact that staff had incorporated
UAC comments, and another asked about rate design and the balance of fixed versus
volumetric charges. Staff noted that the best time to discuss the appropriate level for fixed
charges was at the next cost of service study.
The draft minutes from the UAC’s March 4, 2015 meeting are provided as Attachment F.
Timeline
Assuming the Finance Committee supports staff’s recommendation, notification of the rate
increases will be sent to customers as required by Article XIIID of the California Constitution
(added by Proposition 218). The Financial Plans and rate schedules will then go to the City
Council with the FY 2016 budget for adoption, at which time a public hearing will be held. All
residents and other interested persons may submit written or oral testimony at the hearing,
and may also submit written protests to any or all of the proposed rate increases. Council may
adopt the proposed rates unless written protests are filed by a majority of the affected
customers.
Resource Impact
Normal year sales revenues for the Water Utility are projected to increase by roughly 12% ($3.7
million) as a result of these rate increases. The entire revenue increase will be offset by a $4.4
million increase in wholesale water supply costs. See the attached Financial Plans for a more
comprehensive overview of projected cost and revenue changes for the next five years.
Policy Implications
The attached Financial Plan includes amended Reserve Management Practices that will modify
Council policy with respect to the structure of the financial reserves Water Utility. These
Reserve Management Practices replace the current Reserve Management Practices, which
were last updated by Council in June 2014 (Resolution 9423).
Environmental Review
The Finance Committee’s review and recommendation to Council on these Financial Plans and
rate adjustments does not meet the California Environmental Quality Act’s definition of a
project, pursuant to Public Resources Code Section 21065, thus no environmental review is
required.
City of Palo Alto Page 8
Attachments:
Attachment A: Resolution Approving Water Financial Plan and Amending the Water
Utility Reserves Management Practices (PDF)
Attachment B: Proposed Amendments to Water Utility Reserves Management Practices
(PDF)
Attachment C: FY 2016 Water Utility Financial Plan (PDF)
Attachment D: Resolution of the Council of the City of Palo Alto Adopting a Water Rate
Increase and Amending Rate Schedules W-1, W-2, W-3, W-4, and W-7 (PDF)
Attachment E: Proposed Amendments to Rate Schedules W-1, W-2, W-3, W-4, and W-7
(PDF)
Attachment F: Excerpted Draft UAC Minutes of the March 4, 2015 (PDF)
Attachment A
* NOT YET APPROVED *
150220 mf 6053256 1
Resolution No. ____
Resolution of the Council of the City of Palo Alto Approving the
FY 2016 Water Utility Financial Plan and Amending the Water Utility
Reserves Management Practices
R E C I T A L S
A. Each year the City of Palo Alto (“City”) regularly assesses the financial position of
its utilities with the goal of ensuring adequate revenue to fund operations. This includes
making long-term projections of market conditions, the physical condition of the system, and
other factors that could affect utility costs, and setting rates adequate to recover these costs. It
does this with the goal of providing safe, reliable, and sustainable utility services at competitive
rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and made
part of the Financial Plans.
C. The City intends to make changes to its Water Utility Reserves Management
Practices to amend the purpose and management practices of the Water Utility’s Capital
Improvement Program (CIP) Reserve.
The Council of the City of Palo Alto RESOLVES, as follows:
SECTION 1. The Council hereby approves FY 2016 Water Utility Financial Plan,
including the amended Water Utility Reserves Management Practices. These Reserves
Management Practices replace the Reserves Management Practices previously approved for
the Water Utility as part of the FY 2015 Water Utility Financial Plan (Resolution 9423).
SECTION 2. The Council hereby approves the transfer of $2 million in FY 2015 from
the CIP Reserve to the Operations Reserve, the transfer of all funds released from the
Reappropriations Reserve at the end of FY 2015 to the CIP Reserve, the transfer of $5.5 million
from the Rate Stabilization Reserve to the Operations Reserve, and the exceedance of the
maximum CIP Reserve guidelines through the end of FY 2017, as described in the FY 2016
Water Utility Financial Plan approved via this resolution.
//
//
//
Attachment A
* NOT YET APPROVED *
150220 mf 6053256 2
SECTION 3. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act’s (CEQA) definition of a project under Public Resources
Code Section 21065, and therefore, no environmental assessment is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
DRAFT Proposed Amendments to Water Utility Reserves Management Practices
APPENDIX AC: 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 future year expenditure on the Water Utility’scash flow management and
contingencies related to the Water Utility’s Capital Improvement Program (CIP), as
described in Section 5 (CIP Reserve)
d)For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e)For operating contingencies, as described in Section 7 (Operations Reserve)
f)Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 8 (Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all contracts in force for the Water Utility at
that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
ATTACHMENT B
DRAFT Proposed Amendments to Water Utility Reserves Management Practices
Section 5. CIP Reserve
Funds may be added to or withdrawn from the CIP Reserve by action of the City Council and
held for future year expenditure on the Water Utility’s CIP Program. If there are funds in the
CIP 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 CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels
are calculated for each fiscal year of the Financial Planning Period based on the levels of
CIP expense budgeted for that year.
Minimum Level 12 months of budgeted CIP expense
Maximum Level 24 months of budgeted CIP expense
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added to or removed from the Reserve
for Commitments as a result of a change in contractual commitments related to CIP
projects. Any other additions to or withdrawals from the CIP reserve require Council
action.
c) Minimum Level:
i) Funds held in the Reserve for Commitments may be counted as part of the CIP
Reserve for the purpose of determining compliance with the CIP Reserve minimum
guideline level.
ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve
reaching its minimum level by the end of the next fiscal year. For example, if the CIP
Reserve is below its minimum level at the end of FY 2017, staff must present a plan
by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In
addition, staff may present, and the Council may adopt, an alternative plan that
takes longer than one year to replenish the reserve, or that does so in a shorter
period of time.
d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds
may be added to this reserve. If there are funds in this reserve in excess of the
maximum level staff must propose to transfer these funds to another reserve or return
them to ratepayers in the next Financial Plan. Staff may also seek City Council to
approve holding funds in this reserve in excess of the maximum level if they are held for
a specific future purpose related to the CIP.
DRAFT Proposed Amendments to Water Utility Reserves Management Practices
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.
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves
described in Section 3-Section 6 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for
that year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Water Utility shall be designed
to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Water Utility’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section
8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the
DRAFT Proposed Amendments to Water Utility Reserves Management Practices
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
FY 2016 TO FY 2023
CONTENTS
Section 1: Definitions and Abbreviations ............................................................................................................... 2
Section 2: Introduction .......................................................................................................................................... 2
Section 3: Executive Summary and Recommendations .......................................................................................... 2
Section 3A: Overview of Financial Position ................................................................................................................ 2
Section 3B: Summary of Proposed Actions ................................................................................................................ 3
Section 4: Detail of FY 2016 Rate and Reserves Proposals ...................................................................................... 4
Section 4A: Current and Proposed Rates ................................................................................................................... 4
Section 4B: Bill Impact of Proposed Rate Changes .................................................................................................... 5
Section 4C: Reserves Management Practices, Proposed Change .............................................................................. 6
Section 4D: Proposed Reserve Transfers .................................................................................................................... 8
Section 5: Utility Overview .................................................................................................................................... 8
Section 5A: Water Utility History ............................................................................................................................... 8
Section 5B: Customer Base ........................................................................................................................................ 9
Section 5C: Distribution System ................................................................................................................................. 9
Section 5D: Cost Structure and Revenue Sources..................................................................................................... 10
Section 5E: Reserves Structure ................................................................................................................................. 10
Section 5F: Competitiveness .................................................................................................................................... 11
Section 6: Utility Financial Projections ................................................................................................................. 12
Section 6A: Load Forecast ........................................................................................................................................ 12
Section 6B: FY 2009 to FY 2014 Cost and Revenue Trends ....................................................................................... 14
Section 6C: FY 2014 Results ..................................................................................................................................... 15
Section 6D: FY 2015 Projections ............................................................................................................................... 16
Section 6E: FY 2016 – FY 2023 Projections ............................................................................................................... 16
Section 6F: Risk Assessment and Reserves Adequacy .............................................................................................. 18
Section 6G: Alternate Scenarios ............................................................................................................................... 19
Section 6H: Long-Term Outlook ............................................................................................................................... 20
Section 7: Details and Assumptions ..................................................................................................................... 21
Section 7A: Water Purchase Costs ........................................................................................................................... 21
Section 7B: Operations............................................................................................................................................. 22
Section 7C: Capital Improvement Program (CIP) ..................................................................................................... 24
Section 7D: Debt Service .......................................................................................................................................... 26
Section 7E: Other Revenues ..................................................................................................................................... 26
Section 7F: Sales Revenues ...................................................................................................................................... 27
Section 8: Communications Plan .......................................................................................................................... 27
Appendices .......................................................................................................................................................... 28
Appendix A: Water Utility Financial Forecast Detail ................................................................................................ 29
Appendix B: Water Utility Capital Improvement Program (CIP) Detail .................................................................... 33
Appendix C: Water Utility Reserves Management Practices ................................................................................... 35
Appendix D: Rate Design.......................................................................................................................................... 36
Appendix E: Water Utility Debt Service Details ........................................................................................................ 37
Appendix G: Description of Water Utility Operational Activities ............................................................................. 39
Appendix H: Sample of Water Utility Outreach Communications ........................................................................... 40
ATTACHMENT C
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SECTION 1: DEFINITIONS AND ABBREVIATIONS
BAWSCA: Bay Area Water Supply and Conservation Agency
CCF: one hundred cubic feet, the standard unit of measurement for water delivered to water
customers. Equal to roughly 748 gallons.
CIP: Capital Improvement Program
CPAU: City of Palo Alto Utilities Department
O&M: Operations and Maintenance
SFPUC: San Francisco Public Utilities Commission
SFWD: San Francisco Water Department
WSIP: the SFPUC’s Water System Improvement Program to seismically strengthen the
transmission lines of the Hetch Hetchy regional water system.
SECTION 2: INTRODUCTION
This document presents a Financial Plan for the City’s Water Utility for the next eight years. This
Financial Plan provides revenues to cover the costs of operating the utility safely over that time
while adequately investing for the future. It also addresses the financial risks facing the utility
over the short term and long term, and includes measures to mitigate and manage those risks.
SECTION 3: EXECUTIVE SUMMARY AND RECOMMENDATIONS
SECTION 3A: OVERVIEW OF FINANCIAL POSITION
By FY 2020, costs for the Water Utility will increase 30% over FY 2015 levels, as shown in Table
1. Most of increase from FY 2015 to FY 2020 is related to the cost of water supplied by the San
Francisco Public Utilities Commission (SFPUC), which is rising 50% in that time due to the
issuance of long term debt to finance major seismic improvements to the Hetch Hetchy
transmission system. The cost of replacing the water mains in the City’s water distribution
system has also increased substantially from the low costs seen during the recent recession.
Staff projects only inflationary increases to most other costs over the forecast period.
Table 1: Expenses for FY 2014 to FY 2023
Expenses
($000)
FY 2014
(actual)
FY 2015
(est.)
FY
2016
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
Water
Purchases 15,705 16,013 20,451 20,498 20,225 22,764 24,080 22,922 23,013 24,123
Operations 15,730 16,386 17,279 17,727 18,199 18,677 19,174 19,630 20,062 20,508
Capital Projects 8,336 8,554 8,724 9,089 9,099 9,388 9,666 9,951 10,245 10,548
TOTAL 39,771 41,478 46,193 46,903 49,430 52,136 53,801 53,170 53,977 55,249
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To cover these increases in costs, revenues (and therefore rates) need to increase over the next
several years to balance costs and revenues, as shown in Table 2. This rate trajectory assumes
that the drought continues through 2015 and that consumption does not return to its pre-
drought levels. Because of reductions in consumption, customers who conserve will see lower
bill increases than what is shown in Table 2. Projected average residential bill increases are
shown in Appendix A (Water Utility Financial Forecast Detail).
Table 2: Projected Water Rate Trajectory for FY 2016 to FY 2023
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
12% 8% 8% 8% 3% 1% 2% 3%
The Water Utility has Rate Stabilization Reserves that can be used to spread these increases
over several years. This Financial Plan projects that these reserves will be exhausted by the end
of FY 2020. The utility also has a Capital Improvement Program (CIP) Reserve that can be used
to offset one-time unanticipated capital costs. This Financial Plan assumes that the CIP Reserve
will be used for unanticipated capital expenses or returned to the Operations Reserve by the
end of FY 2017. At that point the Emergency Water Supply and Storage Project and the Water
System Master Plan will have been completed, so capital costs will be known with more
certainty. Table 3 shows the projected reserve transfers over the forecast period.
Table 3: Transfers To/(From) Reserves for FY 2016 to FY 2023 ($000)
Reserve FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Capital
Improvement - (4,000) - - - - - -
Rate
Stabilization (5,500) 0 (567) - (500) - - -
Operations 5,500 4,000 567 - 500 - - -
SECTION 3B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Water Utility in FY 2015:
1. Transfer $2 million from the CIP Reserve to the Operations Reserve in FY 2015 due to
higher than projected expenses for the seismic strengthening of reservoirs and turnouts.
See Section 4D (Proposed Reserve Transfers) for more details.
Staff proposes the following actions for the Water Utility in FY 2016:
1. Increase rates as shown in Section 4A (Current and Proposed Rates). These changes are
projected to increase the system average rate by roughly 12%.
2. Take the following measures with respect to the CIP Reserve (see Section 4C (Reserves
Management Practices, Proposed Change) for more details):
a. Amend the Reserves Management Practices to modify the purpose of the CIP
Reserve to enable it to act as a cash flow and contingency reserve for capital
investment projects.
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b. Transfer all funds released from the Reappropriations Reserve at the beginning
of FY 2016 to the CIP Reserve.
c. Request Council approval to exceed the proposed maximum CIP Reserve
guidelines through the end of FY 2017.
3. Transfer $5.5 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 4D (Proposed Reserve Transfers) for more details.
SECTION 4: DETAIL OF FY 2016 RATE AND RESERVES PROPOSALS
SECTION 4A: CURRENT AND PROPOSED RATES
The current rates were adopted July 1, 2013, when CPAU increased water rates by 7%. CPAU
has five rate schedules: one for separately metered residents (W-1), one for commercial and
master-metered multi-family residential customers (W-4), and specific schedules for irrigation-
only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3),
and for service to fire hydrant rental meters used for construction (W-2). All customers pay a
monthly service charge, based on the size of their inlet meter. This charge represents meter
reading, billing, and other customer service costs, but also the cost of maintaining the capability
to deliver a peak flow for that customer corresponding to their meter size. All customers are
also charged for each CCF (one hundred cubic feet) of water used. Separately metered
residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF for a
30 day billing period) charged a base price per CCF, and all additional units charged a higher
price per CCF. Commercial customers pay a uniform price for each CCF used, and a higher price
for separately metered irrigation service.
Table 4 shows the current and proposed monthly service charges for all rate schedules. Table 5
shows the consumption charges. The basis for calculating these charges is staff’s annual
assessment of the water utility’s financial position, as well as the cost of service methodology
from the 2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants.
Table 4: Current and Proposed Monthly Service Charge
Meter
Size
Monthly Service Charge
($/month based on meter size) Change
Current (7/1/13) Proposed (7/1/15) $/mo %
5/8” 14.67 $16.01 $1.34 9%
3/4” 19.51 $21.48 $1.97 10%
1” 29.18 $32.42 $3.24 11%
1 ½” 53.37 $59.77 $6.40 12%
2” 82.39 $92.60 $10.21 12%
3” 174.29 $196.54 $22.25 13%
4” 309.72 $349.71 $39.99 13%
6” 633.80 $716.24 $82.44 13%
8” 1,165.86 $1,318.01 $152.15 13%
10” 1,843.02 $2,083.89 $240.87 13%
12” 2,423.45 $2,740.37 $316.92 13%
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SECTION 4B: BILL IMPACT OF PROPOSED RATE CHANGES
Table 7 shows the impact of the proposed July 1, 2015 rate changes on the median residential
bill. This comparison assumes that customers do not decrease consumption. Historically,
however, customers have looked for ways to conserve after their bills have increased, so not all
customers will experience the same bill increase. The average increase is roughly 12%, but
some customers with very low bills may see slightly higher increases due to slight changes in
the composition of the utility’s costs and how that affects the first tier and fixed charges under
the cost of service methodology.
Table 6: Water Consumption Charges (Current and Proposed)
Current Rates
(7/1/13)
Proposed Rates
(7/1/15)
Change
$/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 4.99 5.70 $0.71 14%
Tier 2 Rates 7.58 8.38 $0.80 11%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 6.15 6.97 $0.82 13%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 6.15 6.97 $0.82 13%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 7.52 8.46 $0.94 13%
Table 5: Current and Proposed Monthly Fire Service Charges
Meter
Size
Monthly Fire Service Charge
($/month based on meter size) Change
Current (7/1/13) Proposed (7/1/15) $/mo %
2” $3.03 $3.43 $0.40 13%
4” $18.78 $21.21 $2.43 13%
6” $54.55 $61.60 $7.05 13%
8” $116.24 $131.28 $15.04 13%
10” $209.03 $236.09 $27.06 13%
12” $337.65 $381.35 $43.70 13%
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Table 7: Impact of Proposed Water Rate Changes on Residential Bills
Usage
(CCF/month)
Bill under
Existing Rates
Bill under
Proposed
Rates (7/1/15)
Change
$/mo. %
4 34.63 38.81 4.18 12%
(Winter median) 7 52.19 58.59 6.40 12%
(Annual median) 9 67.35 75.35 8.00 12%
(Summer median) 14 105.25 117.24 11.99 11%
25 188.63 209.40 20.77 11%
Table 8 shows the impact of the proposed July 1, 2015 rate changes on various representative
commercial customer bills. As with residents, this comparison assumes that customers do not
decrease consumption.
Table 8: Impact of Proposed Water Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current
Rates
Bill under
Proposed
Rates (7/1/15)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 88.47 99.65 11.18 13%
(Annual average) 64 408.27 462.09 53.82 13%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 121 136 15 13%
(Summer median) 37 332 373 41 12%
(Winter average) 56 474 534 59 12%
(Summer average) 199 1,550 1743 193 12%
SECTION 4C: RESERVES MANAGEMENT PRACTICES, PROPOSED CHANGE
Staff is proposing one change to the Water Utility Reserves Management Practices (Appendix C)
in this Financial Plan. Staff recommends changing the CIP Reserve definition and management
practices so that it becomes a cash flow and contingency reserve for CIP projects. Currently
these purposes are served by a combination of the Operations and Reappropriations Reserves,
while the CIP Reserve acts as a sinking fund to accumulate funds for large one-time future CIP
expenditures (which are rare). The City is changing its budgeting practices starting with FY 2016,
and will no longer reappropriate CIP budgets each year. Instead, CIP budgets for long-term or
ongoing projects will be renewed each year through the annual budget process. This means
that the funds in the Reappropriations Reserve ($10.4 million as of June 30, 2014) will be
released after June 30, 2015. These funds acted as a cash flow reserve for CIP projects, and
some or all of it should be retained for that purpose. Staff proposes to retain these funds in the
CIP reserve, and the proposed changes to the Reserves Management Practices will enable CPAU
to do that.
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Staff proposes to initially set a minimum and maximum guideline for the CIP reserve that will
enable it to hold similar amounts to what has typically been held in the Reappropriations
Reserve. Staff then intends to review capital reserve management practices at other agencies
and revisit these guideline levels. Initially, staff proposes a minimum guideline level of 12
months of CIP expenditures. CIP-related funds in the Commitments Reserve would be allowed
to count toward that guideline. The CIP-related funds in the Commitments Reserve are equal to
the total remaining balance of all CIP contracts currently in progress, and these funds should be
taken into account when determining whether CIP cash flow and contingency reserves are
adequate. The initial maximum guideline level would be 24 months of CIP expenditures, but the
maximum guideline could be exceeded with Council approval.
Figure 1 shows the Reappropriations Reserve level as of June 30, 2014, as well as the CIP
portion of the Reserve for Commitments. The proposed minimum and maximum guidelines
over the forecast period are also shown. The total funds held for CIP cash flow and
contingencies exceed the maximum guidelines in the short term because of the $4 million
already in the CIP reserve. Staff recommends holding that $4 million in the CIP Reserve until the
end of FY 2017 for unanticipated CIP expenditures associated with seismic upgrades to various
reservoirs. At that point, any funds remaining of that $4 million would be returned to the
Operations Reserve.
Figure 1: Capital Reserve
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SECTION 4D: PROPOSED RESERVE TRANSFERS
In the FY 2015 Financial Plan several transfers between reserves were approved. Funds were
transferred out of the Emergency Plant Replacement and Rate Stabilization Reserve into the
newly-created CIP and Operations Reserves. These transfers were mainly related to setting up
the new approved reserves structure. Now, in addition to these previously approved transfers,
staff recommends an additional transfer for FY 2015. The final design for the seismic
strengthening and recoating of some of the reservoirs identified some additional work that may
need to be done at a cost of roughly $2 million. As a result, staff proposes a transfer of $2
million from the CIP Reserve, leaving it with $4 million remaining at the end of FY 2015.
For FY 2016, staff proposes a $5.5 million transfer from the Rate Stabilization Reserve. This
transfer is included in the financial projections in this Financial Plan. It will enable CPAU to
maintain adequate Operations Reserve levels while moderating the pace of increase in water
rates. In addition, staff is proposing transfers from the Reappropriations Reserve to the CIP
Reserve as described in the previous section. The impact of these transfers on reserves levels
can be seen in Figure 7 and Appendix A (Water Utility Financial Forecast Detail).
SECTION 5: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information to help readers better understand the forecasts in Sections 6 and 7.
SECTION 5A: WATER UTILITY HISTORY
The Water Utility was established on May 9, 1896, two years after the city was incorporated.
Voters of the 750 person community approved a $40,000 bond to buy local, private water
companies who operated one or more shallow wells to serve the nearby residents. The city
grew and the well system expanded until nine wells were in operation in 1932. Palo Alto began
receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these
sources.
A 1950 engineering report noted, “the capricious alternation of well waters and the San
Francisco Water Department water… has made satisfactory service to the average customer
practically impossible”. By 1950, only eight wells were still in operation. Despite this,
groundwater production increased in the 1950’s leading to lower groundwater tables and water
quality concerns. In 1962, a survey of water softening costs to CPAU customers determined that
CPAU should purchase 100% of its water supply needs from the SFWD. A 20-year contract was
signed with San Francisco, and CPAU’s wells were placed in standby condition. The SFWD later
became known as the SFPUC. Since 1962 (except for some very short periods) CPAU’s entire
supply of potable water has come from the SFPUC.
As the city grew, so did the number of mains in the water system. The system of mains
expanded along with the town, while existing sections of the system continued to age. In the
mid-1980s, the number of breaks in cast iron mains installed during the 1940s and earlier
started to accelerate. In FY 1994, to combat deterioration of older sections of the system, an
analysis of cost effective system improvements was performed and the rate of main
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replacement was increased from one mile per year to three. A plan to replace 75 miles of
deficient mains within 25 years was begun.
In 1999, a study of system reliability concluded that major upgrades were needed to the
distribution system to provide adequate water supply during a natural disaster. This ultimately
resulted in the $40 million Emergency Water Supply and Storage Project, still underway, which
involved a new underground reservoir in El Camino Park, the siting and construction of several
emergency supply wells, and the upgrade of several existing wells and the Mayfield pump
station.
At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in
consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy water
system, which crosses two major fault lines between the Sierras and the Bay Area. That
evaluation concluded that major upgrades to the system were required. This planning process
culminated in the SFPUC’s $4.6 billion Water System Improvement Project (WSIP), which is
ongoing.
SECTION 5B: CUSTOMER BASE
CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a
handful of residential customers not in Palo Alto (Los Altos Hills, primarily). Nearly 20,300
customers are connected to the water system, approximately 16,500 (81%) of which are
separately metered residential customers and 3,800 (19%) of which are commercial, master-
metered residential, irrigation and fire service customers.
Customers use water for drinking, cooking, bathing, cleaning, irrigation, and other commercial
use. Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is
used for irrigation, and that consumption is heavily weather dependent. It also varies
significantly by season. As a result of these two factors, there is significant variability in the
amount of water that is demanded from the system month to month and year to year.
SECTION 5C: DISTRIBUTION SYSTEM
To deliver water to its customers, the utility owns roughly 233 miles of mains (which transport
the water from the SFPUC meters at the city’s borders to the customer’s service laterals and
meters), eight wells (to be used in emergencies), five water storage reservoirs (also for
emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow
and demand (due to fire suppression, heavy usage times, etc.). These represent the vast
majority of the infrastructure used to distribute water in Palo Alto.
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Figure 2: Cost Structure (FY 2014)
Figure 3: Revenue Structure (FY 2014)
SECTION 5D: COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 2, water purchase
costs accounted for roughly 40% of the
Water Utility’s costs in FY 2014.
Operational costs also represented
roughly 40%, and capital investment was
responsible for the remaining 21%.
Water purchase costs are projected to
rise to roughly 46% of costs by FY 2020.
The Water Utility receives 91% of its
revenue from sales of water and the
remainder from capacity and connection
fees, interest on reserves, and other
sources. As rates increase over the next
several years, the percentage of revenue
from sales of water is expected to
increase as well. Appendix A (Water
Utility Financial Forecast Detail) shows
more detail on the utility’s cost and
revenue structures. Roughly 15% of the
utility’s revenues come from fixed service charges, though most of its costs are fixed. This is
typical for California water utilities, and conforms to the Best Management Practices (BMPs) of
the California Urban Water Conservation Council (CUWCC), a statewide conservation council of
environmental groups, state agencies, and water utilities to which the City is a signatory. One
of CUWCC’s BMPs is that a utility’s revenue from fixed service charges constitute at most 30%
of the utility’s total revenue from all charges1.
SECTION 5E: RESERVES STRUCTURE
CPAU maintains six reserves for its Water Utility to manage various types of contingencies.
These are summarized below, but see Appendix C (Water Utility Reserves Management
Practices) for more detailed definitions and guidelines for reserve management:
1 See http://www.cuwcc.org/Resources/Memorandum-of-Understanding/Exhibit-1-BMP-
Definitions-Schedules-and-Requirements/BMP-1-Utility-Operations-Programs
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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. This is currently an important
reserve for all utility funds, but changes in budgeting practices will change that in future
years, as described in Section 4C (Reserves Management Practices, Proposed Change).
Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to
accumulate funds for future expenditure on CIP projects and is anticipated to be empty
unless a major one-time CIP expenditure is expected in future years. This Financial Plan
proposes adding an additional purpose, making it a contingency reserve for the CIP. This
would change the way the reserve is managed, as described in Section 4C (Reserves
Management Practices, Proposed Change). This type of reserve is used in other utility
funds (Electric, Gas, and Wastewater Collection) as well.
Rate Stabilization Reserve: This reserve is intended to be empty unless one or more
large rate increases are anticipated in the forecast period. In that case, funds can be
accumulated to spread the impact of those future rate increases across multiple years.
This type of reserve is used in other utility funds (Electric, Gas, and Wastewater
Collection) as well.
Operations Reserve: This is the primary contingency reserve for the Water Utility, and is
used to manage yearly variances from budget for operational water supply costs. This
type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection)
as well.
Unassigned Reserve: This reserve is for any funds not assigned to the other reserves
and is normally empty.
SECTION 5F: COMPETITIVENESS
Table 8 shows the current water bills for residential customers compared to what they would
be under surrounding communities’ rate schedules. CPAU has the highest monthly bills of the
group, although bills for smaller water users are less than in some surrounding communities.
Table 9: Residential Monthly Water Bill Comparison
Residential monthly bill comparison ($/month) *
As of February 1, 2015
Usage
(CCF/month)
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
4 34.63 35.38 27.56 24.65 40.10 15.20
(Winter median) 7 52.19 51.10 42.74 41.49 52.43 26.60
(Annual median) 9 67.35 61.58 52.86 52.71 61.27 34.20
(Summer median) 14 105.25 89.01 78.16 82.65 87.59 53.20
25 188.63 150.02 164.22 158.14 167.12 95.00
* All comparisons using 5/8” meter size
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Table 9 shows the annual average monthly water bill for commercial customers for various
water usage levels. Redwood City is notable in that their irrigation rates are set on a budget
basis, and as such each parcel has a unique baseline value. For purposes of this comparison, the
budget was assumed to be equal to the usage amount.
SECTION 6: UTILITY FINANCIAL PROJECTIONS
SECTION 6A: LOAD FORECAST
Figure 4 shows 40 years of water consumption history. Average water use has trended
downward over time even as Palo Alto’s population has grown. Significant water use reductions
over the 40-year history were in response to requests to reduce water use in the 1976-77 and
1988-92 drought periods. During these periods, customers invested in efficient equipment and
modified behavior to achieve the water reduction goals. More recently, water sales decreased
substantially after the 2007-2009 recession and have not increased since, despite the fact that
economic activity in Palo Alto and the Bay Area has revived. The factors driving this are not
clear, but may include an increased awareness of the need for water conservation since
precipitation has been low for five of the seven years since 2007. Water use is down by similar
amounts among both commercial and residential customers. Both summertime use, which
includes irrigation, and wintertime use, which includes far less irrigation, have decreased for all
customer classes.
Table 10: Commercial Monthly Water Bill Comparison
Commercial/Multi-Family and Irrigation bill comparison ($/month)
As of February 1, 2015
Usage
(CCF/month)
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
Commercial (W-4) (5/8” meters)
(Annual median) 12 88.47 83.34 71.82 72.00 81.82 45.60
(Annual average) 64 408.27 359.77 334.94 371.00 484.96 243.20
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 121 146 90 65 186 34
(Summer median) 37 332 294 232 226 391 141
(Winter average) 56 474 395 328 335 540 213
(Summer average) 199 1,550 1,156 1,051 1,158 1,666 756
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Figure 5 shows the forecast of water consumption through FY 2023. The forecast assumes that
current trends continue and sales through the forecast period decline slightly. This represents a
significant change from the prior year forecasts. Since the 2007-2009 recession, staff has
forecasted that water sales would grow as economic activity picked up, but that has not
occurred.
Palo Alto is currently experiencing drought conditions with 10% voluntary water use restrictions
in effect. The current forecast assumes current conditions continue through 2015, with the
drought ending in spring of 2016. It also assumes consumption only returns to 50% of its pre-
drought levels, which is consistent with patterns seen in prior droughts. It is highly unlikely the
state will exit the drought in 2015 given precipitation to date, but for informational purposes
Figure 5 shows the load forecast if the drought ends in 2015 and consumption returns to
normal.
Figure 4: Historical Water Consumption
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Figure 5: Forecasted Water Consumption
SECTION 6B: FY 2009 TO FY 2014 COST AND REVENUE TRENDS
The annual expenses for the water utility rose substantially between 2009 and 2014, though
the increase is difficult to discern from Figure 6 and the tables in Appendix A (Water Utility
Financial Forecast Detail) due a variety of major budget adjustments and transfers that took
place during that time. These adjustments and transfers were mainly related to the Emergency
Water Supply and Storage Project, a debt-financed project costing over $40 million. The project
involved seismically strengthening reservoirs, rehabilitating the five existing wells, drilling three
new wells, building a new reservoir at El Camino Park, and upgrading pumping stations.
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Excluding adjustments and transfers, the normal annual expenses for FY 2009 would have been
roughly $29 million. That includes $8.4 million for water purchases, $15 million for operational
expenses and debt service, and $5.5 million for capital investment. In FY 2014 normal year
annual expenses were $39 million. This was a 35% increase, or 6% per year on average from
FY 2009 to FY 2014. The increases were primarily related to water purchases and capital
investment. Water purchase costs increased from $8.4 million in FY 2009 to $15.7 million in FY
2014, an 87% increase. Average annual capital investment increased from $5.5 million to $7.5
million, primarily due to an increase in water main replacement costs. The reasons for both
increases are discussed in more detail in Sections 7C (Capital Improvement Program) and 7A
(Water Purchase Costs).
SECTION 6C: FY 2014 RESULTS
In spring of 2013, when proposing rate adjustments to be effective on July 1, 2013, staff
forecasted an $810,000 deficit for FY 2014. Results were better than forecasted, a $3.3 million
surplus. Sales revenues were higher than forecasted due to dry weather (Palo Altans were not
asked to reduce consumption until February 2014, late in the fiscal year). In addition, the SFPUC
wholesale water rate was 9% lower than forecasted, which resulted in savings despite the
higher water consumption. Revenues from connection and capacity fees were high, and there
were savings in operational budgets. These savings were partially offset by increased capital
Figure 6: Water Utility Expenses, Revenues, and Rate Changes:
Actual Costs through FY 2014 and Projections through FY 2023
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investment costs associated with water main replacement. Table 11 summarizes the variances
from forecast.
Table 11: FY 2014, Actual Results vs. 2013 Forecast
Net Cost/
(Benefit)
Type of
change
Savings in Operations budgets ($1,576,000) Cost savings
Sales volumes were 5% higher than forecasted ($2,227,000) Revenue increase
SFPUC rate was 9% lower than projected (partially
offset by purchase volumes that were 5% higher)
($648,000) Cost savings
Other revenues (interest income, capacity fees)
were higher than forecasted
($1,590,000) Revenue increase
Transfers out were lower than forecasted ($1,219,000) Cost savings
Capital project costs higher than projected $3,135,000 Cost increase
Net Cost / (Benefit) of Variances ($4,125,000)
SECTION 6D: FY 2015 PROJECTIONS
In spring of 2014, when preparing the financial forecast, staff forecasted a $3.1 million deficit
for FY 2015. Staff’s current forecast is for a deficit of about $3.7 million. In 2014, staff projected
lower revenues for FY 2015 due to the drought, but revenues are now projected to be even
lower. In addition, the SFPUC wholesale water rate was 5% lower than forecasted, which
resulted in additional savings. And although staff projected higher revenues from connection
and capacity fees, these have been even higher than staff’s projections. Lastly, there were
savings in operational budgets. These savings will be offset by increased capital investment
costs associated with seismic strengthening and re-coating of the reservoirs. Table 12
summarizes the changes from last year’s forecast.
Table 12: FY 2015 Change in Projected Results, 2014 Forecast vs 2015 Forecast
Net Cost/
(Benefit)
Type of
change
Savings in Operations budgets ($925,000) Cost savings
SFPUC rate 5% lower than projected ($1,170,000) Cost savings
Higher misc. revenues (interest income, fees) ($450,000) Revenue increase
lower sales revenue $260,000 Revenue decrease
Capital project costs higher than projected $2,406,000 Cost increase
Other changes in costs/revenue $485,000 Various
Net Cost / (Benefit) of Variances $606,000
SECTION 6E: FY 2016 – FY 2023 PROJECTIONS
As can be seen in Figure 6 above, costs for the Water Utility are projected to increase by $5.5
million (14%) in FY 2016, then another $2-3 million (6%) in both FY 2019 and FY 2020, but at
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only 1-3% per year in subsequent years. As discussed earlier, water supply costs are the main
reason for the cost increases. Water supply costs are projected to increase by 30% in FY 2016
and 9% per year on average in FY 2019 and FY 2020. Operations costs will increase by $1 million
in FY 2016 for emergency generator leasing and maintenance, but will otherwise roughly match
inflation through the forecast period. Capital investment costs are also expected to increase at
only an inflationary rate, though there is still uncertainty with regard to the utility’s future costs
for main replacement. See Section 7 (Details and Assumptions) for more detail on the costs that
make up these projections, as well as the various assumptions underlying the projections.
Revenues will have to increase at more than 8% per year on average through FY 2019 to keep
up with these cost increases, even with the use of rate stabilization reserves to spread the
increases over multiple years. Costs have already increased substantially over the last few
years, and revenues have not kept pace. Sales revenues were adequate in FY 2014 due to lower
than average CIP expenditures in that year, but starting in FY 2015 the utility will begin to see
deficits. To close this gap, revenues need to increase by 12% in FY 2016, then 8% per year
through FY 2019, then increase at a slower pace after that. To moderate the pace of increase in
the water rates, the utility’s Rate Stabilization Reserve will be drawn down over that period,
with most of it being used in FY 2016.
Customers who reduce consumption over the forecast period will see their bills increase at a
slower rate, and as more customers are added to the utility’s customer base, those customers
will share in paying for the utility’s fixed costs. The combination of these factors means that the
average residential bill is projected to increase at a slightly slower pace than the rates, or about
7% to 9% per year, assuming some growth in the customer base and decreases in the average
amount of water each customer uses. Of course, results will differ for each individual customer
depending on their water use patterns and whether they conserve.
Reserves trends based on these revenue projections are shown in Figure 7, below. The Rate
Stabilization Reserve is projected to be empty by the end of FY 2020, and the CIP Reserve is
projected to decrease by $4 million by the end of FY 2017. Assuming these increases in
revenue, the utility’s reserves will remain adequate through the forecast period. The
Operations Reserve, the utility’s main contingency reserve, will remain comfortably above
minimum levels and will be adequate to meet all identified risks, as discussed in Section 6F (Risk
Assessment and Reserves Adequacy).
These projections assume that drought restrictions end in early 2016, and that the request for
water usage reductions remain at 10%. If the drought worsens or continues longer than
projected, a drought surcharge may need to be developed and put in place. The forecast also
assumes that water main replacement project costs do not increase faster than inflation. This is
a major uncertainty, so staff has included a forecast in Section 6G (Alternate Scenario) involving
an alternate scenario with higher main replacement costs.
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SECTION 6F: RISK ASSESSMENT AND RESERVES ADEQUACY
The Water Utility currently has one contingency reserve, the Operations Reserve, and this
Financial Plan maintains reserves within the approved reserve maximum and minimum
guidelines throughout the forecast period, as shown in Figure 8. Reserve levels also exceed the
short term risk assessment for the utility.
Table 13 summarizes the risk assessment calculation for the Water Utility through FY 2020. The
same methodology is used for FY 2021 through FY 2023 as well. The risk assessment includes
the revenue shortfall that could accrue due to:
1. Lower than forecasted sales revenue; and
2. An increase of 10% of planned system improvement CIP expenditures for the budget year.
Figure 7: Water Utility Reserves:
Actual Reserve Levels through FY 2014 and Projections through FY 2023
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Table 13: Water Risk Assessment ($000)
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Total non-commodity revenue $16,789 $20,131 $22,547 $22,998 $22,829
Max. revenue variance, previous ten years 13% 13% 13% 13% 13%
Risk of revenue loss $1,659 $1,989 $2,228 $2,272 $2,256
CIP Budget $8,724 $9,089 $9,099 $9,388 $9,666
CIP Contingency @10% $872 $909 $910 $939 $967
Total Risk Assessment value $2,531 $2,898 $3,138 $3,211 $3,222
This Financial Plan includes a proposal to make the CIP Reserve a contingency reserve as well.
See Section 4C (Reserves Management Practices, Proposed Change) for more details.
SECTION 6G: ALTERNATE SCENARIO
Staff created an additional scenario in which water main replacement budgets are 50% higher
than the base forecast. As described in Section 7C (Capital Improvement Program), prices for
the most recent water main replacement projects have been nearly 50% higher than previous
projects. The current forecast assumes that these prices have been temporary spikes due to the
Figure 8: Operations Reserve Adequacy
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economy picking up, but that may not be the case. The “High CIP” scenario assumes that CPAU
continues its current pace of water main replacement and prices remain at these higher levels.
Figure 9 shows the rate increases under the high CIP scenario as compared to the base case
(inflationary increases in CIP budgets). The high CIP scenario has a greater impact on rates than
an extended drought because it involves higher ongoing costs rather than a short-term revenue
loss. If this scenario becomes reality, it may be possible to phase in the increase in CIP budgets
over several years to defer the rate impact into later years. CPAU is developing a Water System
Master Plan, which is expected to be completed in early 2015. It will give CPAU the information
it needs to determine the feasibility of these types of strategies. See Section 7C (Capital
Improvement Program) for more discussion of CIP costs.
SECTION 6H: 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, so the next 20 to 40 years
after FY 2020 may involve only inflationary cost increases for the utility. The Water System
Master Plan, expected to be completed in May 2015, will give CPAU a better picture of the
long-term outlook for its infrastructure and will result in a plan for an appropriate schedule for
Figure 9: Rate Increases for High CIP Scenario
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infrastructure replacement and upgrades. In addition, CPAU’s water supplier, the SFPUC, has
replaced and seismically strengthened its water transmission infrastructure, which will be a
benefit to Palo Alto and all Hetch Hetchy customers over the long term.
The opportunities for CPAU’s Water Utility over the long term may be in alternative water
supplies such as recycled water, groundwater, and water from the Santa Clara Valley Water
District. These alternatives have been analyzed in the past, and will be analyzed again in an
upcoming update to the Water Integrated Resource Plan. Some of these alternatives may
provide cost savings or increased drought protection.
Climate change may begin to present challenges for the Water Utility over the next 20 to 40
years. Water consumption patterns may change. Consumption could increase due to drier
weather or decrease as customers become even more focused on water conservation.
Droughts may become more frequent. The risk of wildfire in the foothills could increase,
possibly threatening utility infrastructure or placing greater demands on it. Sea level rise could
result in greater exposure of utility infrastructure to saltwater intrusion or the need to protect
infrastructure from inundation, possibly resulting in higher maintenance and replacement
costs. It could also affect the groundwater aquifer that the utility relies on in emergencies. Any
of these could result in increases to the costs of operating the Water Utility. As part of the
Sustainability/Climate Action Plan, CPAU is currently working on a Climate Change Adaptation
Roadmap that will begin to assess some of these risks.
SECTION 7: DETAILS AND ASSUMPTIONS
SECTION 7A: WATER PURCHASE COSTS
CPAU purchases all of the potable water for its Water Utility from the SFPUC, which owns and
operates the Hetch Hetchy system. CPAU is one of several agencies that purchase water from
the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation Agency
(BAWSCA). Palo Altans use roughly 7% of the water delivered by the SFPUC to BAWSCA
member agencies.
The Hetch Hetchy system begins with a system of reservoirs and tunnels in the high Sierra in
Yosemite County and is transported by a gravity-fed pipeline to the Bay Area. Currently, the
SFPUC is in the midst of a $4.6 billion bond-financed capital improvement program (the Water
System Improvement Program, or WSIP) to seismically retrofit the facilities that transport water
to the Bay Area. This is resulting in large increases in the annual debt service costs assigned to
wholesale customers like Palo Alto. The wholesale customer debt service share of the WSIP is
increasing from $53 million in FY 2010 to over $200 million in FY 2020. As a result, the SFPUC’s
wholesale water rate has already increased from $1.43 per CCF in FY 2009 to $2.93 per CCF in
FY 2015, and is forecasted to increase to $4.50 per CCF by FY 2020. Figure 10 shows the
SFPUC’s actual wholesale water rate since FY 2009 and a projection through FY 2023.
The SFPUC’s water rate projections show rates flattening out in FY 2020 after all of the debt for
the WSIP has been issued. Some other parts of SFPUC’s system not included in the WSIP also
may need rehabilitation. Some of these projects are already included in the SFPUC’s rate
projections, but the SFPUC is planning to do condition assessments of other “up-country”
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facilities, located in the Sierras in the coming years. If the these assessments identify other
facilities that need replacement, it may result in additional rate increases beyond FY 2020 as
new debt is issued to finance the projects.
As shown in Figure 10, this year’s projection of SFPUC wholesale rates has increased from the
previous year’s projection. The current projection assumes that drought restrictions continue
through 2015, ending in the spring of 2016. The SFPUC needed to increase its rates more than
anticipated due to lower consumption during 2014 and 2015 due to the drought, but wholesale
rates are not projected to decrease much (if at all) after the drought ends. Instead, underlying
costs will have increased enough by then that even if consumption increases after the drought,
the rates are not likely to decrease much. The current wholesale water rate projection assumes
higher rates in the long term than were assumed in last year’s projections. Consumption is
unlikely to return to pre-drought levels even after the drought ends, and the SFPUC will likely
adopt higher rates to recover its costs, which are mostly fixed.
Figure 10: Historical and Projected SFPUC Wholesale Water Rate
SECTION 7B: 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
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administration, as well as debt service and other transfers. Additional detail on Water
Utility debt service is provided in Section 7D (Debt Service)
Customer Service
Engineering work for maintenance activities (as opposed to capital activities)
Operations and Maintenance of the distribution system; and
Resource Management
Appendix F (Description of Water Utility Operational Activities) includes detailed descriptions of
the work associated with each of these activities.
From FY 2009 to FY 2014 Operations costs (excluding debt service, rent, and transfers)
increased 5% per year on average (see Figure 11). The increases were driven by allocated
charges, which increased by 8% per year on average and increases in other Operations costs,
which increased by roughly 4% per year. Debt service costs increased by $2.4 million per year as
a result of a bond issued to finance the Emergency Water Supply and Storage Project. Transfers
have varied from year to year, but are expected to remain relatively low and stable through the
forecast period.
In FY 2016 Operations costs are projected to increase by $1 million for a capital lease of
emergency generators for various wells and pump stations. This is a new ongoing cost. Aside
from that, only inflationary increases are projected for Operations costs. Underlying these
projections are assumptions for salary and benefit costs, consumer price index, and other cost
projections that match the City’s long-range financial forecast.
Figure 11: Historical and Projected Operational Costs
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SECTION 7C: CAPITAL IMPROVEMENT PROGRAM (CIP)
The Water Utility’s CIP consists of the following types of projects:
Customer connections, which represents the cost when the Water Utility installs new
services or upgrades existing services at a customer’s request in response to
development or redevelopment. CPAU charges a fee to these customers to cover the
cost of these projects.
Ongoing projects, which represent the cost of replacing aging and under-recording
meters and degraded boxes and covers, minor replacements of various types of
distribution system equipment, and the cost of capitalized tools and equipment.
One time projects, or large, non-recurring replacement of system assets (such as
reservoir rehabilitation)
Water main replacement, which represents the ongoing replacement of aging water
mains, and sometimes the services associated with those mains.
Table 14 shows the FY 2015 adopted budget, with actual spending and remaining budget as of
December 31, 2014. Also included is the five year CIP spending plan, although these figures are
preliminary pending budget discussions starting in May. The ‘committed’ column represents
funds committed to contracts for which work has not yet been completed or invoices paid.
Table 14: Budgeted Water Utility CIP Spending ($000)
*Includes unspent funds from previous years carried forward or reappropriated into the current fiscal
year
**Equal to Reserve for Reappropriations + Reserve for Commitments.
The water main replacement program funds the replacement of deteriorating water mains. The
water system consists of over 236 miles of mains, approximately 2000 fire hydrants, and over
20,000 metered service connections spanning 9 pressure zones over a 26 square mile service
area. CPAU utilizes an asset management database in conjunction with hydraulic modeling
software to prioritize capital improvements. Mains are selected by researching the
maintenance history of the system and identifying those that are undersized, corroded, and
subject to recurring breaks. CPAU uses a scoring system based on criticality in order to
prioritize which mains to replace first, and coordinates with the Public Works street
maintenance program to avoid cutting into newly repaved streets. CPAU replaces
approximately 3 miles of main per year, or 1.3% of the system.
Costs for the water main replacement program are increasing for a variety of reasons:
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Fire Code regulations now mandate fire sprinklers for new residential units. To
accommodate increased fire flows, new main replacement projects require larger
diameter pipe.
CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs
for this material are slightly higher, though lifecycle costs are lower, and the material
performs better. Joints in distribution mains are the most likely place for failure, and
sections of HDPE pipe can be fused together rather than connected with fittings. In the
long run, this will reduce losses and maintenance costs.
To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along
with the water mains with new HDPE services. In the past, the existing services were
reconnected, regardless of the material. This new practice costs more in the short run,
but will provide long term benefits.
Lastly, as the economy begins to recover, costs have begun to escalate.
These factors have created some uncertainty in future water main replacement costs. If the
cost of water main replacement continues at its current levels, water main replacement
budgets will need to be increased by $1M to $2M per year to keep up the current pace of main
replacement. However, CPAU is nearing the end of a long term water main replacement
program initiated in 1993 to replace the oldest and most degraded parts of the system. Roughly
25% of the system has been replaced, and the rate of water leaks has decreased 50%. This
makes it a good time to re-evaluate the program. CPAU initiated a master planning process in
FY 2015 to evaluate the current state of the distribution system and determine the necessary
rate of main replacement in future years. Currently the utility replaces about 1.3% of the
system each year, which is an 80-year replacement cycle. The master planning process may
reveal a need for a higher main replacement rate, or may reveal that pipes are currently in good
condition and a lower rate of replacement is required. Results are expected in May 2015.
If this study determines that a lower rate of main replacement is acceptable, increases to water
main replacement project budgets may not be necessary. Likewise, if the per-mile costs of main
replacement come down, that would also reduce or eliminate the need to increase main
replacement budgets. A combination of reduced costs and a reduced rate of main replacement
could even allow CPAU to reduce those budgets. However, if per-mile main replacement costs
stay at their current levels and the study reveals the need to maintain the same rate of main
replacement (or a higher rate), CPAU’s CIP costs would rise. The implications for ratepayers of
that scenario are analyzed in Section 6G (Alternate Scenario).
One project not included in this forecast is the seismic strengthening of a large water
transmission line in the foothills. Staff has engaged a consultant to investigate alternatives for
this project. The consultant is analyzing an alternative that involves installing a valve and hose
system that could be used to bypass breaks in the line while they are repaired after an
earthquake. This is a relatively low cost alternative that would not substantially affect the
financial forecast. The study is not finalized yet, however, and if it is determined that the entire
pipeline needs to be replaced, it could cost between $15 million and $20 million, which would
likely require bond financing and would substantially affect the financial forecast. The final
report with recommendations is expected to be available in May 2015.
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Ongoing Projects and Customer Connections are projected to cost approximately $1.9 million in
FY 2016 and increase by 3.5% per year through the end of the forecast period. Actual expenses
for these projects fluctuate annually depending on how many defective meters are discovered
and replaced during routine maintenance, as well as how much development and
redevelopment is going on that prompts the replacement or upgrade of water services. It is
worth noting that property owners pay a fee for water service replacement or expansion during
redevelopment, so when the number of projects go up (meaning higher costs for this activity),
so does fee revenue.
Aside from customer connections, the CIP plan for FY 2015 to FY 2019 is funded by utility rates
and capacity fees. The details of the plan are shown in Appendix B (Water Utility Capital
Improvement Program (CIP) Detail).
SECTION 7D: DEBT SERVICE
The Water Utility’s annual debt service is roughly $3.2 million per year. This is related to two
bond issuances, one requiring payments through 2026, the other through 2035. The first
issuance, the 2011 Utility Revenue Refunding Bond, Series A, was a joint issuance between the
Water and Gas Utilities refinancing the 2002 Utility Revenue Bonds, Series A, which was issued
to finance various capital improvements for both systems. The second, larger issuance is the
2009 Water Revenue Bond, Series A (Direct Payment Build America bond) used to finance
construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new
wells, rehabilitation of existing wells and tanks, etc.) CPAU is in compliance with all covenants
on both bonds. Additional detail is provided in Appendix E (Water Utility Debt Service Details).
SECTION 7E: OTHER REVENUES
The Water Utility receives most of its revenues from sales of water, but about 9% comes from
other sources. The largest revenue source is connection and capacity fees, which in FY 2014
represented 52% of revenue from sources other than water sales. The next largest revenue
source in that category was interest on reserves (26%), followed by the interest subsidy from
the Federal government related to the utility’s 2009 Build America Bond issuance (14%), with
the remainder consisting of a variety of miscellaneous charges and transfers.
Revenues from connection and capacity fees have more than doubled since FY 2009.
Connection fees are charged to new developments that need new or replacement service
connections, while capacity fees are charged to development that put additional demands on
the water distribution system. Revenue from these sources decreased slightly during the
recession, but has increased substantially since then. Staff is forecasting lower revenue from
these sources in subsequent years, but has also proposed increases in connection fees that, if
adopted in early 2015, are expected to offset these reductions to some extent.
Other revenue sources are projected to stay stable through the forecast period, though interest
income always fluctuates depending on changes in interest rates. Some uncertainty also exists
related to the Federal government’s commitment to continuing to pay the interest subsidy on
the Build America Bonds. See Appendix E (Water Utility Debt Service Details) for more
information.
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SECTION 7F: SALES REVENUES
Sales revenue projections are based on the load forecast in Section 6A (Load Forecast) and the
projected rate changes shown in Figure 6. Except where stated otherwise, these load forecasts
are based on normal precipitation. Precipitation can vary substantially, however, even in non-
drought years, and this can affect revenues substantially. In dry years customers use more
water, increasing revenues, and in wet years they use less. These variations happen in the
winter, since summers have virtually no local precipitation regardless of whether it is a dry or
wet year. The variations are most likely related to winter irrigation demand.
SECTION 8: COMMUNICATIONS PLAN
In FY 2016, communications will focus on water utility rate increases, including the reasons why
and how rates may change contingent upon continued drought conditions. Rates
communications will include a substantial update to information on a webpage dedicated to
Utilities rates, “breaking news” on the Utility home webpage, discussion in the Proposition 218
rate adjustment notice, bill inserts, print ads, videos for web and television, social media posts
and frequent educational updates to internal and external stakeholders (customer service,
marketing, City Manager’s Office, UAC, City Council, business and residential customers). Other
communications vehicles will include financial plans, presentations to UAC, Finance Committee,
City Council and any media coverage as a result of the rate increases. CPAU will continue its
outreach about drought conditions and importance of water use efficiency, tying in the
message that although rates are increasing, efficient usage should mean that a customer should
not see a significant increase in water utility costs on their bills.
Water conservation outreach will include bill inserts, web updates, email blasts, videos for the
web and television, presentations to customer groups and the use of social media. To keep
customers apprised of the status and accomplishments of CIP projects, a network of project
web pages are maintained. Traffic is driven to the website via ads in publications, newspaper
inserts, and through the comprehensive portfolio of outreach strategies as outlined above.
Safety topics are also emphasized year-round. For all utility outreach, while print materials and
website pages still feature prominently, CPAU is placing more emphasis on digital advertising
content, direct mail, community safety/emergency preparation events and presentations.
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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: Rate Design
Appendix E: Water Utility Debt Service Details
Appendix F: Description of Water Utility Operational Activities
Appendix G: Sample of Water Utility Outreach Communications
APPENDIX A: WATER UTILITY FINANCIAL FORECAST DETAIL
1 FISCAL YEAR FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
2
3 WATER SUPPLY
4 Purchases 5,669,518 5,362,359 5,416,220 5,538,305 5,532,947 5,507,153 4,725,136 4,773,600 4,887,917 4,810,714 4,735,760 4,701,084 4,680,394 4,651,320 4,616,646
5 Sales 5,395,080 4,954,950 4,992,473 5,062,873 5,097,392 5,047,148 4,344,946 4,389,511 4,494,630 4,423,638 4,354,716 4,322,829 4,303,804 4,277,070 4,245,185
6
7 BILL AND RATE CHANGES
8 Variable Charge (Supply)15%38%11%-16%20%31%-2%0%16%7%-5%1%6%
9 Variable Charge (Distribution)-7%-12%17%30%-12%0%23%14%4%0%6%3%1%
10 Service Charge (Distribution)-3%72%75%9%0%0%0%12%2%0%4%2%0%
11 Change in System Average Rate 0%12%22%8%0%12%8%8%8%3%1%2%3%
12 Change in Average Residential Bill -1%12%21%7%-1%9%7%6%6%2%1%1%2%
13
14 STARTING RESERVES
15 Reappropriations (Non-CIP)- - 54,000 20,000 - - - - - - - - - - -
16 Commitments (Non-CIP)267,323 98,000 40,000 765,000 714,000 2,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000
17 Restricted for Debt Service 780,000 780,000 3,348,000 3,348,000 3,225,000 3,225,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000
18 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 - - - - - - - -
19 Capital Reserve - - - - - - - 4,000,000 14,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000
20 Rate Stabilization Reserve 14,089,000 5,400,000 17,037,000 10,639,000 7,996,000 17,272,000 20,133,000 6,567,000 1,067,000 1,067,000 500,000 500,000 - - -
21 Operations Reserve - - - - - - - 6,825,996 7,388,745 9,587,610 10,996,799 11,491,182 11,522,648 11,904,886 12,374,300
22 Unassigned - - - - - - - - - - - - - - -
23 TOTAL STARTING RESERVES 16,136,323 7,278,000 21,479,000 15,772,000 12,935,000 21,499,000 24,811,000 21,070,996 26,980,745 25,179,610 26,021,799 26,516,182 26,047,648 26,429,886 26,899,300
24
25 REVENUES
26 Net Sales 26,640,717 25,839,375 26,133,998 30,673,882 36,647,924 39,008,671 34,066,218 38,321,464 42,263,580 45,061,690 47,965,975 49,037,955 49,414,313 50,256,219 51,432,726
27 Other Revenues and Transfers In 2,833,016 12,104,925 2,812,063 5,892,133 6,811,461 4,074,511 3,146,219 3,195,685 3,249,006 3,303,323 3,358,265 3,413,741 3,471,338 3,533,115 3,598,411
28 TOTAL REVENUES 29,473,733 37,944,300 28,946,061 36,566,015 43,459,385 43,083,182 37,212,437 41,517,150 45,512,586 48,365,013 51,324,240 52,451,696 52,885,651 53,789,333 55,031,137
29
30 EXPENSES
31 Water Purchases 8,443,057 9,061,245 10,677,914 14,889,399 16,605,351 15,705,288 16,012,748 20,450,988 20,497,789 20,224,895 22,764,353 24,080,279 22,921,818 23,012,781 24,123,189
32 Operating Expenses
33 Administration
34 Allocated Charges 1,629,800 1,580,604 1,798,630 2,003,116 2,422,880 2,374,411 2,082,585 2,134,799 2,188,511 2,243,583 2,300,029 2,357,900 2,417,009 2,477,469 2,539,450
35 Rent 1,919,052 2,107,405 2,122,405 2,156,887 1,911,963 2,192,454 2,249,457 2,316,941 2,386,449 2,458,042 2,531,784 2,607,737 2,685,969 2,766,548 2,849,545
36 Debt Service 776,059 1,950,625 3,341,781 3,385,986 3,219,165 3,220,208 3,218,869 3,222,606 3,219,316 3,222,669 3,220,858 3,220,638 3,222,843 3,223,563 3,224,553
37 Transfers and Other Adjustments 4,569,523 (2,551,533) 200,286 301,963 2,241,793 327,474 368,733 376,108 383,630 391,302 399,129 407,111 415,253 423,558 432,030
38 Subtotal, Administration 8,894,435 3,087,100 7,463,102 7,847,952 9,795,801 8,114,546 7,919,644 8,050,454 8,177,906 8,315,596 8,451,799 8,593,386 8,741,074 8,891,138 9,045,577
39 Resource Management 394,281 485,727 575,834 552,972 557,910 570,040 685,688 705,481 729,227 753,931 779,267 805,539 828,660 850,008 872,092
40 Operations and Mtc 4,039,649 4,257,240 4,885,428 4,900,606 4,944,064 4,986,274 6,184,549 6,365,432 6,585,118 6,813,962 7,048,720 7,292,410 7,504,387 7,698,282 7,899,029
41 Engineering (Operating)333,017 262,889 247,488 301,278 338,659 381,502 422,650 435,118 450,380 466,290 482,616 499,574 514,216 527,527 541,317
42 Customer Service 1,435,667 1,371,943 1,476,175 1,544,608 1,584,759 1,677,926 2,097,861 2,159,829 2,235,777 2,314,969 2,396,225 2,480,639 2,553,438 2,619,560 2,688,063
43 Allowance for Unspent Budget - - - - - - (924,743) (436,860) (451,237) (466,183) (481,514) (497,403) (511,532) (524,679) (538,269)
44 Subtotal, Operating Expenses 15,097,049 9,464,900 14,648,027 15,147,415 17,221,192 15,730,288 16,385,649 17,279,453 17,727,171 18,198,565 18,677,112 19,174,145 19,630,244 20,061,837 20,507,809
45 Capital Program Contribution 14,791,950 5,217,154 9,327,120 9,366,201 1,068,841 8,335,605 8,554,044 8,723,959 9,088,761 9,099,364 9,388,392 9,665,805 9,951,351 10,245,303 10,547,961
46 TOTAL EXPENSES 38,332,056 23,743,300 34,653,061 39,403,015 34,895,385 39,771,182 40,952,441 46,454,401 47,313,721 47,522,825 50,829,857 52,920,229 52,503,413 53,319,920 55,178,960
47
48 ENDING RESERVES
49 Reappropriations (Non-CIP)- 54,000 20,000 - - - - - - - - - - - -
50 Commitments (Non-CIP)98,000 40,000 765,000 714,000 2,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000
51 Restricted for Debt Service 780,000 3,348,000 3,348,000 3,225,000 3,225,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000 3,331,000
52 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 - - - - - - - - -
53 Capital Reserve - - - - - - 4,000,000 14,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000 10,847,000
54 Rate Stabilization Reserve 5,400,000 17,037,000 10,639,000 7,996,000 17,272,000 20,133,000 6,567,000 1,067,000 1,067,000 500,000 500,000 - - - -
55 Operations Reserve - - - - - - 6,825,996 7,388,745 9,587,610 10,996,799 11,491,182 11,522,648 11,904,886 12,374,300 12,226,477
56 Unassigned - - - - - - - - - - - - - - -
57 TOTAL ENDING RESERVES 7,278,000 21,479,000 15,772,000 12,935,000 21,499,000 24,811,000 21,070,996 26,980,745 25,179,610 26,021,799 26,516,182 26,047,648 26,429,886 26,899,300 26,751,477
58
1 FISCAL YEAR FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
2
3 REVENUES
4 Net Sales 90%68%90%84%84%91%92%92%93%93%93%93%93%93%93%
5 Other Revenues and Transfers In 10%32%10%16%16%9%8%8%7%7%7%7%7%7%7%
6 TOTAL REVENUES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
7
8 EXPENSES
9 Water Purchases 22%38%31%38%48%39%39%44%43%43%45%46%44%43%44%
10 Operating Expenses
11 Administration
12 Allocated Charges 4%7%5%5%7%6%5%5%5%5%5%4%5%5%5%
13 Rent 5%9%6%5%5%6%5%5%5%5%5%5%5%5%5%
14 Debt Service 2%8%10%9%9%8%8%7%7%7%6%6%6%6%6%
15 Transfers and Other Adjustments 12%-11%1%1%6%1%1%1%1%1%1%1%1%1%1%
16 Subtotal, Administration 23%13%22%20%28%20%19%17%17%17%17%16%17%17%16%
17 Resource Management 1%2%2%1%2%1%2%2%2%2%2%2%2%2%2%
18 Operations and Mtc 11%18%14%12%14%13%15%14%14%14%14%14%14%14%14%
19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%
20 Customer Service 4%6%4%4%5%4%5%5%5%5%5%5%5%5%5%
21 Allowance for Unspent Budget 0%0%0%0%0%0%-2%-1%-1%-1%-1%-1%-1%-1%-1%
22 Subtotal, Operating Expenses 39%40%42%38%49%40%40%37%37%38%37%36%37%38%37%
23 Capital Program Contribution 39%22%27%24%3%21%21%19%19%19%18%18%19%19%19%
24 TOTAL EXPENSES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
25
26 RISK ASSESSMENT DETAIL
27 Distribution Revenue Variance 1,691,676 1,658,926 1,989,201 2,227,905 2,272,463 2,255,824 2,374,042 2,433,393 2,445,560
28 10% CIP Program Contingency 855,404 872,396 908,876 909,936 938,839 966,581 995,135 1,024,530 1,054,796
29 Total Risk Asssessment Value 2,547,081 2,531,322 2,898,077 3,137,842 3,211,303 3,222,404 3,369,177 3,457,923 3,500,356
30 Projected Operations Reserve 6,825,996 7,388,745 9,587,610 10,996,799 11,491,182 11,522,648 11,904,886 12,374,300 12,226,477
31 Operations Reserve, % of Risk Value 268%292%331%350%358%358%353%358%349%
32
33 OPERATIONS RESERVE
34 Min (60 days of non-capital expenses)- - - - - - 5,633,883 6,516,546 6,604,123 6,643,164 7,145,814 7,450,505 7,341,852 7,434,691 7,697,613
35 Target (90 days of non-capital expenses)- - - - - - 9,681,864 9,805,203 9,939,273 10,000,649 10,757,546 11,217,620 11,057,753 11,200,219 11,597,933
36 Max (120 days of non-capital expenses)- - - - - - 13,729,844 13,093,861 13,274,424 13,358,135 14,369,279 14,984,734 14,773,654 14,965,747 15,498,253
37 Risk Assessment Value 2,547,081 2,531,322 2,898,077 3,137,842 3,211,303 3,222,404 3,369,177 3,457,923 3,500,356
38
39 DEBT SERVICE COVERAGE RATIO
40 Net Revenues (125% of Debt Service)2933%850%658%787%951%876%907%1071%1087%1092%1187%1243%1220%1236%1284%
41 Available Reserves (5x Debt Service)*8.2 9.2 3.5 2.7 5.7 6.6 5.4 7.2 6.7 6.9 7.1 6.9 7.1 7.2 7.2
42 *For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of other utilities to meet its debt covenants.
WATER UTILITY FINANCIAL PLAN
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APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Project #Project Name
Reappropriated /
Carried Forward from
Previous Years
Current Year
Funding
Budget
Amendments
Spending,
Current Year
Remaining in
CIP Reserve
Fund Commitments FY 2016 FY 2017 FY 2018 FY 2019 FY 2019
ONE TIME PROJECTS
WS-07000 Regulation Station Imp.370,824 - - (15,406) 355,418 895,806 - - - -
WS-07001 Water Recycling Facilities 388,421 - - (37,603) 350,818 106,224 - - - -
WS-08001 Water Reservoir Coating 2,177,560 750,000 - (15,406) 2,912,154 4,376,620 - - - -
WS-09000 Seismic Water System 4,284,420 2,230,000 - (40,620) 6,473,800 6,107,517 - - - -
WS-11001 Vacuum Excavation Equip.- - - - - - - - - -
WS-13003 GPS Equipment Upgrade 200,000 - - - 200,000 - - - - -
WS-13004 Asset Mgmt. Mobile Sys.98,471 - - (3,467) 95,004 - - - - -
WS-13006 Meter Shop Renovations 46,907 - - (10,001) 36,906 - - - - -
WS-15004 Water System Master Plan - - 500,000 - 500,000 255,858
WS-08002 Emergency Water Supply 1,106,738 - - (296,577) 810,161 853,189 - - - -
Subtotal, One-time Projects 8,673,341 2,980,000 500,000 (419,080) 11,734,261 12,595,214 - - - - -
WATER MAIN REPLACEMENT PROGRAM
WS-08017 WMR - Project 22 - - - - - - - - - - -
WS-09001 WMR - Project 23 112,021 - - - 112,021 - - - - - -
WS-10001 WMR-Project 24 208,305 - - - 208,305 - - - - - -
WS-11000 WMR-Project 25 5,238,360 - (55,186) 5,183,174 4,414,466 - - - - -
WS-12001 WMR- Project 26 461,065 - - (1,176) 459,889 - 5,515,195 - - - -
WS-13001 WMR - Project 27 - - - - - - 568,065 5,680,651 - - -
WS-13001 WMR - Project 28 - - - - - - - 585,107 5,851,070 - -
WS-15002 WMR - Project 29 - - - - - - - - 602,600 6,026,602 -
WS-16001 WMR - Project 30 - - - - - - - - - 620,740 6,207,400
WS-16001 WMR - Project 31 - - - - - - - - - - 608,512
Subtotal, Water Main Replacement Prog.6,019,751 - - (56,362) 5,963,389 4,414,466 6,083,260 6,265,758 6,453,670 6,647,342 6,815,912
WATER UTILITY FINANCIAL PLAN
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Appendix B: Water Utility Capital Improvement Program (CIP) Detail (Continued)
Project #Project Name
Reappropriated /
Carried Forward from
Previous Years
Current Year
Funding
Budget
Amendments
Spending,
Current Year
Remaining in
CIP Reserve
Fund Commitments FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
ONGOING PROJECTS
WS-80014 Services/Hydrants 176,771 236,000 - (82,315) 330,456 - 243,080 250,400 263,000 270,000 278,100
WS-80015 Water Meters 256,009 386,000 - (94,025) 547,984 175,669 393,080 400,372 407,000 415,000 427,450
WS-02014 W-G-W Utility GIS Data 130,984 303,000 - (98,684) 335,300 156,505 332,750 366,025 402,628 442,890 456,177
WS-13002 Equipment/Tools 28,132 50,000 - (6,674) 71,458 - 50,000 50,000 50,000 50,000 50,000
WS-11003 Dist. Sys. Improvements 201,515 225,000 - (675,186) (248,671) 35,556 232,000 239,000 247,000 254,000 261,620
WS-11004 Supply Sys. Improvements 157,622 225,000 - (123,401) 259,221 39,773 232,000 239,000 247,000 254,000 261,620
Subtotal, Ongoing Projects 951,033 1,425,000 - (1,080,285) 1,295,748 407,503 1,482,910 1,544,797 1,616,628 1,685,890 1,734,967
CUSTOMER CONNECTIONS (FEE FUNDED)
WS-80013 Water System Extensions 2,553 450,000 - (265,623) 186,930 4,572 460,000 473,000 486,000 500,000 515,000
Subtotal, Customer Connections 2,553 450,000 - (265,623) 186,930 4,572 460,000 473,000 486,000 500,000 515,000
GRAND TOTAL 15,646,678 4,855,000 500,000 (1,821,350)19,180,328 17,421,755 8,026,170 8,283,555 8,556,298 8,833,232 9,065,879
Funding Sources
Connection/Capacity Fees 450,000 - 460,000 473,000 486,000 500,000
Other Utility Funds (Asset Mgmt, GIS Systems)202,000 - 222,000 244,000 268,000 295,000
Utility Rates 4,855,000 500,000 8,026,170 8,283,555 8,556,298 8,833,232 9,065,879
CIP-RELATED RESERVES DETAIL
6/30/2014
(Actual)12/31/20114
Reappropriations (excl. Bond Funded)10,846,585 1,758,573
Commitments (excl. Bond Funded)4,800,093 17,421,755
WATER UTILITY FINANCIAL PLAN
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APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES
(Amendments to this section are proposed. See the proposed adopting resolution for this
Financial Plan. This section will be added to the Financial Plan following adoption of any
amendments to this section.)
WATER UTILITY FINANCIAL PLAN
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APPENDIX D: RATE DESIGN
The Water Utility’s rates are evaluated and implemented in compliance with the cost of service
requirements and procedural rules set forth in the California Constitution under Article 13 (per
Proposition 218). Current rates were structured based on the methodology from the March
2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc 2. Staff
plans to review and update this cost of service study in 2 to 3 years, unless any major changes
occur to the utility’s operations or customer base that would necessitate an earlier study.
Before conducting any new cost of service study, staff will review current rates and the scope of
the study with the Utilities Advisory Commission (UAC) and Council to determine the City’s
policy priorities.
2 Staff Report ID#2676, Finance Committee, April 18, 2012
WATER UTILITY FINANCIAL PLAN
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APPENDIX E: WATER UTILITY DEBT SERVICE DETAILS
The Water Utility currently makes payment on its share of two bond issuances. The first is the
2009 Water Revenue Bond, Series A, issued for $35 million, and to be retired by 2035. As part
of the ‘Build America’ bond program, there is an interest payment subsidy from the Federal
Government of 35%. There is always the possibility that the federal government will choose to
stop payment on this subsidy. The automatic federal spending cuts under the Budget Control
Act (BCA) of 2011 have already reduced the subsidy by $50,000 per year, and if planned cuts
through 2021 proceed without amendment, staff estimates that the subsidy would be reduced
by over $200,000 per year by 2021. The Bipartisan Budget Act of 2013, which relieved some of
the discretionary spending cuts in the 2011 BCA, did not affect automatic cuts to the subsidy,
and actually extended the automatic cuts through 2023.
The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be
retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond
issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital
improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8
million.
The cost of debt service for the Water Utility’s share of these bond issuances for the financial
forecast period is as follows:
Table 15: Water Utility Debt Service ($000)
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
2009 Water
Revenue Bonds,
Series A (net of
grants)
1,986 2,002 2,012 2,031 2,046 2,064 2,079 2,101
2011 Utility
Revenue Bonds,
Series A
656 657 657 656 654 656 657 657
Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available
Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available
Reserves shall be at least 5 times the maximum annual debt service. Note that “Available
Reserves,” as defined for both bonds, include the reserves for the Gas and Electric systems, not
just the Water system.
The current Financial Plan maintains compliance with these covenants throughout the forecast
period, as shown in Appendix A (Water Utility Financial Forecast Detail).
The net revenues (but not the reserves) of the Water Utility are also pledged for one other
bond as shown in Table 16 below, even though the Water Utility is not responsible for the debt
service payments. The Water Utility’s reserves or net revenues would only be called upon if the
responsible utilities are unable to make their debt service payments. Staff does not currently
foresee this occurring. Requirements of the California Constitution require that any amounts
advanced from one utility to pay debt service for another utility must be repaid by the
borrowing fund.
WATER UTILITY FINANCIAL PLAN
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Table 16: Other Issuances Secured by the Water Utility’s Revenues or Reserves
Bond Issuance Responsible Utilities Annual Debt
Service ($000)
Secured by Water Utility’s:
Net Revenues Reserves
1995 Series A Utility
Revenue Bonds Storm Drain $680 Yes No
WATER UTILITY FINANCIAL PLAN
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APPENDIX F: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES
This appendix describes the activities associated with the various operational activities referred
to in Section 7B (Operations) of this Financial Plan.
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City’s General Fund staff, as well as shared communications services, CPAU administrative
overhead, and billing system maintenance costs. This category also includes Water Utility debt
service and rent paid to the General Fund for the land associated with reservoirs and various
other facilities.
Customer Service: This category includes the Water Utility’s share of the call center, meter
reading, collections, and billing support functions. Billing support encompasses staff time
associated with bill investigations and quality control on certain aspects of the billing process. It
does not include maintenance of the billing system itself, which is included in Administration.
This category also includes CPAU’s key account representatives, who work with large
commercial customers who have more complex requirements for their water services.
Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
Operations and Maintenance: This category includes the costs of a variety of distribution
system maintenance activities, including:
investigating reports of damaged mains or services and performing emergency repairs;
testing and operating valves;
monitoring water quality and reservoir levels;
monitoring the status of the different pressure zones;
flushing water at hydrants and other closed end points of the system;
building and replacing water services for new or redeveloped buildings; and
testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
the Field Services team (which does field research of various customer service issues);
the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal tanks and reservoirs); and
the General Services team (which manages and maintains equipment, paves and
restores streets after gas, water, or sewer main replacements, and provides welding
services)
Resource Management: This category includes water procurement, contract management,
water resource planning, interaction with BAWSCA, the SFPUC, and the SCVWD, and tracking of
legislation and regulation related to the water industry.
APPENDIX G: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS
Attachment D
* NOT YET APPROVED *
150220 mf 6053253 1
Resolution No. _____
Resolution of the Council of the City of Palo Alto Adopting a Water Rate Increase
and Amending Rate Schedules W-1 (General Residential Water Service), W-2
(Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4
(Residential Master-Metered and General Non-Residential Water Service), and
W-7 (Non-Residential Irrigation Water Service)
R E C I T A L S
A. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of
the City of Palo Alto may by resolution adopt rules and regulations governing utility services,
fees and charges.
B. Pursuant to Article XIIID Sec. 6 of the California Constitution, on ________, 2015,
the City of Palo Alto held a public hearing to consider all protests against the proposed water
rate amendments.
C. The total number of written protests presented by the close of the public
hearing was less than fifty percent (50%) of the total number of customers and property
owners subject to the proposed water rate amendments.
The Council of the City of Palo Alto RESOLVES, as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-1 (General Residential Water Service) is hereby amended to read as attached
and incorporated. Utility Rate Schedule W-1, as amended, shall become effective July 1, 2015.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-2 (Water Service from Fire Hydrants) is hereby amended to read as attached
and incorporated. Utility Rate Schedule W-2, as amended, shall become effective July 1, 2015.
SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-3 (Fire Service Connections) is hereby amended to read as attached and
incorporated. Utility Rate Schedule W-3, as amended, shall become effective July 1, 2015.
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-4 (Residential Master-Metered and General Non-Residential Water Service) is
hereby amended to read as attached and incorporated. Utility Rate Schedule W-4, as amended,
shall become effective July 1, 2015.
SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule W-7 (Non-Residential Irrigation Water Service) is hereby amended to read as
attached and incorporated. Utility Rate Schedule W-7, as amended, shall become effective
July 1, 2015.
Attachment D
* NOT YET APPROVED *
150220 mf 6053253 2
SECTION 6. The Council finds that the revenue derived from the adoption of this
resolution shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of
the City of Palo Alto.
SECTION 7. The Council finds that the fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
SECTION 8. 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:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
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 7-1-2013
dated 7-1-2012 Sheet No W-1-1
A. APPLICABILITY:
This schedule applies to all separately metered single family residential water services.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
Per Meter
Monthly Service Charge: Per Month
For 5/8-inch meter ..................................................................................................... $ 14.6716.01
For 3/4 inch meter ..................................................................................................... 19.5121.48
For 1 inch meter ........................................................................................................ 29.1832.42
For 1 1/2 inch meter .................................................................................................. 53.3759.77
For 2-inch meter ........................................................................................................ 82.3992.60
For 3-inch meter ........................................................................................................ 174.29196.54
For 4-inch meter ........................................................................................................ 309.72349.71
For 6-inch meter ........................................................................................................ 633.80716.24
For 8-inch meter ........................................................................................................1,165.861,318.01
For 10-inch meter ......................................................................................................1,843.022,083.89
For 12-inch meter .......................................................................................................2,423.452,740.37
Commodity Rate: (To be added to Service Charge and applicable to all pressure zones.)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Tier 1 usage ........................................................................................................................$4.995.70
Tier 2 usage (All usage over 100% of Tier 1) ........................................................................7.588.38
Temporary unmetered service to residential
subdivision developers, per connection ........................................................................ $6.00
ATTACHMENT E
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 7-1-2013
dated 7-1-2012 Sheet No W-1-2
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2. Calculation of Usage Tiers
Tier 1 water usage shall be calculated and billed based upon a level of 0.2 ccf per day
rounded to the nearest whole ccf, based on meter reading days of service. As an example,
for a 30 day bill, the Tier 1 level would be 0 through 6 ccf. For further discussion of bill
calculation and proration, refer to Rule and Regulation 11.
{End}
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-2-1 Effective 7-1-2013
dated 7-1-2012 Sheet No W-2-1
A. APPLICABILITY:
This schedule applies to all water taken from fire hydrants for construction, maintenance, and
other uses in conformance with provisions of a Hydrant Meter Permit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
1. Monthly Service Charge.
METER SIZE
5/8 inch ........................................................................................................................... 50.00
3 inch ........................................................................................................................... 125.00
2. Commodity Rate: (per hundred cubic feet) ................................................................ $6.156.97
D. SPECIAL NOTES:
1. Monthly charges shall include the applicable monthly service charge in addition to usage billed at
the commodity rate.
2. Any applicant using a hydrant without obtaining a Hydrant Meter Permit or any permittee using a
hydrant without a Hydrant Meter Permit shall pay a fee of $50.00 for each day of such use in
addition to all other costs and fees provided in this schedule. A hydrant permit may be denied or
revoked for failure to pay such fee.
3. A meter deposit of $750.00 may be charged any applicant for a Hydrant Meter Permit as a
prerequisite to the issuance of a permit and meter(s). A charge of $50.00 per day will be added for
delinquent return of hydrant meters. A fee will be charged for any meter returned with missing or
damaged parts.
4. Any person or company using a fire hydrant improperly or without a permit, or who draws water
from a hydrant without a meter installed and properly recording usage shall, in addition to all other
applicable charges be subject to criminal prosecution pursuant to the Palo Alto Municipal Code.
{End}
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-3-1 Effective 7-1-2013
dated 7-1-2012 Sheet No W-3-1
A. APPLICABILITY:
This schedule applies to all public fire hydrants and private fire service connections.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
1. Monthly Service Charges
Public Fire Hydrant .................................................................................................... $5.00
Private Fire Service:
2-inch connection .......................................................................................................$3.033.43
4-inch connection .......................................................................................................18.7821.21
6-inch connection ....................................................................................................... 54.5561.61
8-inch connection .......................................................................................................116.24131.29
10-inch connection .....................................................................................................209.03236.10
12-inch connection .....................................................................................................337.65381.36
2. Commodity (To be added to Service Charge unless water is used for fire extinguishing or
testing purposes.)
Per Hundred Cubic Feet
All water usage........................................................................................................... $10.00
D. SPECIAL NOTES:
1. Service under this schedule may be discontinued if water is used for any purpose other
than fire extinguishing or testing and repairing the fire extinguishing facilities. Using
hydrants and fire services for other purposes is illegal and will be subject to the
commodity charge as noted above, fines, and criminal prosecution pursuant to the Palo
Alto Municipal Code.
2. For a combination water and fire service, the general water service schedule shall apply.
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-3-2 Effective 7-1-2013
dated 7-1-2012 Sheet No W-3-2
3. Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire
Services.
4. Repairs and testing of fire extinguishing facilities are not considered unauthorized use of
water if records and documentation are supplied by the customer.
{End}
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-4-1 Effective 7-1-2013
dated 7-1-2012 Sheet No W-4-1
A. APPLICABILITY:
This schedule applies to non-residential water service in the City of Palo Alto and its distribution
area. This schedule is also applicable to multi-family residential customers served through a master
meter.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
Per Meter
Monthly Service Charge Per Month
For 5/8-inch meter ....................................................................................$ 16.01$ 14.67
For 3/4-inch meter .................................................................................... 21.4819.51
For 1-inch meter .................................................................................... 32.42 29.18
For 1 ½-inch meter .................................................................................... 59.77 53.37
For 2-inch meter .................................................................................... 92.60 82.39
For 3-inch meter .................................................................................... 196.54174.29
For 4-inch meter .................................................................................... 349.71309.72
For 6-inch meter .................................................................................... 716.24633.80
For 8-inch meter ....................................................................................1,318.011,165.86
For 10-inch meter ....................................................................................2,083.891,843.02
For 12-inch meter ....................................................................................2,740.372,423.45
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 6.156.97
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 7-1-2013
dated 7-1-2012 Sheet No W-4-2
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.
{End}
NON-RESIDENTIAL IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-7-1 Effective 7-1-2013
dated 7-1-2012 Sheet No W-7-1
A. APPLICABILITY:
This schedule applies to non-residential water service supplying dedicated irrigation meters in the
City of Palo Alto and its distribution area.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
Per Meter
Monthly Service Charge Per Month
For 5/8-inch meter .................................................................................... $ 16.0114.67
For 3/4-inch meter .................................................................................... 21.48 19.51
For 1-inch meter .................................................................................... 32.4229.18
For 1 1/2 inch meter .................................................................................... 59.77 53.37
For 2-inch meter .................................................................................... 92.60 82.39
For 3-inch meter .................................................................................... 196.54174.29
For 4-inch meter .................................................................................... 349.71309.72
For 6-inch meter .................................................................................... 716.24633.80
For 8-inch meter ....................................................................................1,318.011.165.86
For 10-inch meter ....................................................................................2,083.891.843.02
For 12-inch meter ....................................................................................2,740.372,423.45
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 7.528.46
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 7-1-2013
dated 7-1-2012 Sheet No W-7-2
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.
{End}
EXCERPTED DRAFT MINUTES OF THE MARCH 4, 2015
UTILITIES ADVISORY COMMISSION MEETING
ITEM 6: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2016 Water Utility
Financial Plan and Amending the Water Utility Reserve Management Practices; and (2) a
Resolution 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)
Senior Resource Planner Jon Abendschein provided an update to the preliminary rate
projections that were provided to the UAC at its February meeting. Abendschein stated that
the San Francisco Public Utilities Commission (SFPUC) had previously projected that wholesale
water rates would rise by 15%, but after the UAC's February meeting, the SFPUC advised the
City that its wholesale water rate for FY 2016 is instead projected to increase by 30.7%, which
would increase the City’s wholesale water costs by 14%. He stated that staff had changed its
rate proposal for FY 2016 to a 12% increase instead of 7%, and would use rate stabilization
reserves to spread any remaining cost increase across future years. Staff is working on a public
communications strategy. The result of the change in SFPUC’s wholesale water rates is that the
entire 12% proposed retail rate increase is due to the increased wholesale water cost.
Abendschein showed that the SFPUC's debt service is rising due to the Water System
Improvement Program (WSIP), the program to upgrade and repair the regional water system.
The project had started in 2007 and was projected to end in 2019. Each year the SFPUC issues
new debt to fund the next phase of the project. That meant that each year the annual debt
service costs assigned to wholesale customers like Palo Alto increases, with a corresponding
increase in wholesale water rates. The increases in debt service payments remain in effect until
the debt service is paid off in several decades.
Abendschein said staff incorporated feedback the UAC provided at its February meeting about
post-drought consumption and whether it would return to pre-drought levels. In previous
droughts consumption did not returned to pre-drought levels. Staff took that into account and
changed the water consumption forecast for FY 2016 through FY 2023. This assumption
primarily affected projected future rate increases rather than the proposed FY 2016 rate
increase, and affected them by a percentage point or two. He also noted that the projections
were rate changes, not bill changes, and customers who conserved would see lower bill
increases.
ATTACHMENT F
Commissioner Eglash commended staff on incorporating the comments from the UAC in
February and on responding to the unexpected change in the wholesale price of water.
Commissioner Chang asked if the balance between fixed charges versus volumetric charges was
appropriate, given the drought. She asked whether more revenue should be collected from
volumetric charges if the goal was to encourage conservation.
Abendschein noted that the last cost of service analysis (COSA) resulted in an allocation of fixed
charges of about 15% of the total revenue, which was an increase from the level of fixed
revenues collected prior to that COSA. It was in line with the California Urban Water
Conservation Council’s best management practices. The time to recommend revisions to the
level of fixed charges is at the next COSA.
ACTION:
Chair Foster made a motion to recommend that the City Council adopt: (1) a Resolution
Approving the Fiscal Year 2016 Water Utility Financial Plan and Amending the Water Utility
Reserve Management Practices; and (2) a Resolution Amending Rate Schedules W-1 (General
Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service
Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service),
and W-7 (Non-Residential Irrigation Water Service). Commissioner Eglash seconded the
motion. The motion carried unanimously (5-0 with Chair Foster, Commissioners Chang, Eglash,
Hall, Melton and Vice Chair Waldfogel voting yes, and Commissioners Cook and Hall absent).
City of Palo Alto (ID # 5598)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/7/2015
City of Palo Alto Page 1
Summary Title: Wastewater Collection Financial Plan and Rate Proposals
Title: Utilities Advisory Committee Recommendation that the City Council
Adopt: 1) a Resolution Approving the Fiscal Year 2016 Wastewater Collection
Financial Plan and Amending the Wastewater Collection Utility Reserve
Management Practices, and (2) a Resolution Amending Rate Schedules S-1
(Residential Wastewater Collection and Disposal), S-2 (Commercial
Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection
and Disposal) and S-7 (Commercial Wastewater Collection and Disposal –
Industrial Discharger) to Increase Average Wastewater Collection Rates by 9%
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee
recommend that the City Council:
1. Adopt a resolution (Attachment A) approving the fiscal year (FY) 2016 Wastewater
Collection Utility Financial Plan (Attachment C and amending the Wastewater Collection
Utility Reserve Management Practices (Attachment B); and
2. Adopt a resolution (Attachment D) Amending Rate Schedules S-1 (Residential
Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and
Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial
Wastewater Collection and Disposal – Industrial Discharger) (Attachment E).
Executive Summary
The FY 2016 Wastewater Collection Utility Financial Plan includes projections of the utility’s
costs and revenues through FY 2020. Costs are projected to rise substantially for the next
several years due primarily to increasing wastewater treatment costs. As a result, staff projects
the need for 9% rate increases each year from FY 2016 through FY 2019. Rates for FY 2020 are
projected to increase by 6%.
City of Palo Alto Page 2
Staff also recommends changes to the Wastewater Collection Utility Reserves Management
Practices to accommodate a change in City budgeting practices for Capital Improvement
Program (“CIP”) projects.
The UAC reviewed the Wastewater Collection Financial Plan and Rate Projections at its meeting
on March 4, 2015 and recommended approval of staff’s recommendations.
Background
Every year staff presents the Finance Committee with Financial Plans for its Electric, Gas, Water,
and Wastewater Collection Utilities and recommends any rate adjustments required to
maintain their financial health. These Financial Plans include a comprehensive overview of the
utility’s operations, both retrospective and prospective, and are intended to be a reference for
UAC, Finance Committee and Council members as they review the budget and staff’s rate
recommendations.
Each Financial Plan also contains a set of Reserves Management Practices describing the
reserves for each utility and the management practices for those reserves. Staff may propose
amendments to these reserves as part of the Financial Plans.
The UAC reviewed this proposal at its March 4, 2015 meeting. The UAC and Finance Committee
reviewed preliminary financial forecasts and rate projections at their February 4, 2015 and
March 3, 2015 meetings, respectively.
Discussion
Proposed Actions for FY 2015
Council approved several transfers between reserves as part of the FY 2015 Financial Plan.
Funds were transferred out of the Emergency Plant Replacement and Rate Stabilization
Reserves into the newly-created Operations Reserve. These transfers were mainly related to
setting up the new reserves structure approved as part of that Financial Plan. For FY 2015, staff
proposes an additional transfer of $264,000 from the Rate Stabilization Reserve to the
Operations Reserve over the original $1.9 million transfer as discussed in the FY 2015 Financial
Plan, in order to cover additional expected expenses and to keep the Operations Reserve at the
target level.
Proposed Actions for FY 2016
This year’s Wastewater Collection Utility Financial Plan includes the following proposed actions
for FY 2016:
1. Amend the CIP Reserve to accommodate a change in City capital budgeting practices.
These amendments are summarized below, but for a more in-depth description of the
reasons for these changes, see Section 4C of the Financial Plan:
a. Amend the Reserves Management Practices to modify the purpose of the CIP
Reserve to enable it to act as a cash flow and contingency reserve for capital
investment projects.
City of Palo Alto Page 3
b. Transfer the funds that are projected to be released from the Reappropriations
Reserve at the beginning of FY 2016 to the CIP Reserve.
2. Transfer $2 million from the Rate Stabilization Reserve to the Operations Reserve in FY
2016. This transfer will enable staff to maintain Operations Reserve levels while
spreading the required rate increases for the wastewater collection utility over several
years.
These proposed actions are described in more detail in the FY 2016 Wastewater Collection
Financial Plan (Attachment B).
Proposed Rate Adjustments Effective July 1, 2015
Staff proposes to adjust rates as shown in Table 1 below, effective July 1, 2015. The
adjustments will increase the system average rate by roughly 9%. These rate changes are
included in the amended rate schedules in Attachment E.
Table 1: Current and Proposed (as of July 1, 2015) Wastewater Collection Charges
Rate
Schedule
Customer
Class
Current Rates Proposed Rates Rate Change
Monthly
Charge (1)
($/month)
Quantity
Charge
($/ccf)
Monthly
Charge (1)
($/month)
Quantity
Charge
($/ccf)
Monthly
Charge (1)
Quantity
Charge
$/mo % $/ccf %
S-1 Residential 29.31 N/A 31.95 N/A 2.64 9% N/A N/A
S-2 Commercial 29.31 5.65 31.95 6.16 2.64 9% 0.51 9%
S-6 Restaurant 29.31 8.73 31.95 9.52 2.64 9% 0.79 9%
S-7 Industrial
Dischargers (2) N/A 2.60 N/A 2.83 N/A N/A 0.23 9%
(1) Monthly charges for S-1 are fixed monthly charges, and those for S-2 and S-6 are
minimum monthly charges.
(2) Currently there are no customers on rate schedule S-7, however, CPAU continues to
maintain it in case there is a need for the rate schedule in the future.
Projected Rate Adjustments over the Forecast Period
Table 2 shows the projected rate adjustments included in the Wastewater Collection Utility
Financial Plan and their impact on the median residential wastewater bill.
Table 2: Projected Rate Adjustments and Residential Bill Impact, FY 2016 to FY 2020
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Wastewater Utility 9% 9% 9% 9% 6%
Estimated Bill Impact for
Residential Customers ($/mo) $2.64 $2.88 $3.13 $3.42 $2.48
Staff’s annual assessment of the financial position of the City’s utilities is completed to ensure
adequate revenue to fund operations, in compliance with the cost of service requirements set
forth in the California Constitution (Proposition 218). This includes making long-term
City of Palo Alto Page 4
projections of market conditions, the physical condition of the system, and other factors that
could affect utility costs, and setting rates adequate to recover these costs. The current rate
proposals are also based on the methodology from the 2011 Wastewater Collection Utility cost
of Service and Rate Study completed by Utility Financial Solutions (Staff Report 1399).
The main drivers for the increase in the Wastewater Collection Utility’s costs (and therefore
rates) over the next several years are the cost for treatment, which is projected to go up by 5%
per year as the Regional Water Quality Control Plant makes several upgrades to their facilities,
as well as CIP costs for the wastewater collection system. Operating and CIP costs are
projected to rise roughly 2%-4% annually.
There is uncertainty related to capital costs for the Wastewater Collection Utility in coming
years. Wastewater main replacement and rehabilitation costs have risen substantially in recent
years, and it is possible that higher CIP expenditures will be required in the future. The
Financial Plan includes rate projections for a “High CIP Cost” scenario. Staff plans to perform an
updated master plan for the wastewater collection system to gain better information about
future main replacement costs. Staff expects this study to commence in 2016.
Table 3 shows these projected wastewater rate adjustments along with the other proposed and
projected utility rates.
Table 3: Rate Adjustments, All Utilities, FY 2016 Proposed, FY 2017 to FY 2020 Projected
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Electric 0% 6% 6% 1% 1%
Gas1 0% 7% 4% 4% 4%
Wastewater 9% 9% 9% 9% 6%
Water 12% 8% 8% 8% 3%
Refuse2 9% 9% 8% 2% to 3% 2% to 3%
Storm Drain3 2.7% 2% to 3% 2% to 3% 2% to 3% 2% to 3%
Total Bill
Change4
(%) 6% 8% 7% 5% 3%
($/mo) $14.73 $18.91 $18.53 $14.39 $9.55
(1) Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates
will vary monthly with wholesale market fluctuations
(2) No forecast available past FY 2018, inflationary increases assumed.
(3) Storm Drain Rates increase annually by CPI; existing rates sunset in June 2017 unless
reauthorized by a majority vote of property owners.
(4) Change in estimated median residential bill, $230.76 as of June 30, 2014
Commission Review and Recommendation
At its February 4, 2015 meeting, the UAC requested a more in depth discussion of treatment
costs as these are a major cost driver in the wastewater collection utility. Staff noted this and
City of Palo Alto Page 5
invited Jamie Allen, Regional Water Quality Control Plant (RWQCP) Manager to discuss RWQCP
related operations and CIP plans with the UAC at its March 4, 2015 meeting. This presentation
occurred prior to discussion of the wastewater collection financial plan and rates.
Mr. Allen summarized the RWQCP’s Long-Range Facilities Plan, which was prepared due to the
RWQCP facilities, which are past their design life, needing upgrades to to keep up with
treatment advances,. Rehabilitation costs related to biosolids processing and incinerator
replacement were discussed, as well as possible new regulatory costs associated with nitrogen
and phosphorus discharges. Staff clarified that debt service costs would be increasing as these
projects progressed. Commissioners commented that providing recycled water with a total
suspended solids (TDS) level acceptable for irrigation should be a high priority, and staff noted
that the City had TDS goals and supported expanding recycled water.
One Commissioner requested that additional detail on the operations, debt service and CIP
costs for wastewater treatment be provided in the future as it would provide better guidance
on wastewater collections. Mr. Allen stated he would work with utilities staff to provide that,
with Director Fong noting that the costs would be informative only, not an item for action by
the UAC.
The UAC then reviewed the Wastewater Collection Financial Plan and Rates proposal, but
having had any questions related to it addressed as part of the previous item, the UAC
approved the proposal unanimously with no discussion.
The draft minutes from the UAC’s March 4, 2015 meeting are provided as Attachment F.
Timeline
Assuming the Finance Committee supports staff’s recommendation, notification of the rate
increases will be sent to customers as required under Article XIIID of the California Constitution
(as added by Proposition 218). The Financial Plans and rate schedules will then go to the City
Council with the FY 2016 budget for adoption, at which time a public hearing will be held.
All residents and other interested persons may submit written or oral testimony at the hearing,
and may also submit written protests to any or all of the proposed rate increases. Council may
adopt the proposed rates unless written protests are filed by a majority of the affected
customers.
Resource Impact
Normal year sales revenues for the Wastewater Collection Utility are projected to increase by
roughly 9% ($1.35 million) as a result of these proposed rate increases. See the attached FY
2016 Wastewater Collection Utility Financial Plan for a more comprehensive overview of
projected cost and revenue changes for the next five years.
City of Palo Alto Page 6
Policy Implications
The attached FY 2016 Wastewater Collection Utility Financial Plan includes amended Reserve
Management Practices that will modify Council policy with respect to the structure of the
Wastewater Collection Utility financial reserves. If approved, these Reserve Management
Practices would replace the current Reserve Management Practices, which were last adopted
by Council in June 2014 (Resolution 9423).
Environmental Review
The Finance Committee’s review and recommendation to Council on the proposed Financial
Plan and rate adjustments do not meet the definition of a project, pursuant to Section 21065 of
the California Environmental Quality Act, thus no environmental review is required.
Attachments:
Attachment A: Resolution Approving the FY 2016 Wastewater Collection Financial Plan
and Amending the Wastewater Collection Utility Reserves Management Practices
(PDF)
Attachment B: Proposed Amendments to the Wastewater Collection Utility Reserves
Management Practices (PDF)
Attachment C: Proposed FY 2016 Wastewater Collection Financial Plan (PDF)
Attachment D: Resolution of the Council of the City of Palo Alto Adopted a Wastewater
Collection Rate Increase and Amending Rate Schedules S-1, S-2, S-6 and S-7 (PDF)
Attachment E: Proposed Amendments to Rate Schedules S-1, S-2, S-6 and S-7, effective
7-1-2015 (PDF)
Attachment F: Excerpted Draft UAC Minutes of March 4, 2015 (PDF)
Attachment A
* NOT YET APPROVED *
150223 mf 6053247
Resolution No. _____
Resolution of the Council of the City of Palo Alto Approving the
FY 2016 Wastewater Utility Financial Plan and Amending the
Wastewater Utility Reserves Management Practices
R E C I T A L S
A. Each year the City of Palo Alto (“City”) assesses the financial position of its
utilities with the goal of ensuring adequate revenue to fund operations. This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. It does
this with the goal of providing safe, reliable, and sustainable utility services at competitive
rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and made a
part of the Financial Plans.
C. The City intends to make changes to its Wastewater Utility Reserves
Management Practices to amend the purpose and management practices of the Wastewater
Utility’s Capital Improvement Program (CIP) Reserve.
The Council of the City of Palo Alto RESOLVES, as follows:
SECTION 1. The Council hereby approves the FY 2016 Wastewater Utility Financial
Plan, including the amended Wastewater Utility Reserves Management Practices. These
Reserves Management Practices replace the Reserves Management Practices previously
approved for the Wastewater Utility as part of the FY 2015 Wastewater Utility Financial Plan
(Resolution 9423).
SECTION 2. The Council hereby approves the transfer of $2.164 million in FY 2015
from the Rate Stabilization Reserve to the Operations Reserve, the transfer of all funds released
from the Reappropriations Reserve at the end of FY 2015 to the CIP Reserve, and the
exceedance of the maximum CIP Reserve guidelines through the end of FY 2017, as described in
the FY 2016 Wastewater Utility Financial Plan approved via this resolution.
//
//
//
Attachment A
* NOT YET APPROVED *
150223 mf 6053247
SECTION 3. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act’s definition of a project under Public Resources Code
Section 21065, and therefore, no environmental assessment is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
Proposed Amendments to Wastewater Collection Utility Reserves Management Practices
6053248
APPENDIX B: WASTEWATER COLLECTION UTILITY RESERVES MANAGEMENT
PRACTICES
The following reserves management practices shall be used when developing the Wastewater
Collection Utility Financial Plan:
Section 1. Definitions
a)“Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY
2015 to FY 2019 would be the Financial Planning Period.
b)“Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c)“Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d)“Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Wastewater Collection Utility’s Fund Balance is reserved for the following purposes:
a)For existing contracts, as described in Section 3 (Reserve for Commitments)
b)For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c)For future year expenditure on the Wastewater Collection Utility’scash flow
management and contingencies related to the Wastewater Collection Utility’s Capital
Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d)For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e)For operating contingencies, as described in Section 7 (Operations Reserve)
f)Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 8 (Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount
equal to the total remaining spending authority for all contracts in force for the
Wastewater Collection Utility at that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets, if any, that will be
re-appropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
ATTACHMENT B
Proposed Amendments to Wastewater Collection Utility Reserves Management Practices
6053248
Section 5. CIP Reserve
Funds may be added to or withdrawn from the CIP Reserve by action of the City Council
and held for future year expenditure on the Wastewater Collection Utility’s CIP
Program. Withdrawal of funds from the CIP Reserve requires Council action. If there are
funds in the CIP Reserve at the end of any fiscal year, any subsequent Wastewater
Collection Utility Financial Plan must result in the withdrawal of all funds from this
Reserve by the end of the Financial Planning Period.
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve
for capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels
are calculated for each fiscal year of the Financial Planning Period based on the levels of
CIP expense budgeted for that year.
Minimum Level 12 months of budgeted CIP expense
Maximum Level 24 months of budgeted CIP expense
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added or removed from to that reserve
as a result of a change in contractual commitments related to CIP projects. Any other
additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level:
i) Funds held in the Reserve for Commitments may be counted as part of the CIP
Reserve for the purpose of determining compliance with the CIP Reserve minimum
guideline level.
ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve
reaching its minimum level by the end of the next fiscal year. For example, if the CIP
Reserve is below its minimum level at the end of FY 2017, staff must present a plan
by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In
addition, staff may present, and the Council may adopt, an alternative plan that
takes longer than one year to replenish the reserve, or that does so in a shorter
period of time.
d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds
may be added to this reserve. If there are funds in this reserve in excess of the
maximum level staff must propose to transfer these funds to another reserve or return
them to ratepayers in the next Financial Plan. Staff may also seek City Council to
approve holding funds in this reserve in excess of the maximum level if they are held for
a specific future purpose related to the CIP.
Proposed Amendments to Wastewater Collection Utility Reserves Management Practices
6053248
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and
held to manage the trajectory of future year rate increases. Withdrawal of funds from
the Rate Stabilization Reserve requires Council action. If there are funds in the Rate
Stabilization Reserve at the end of any fiscal year, any subsequent Wastewater
Collection Utility Financial Plan must result in the withdrawal of all funds from this
Reserve by the end of the Financial Planning Period.
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Wastewater Collection Utility’s Fund Balance not
included in the reserves described in Section 3-Section 6 above will be included in the
Operations Reserve unless this reserve has reached its maximum level as set forth in Section
7(d) below. Staff will manage the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for
that year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 105 days of O&M and commodity expense
Maximum Level 150 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Wastewater Collection Utility
shall be designed to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Wastewater Collection
Utility’s Fund Balance shall be automatically included in the Unassigned Reserve
described in Section 8, below.
Section 8. Unassigned Reserve
Proposed Amendments to Wastewater Collection Utility Reserves Management Practices
6053248
If the Operations Reserve reaches its maximum level, any further additions to the
Wastewater Collection Utility’s Fund Balance will be held in the Unassigned Reserve. If
there are any funds in the Unassigned Reserve at the end of any fiscal year, the next
Financial Plan presented to the City Council must include a plan to assign them to a
specific purpose or return them to the Wastewater Collection Utility ratepayers by the
end of the first fiscal year of the next Financial Planning Period. For example, if there
were funds in the Unassigned Reserves at the end of FY 2015, and the next Financial
Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a plan to
return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may
present an alternative plan that retains these funds or returns them over a longer
period of time.
WASTEWATER COLLECTIO N
UTILITY FINANCIAL PLAN
FY 2016 TO FY 2020
TABLE OF CONTENTS
Section 1. Definitions and Abbreviations ................................................................................ 2
Section 2. Executive Summary and Recommendations ........................................................... 3
Section 2a. Executive Summary ................................................................................................... 3
Section 2b. Summary of Proposed Actions .................................................................................. 4
Section 3. Rate and Reserve Proposals ................................................................................... 4
Section 3a. Current and Proposed Rates ..................................................................................... 4
Section 3b. Reserves Management Practices, Proposed Change ................................................ 5
Section 3c. Proposed Reserve Transfers ...................................................................................... 6
Section 4. Current State of the Utility ..................................................................................... 7
Section 4a. Utility Overview ......................................................................................................... 7
Section 4b. Current Rates And Competitiveness .......................................................................... 7
Section 4c. Current Utility Financial Status .................................................................................. 9
Section 4d. Status of Reserves ................................................................................................... 10
Section 4e. Debt Service ............................................................................................................. 10
Section 5. Looking Back ....................................................................................................... 10
Section 5a. Background ............................................................................................................. 10
Section 5b. Historical Expenses and Revenues .......................................................................... 11
Section 6. Looking Forward .................................................................................................. 12
ATTACHMENT C
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Section 6a. Five Year Financial Forecast .................................................................................... 12
1. Overview ...................................................................................................................... 12
2. Treatment Costs ........................................................................................................... 13
3. Operations .................................................................................................................... 14
4. Capital Improvement Program (CIP) ............................................................................ 14
Section 6b. Revenue Requirement and Sources ......................................................................... 16
Section 6c. Risk Assessment and Reserves Adequacy ................................................................ 17
Section 6d. Alternate Scenarios ................................................................................................. 19
Section 6e. Long Term Outlook .................................................................................................. 19
Section 6f. Communications Plan .............................................................................................. 20
Appendices ......................................................................................................................... 21
Appendix A: Wastewater Collection Financial Forecast Detail .................................................. 22
Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail .......... 23
Appendix C: Wastewater Collection Utility Reserves Management Practices .......................... 24
Appendix D: Wastewater Collection Debt Service Details ......................................................... 25
Appendix E: Sample of Wastewater Collection Outreach Materials ......................................... 27
SECTION 1. DEFINITIONS AND ABBREVIATIONS
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons. When water usage is used to assess
wastewater charges for commercial customers, it is measured in CCF.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
FOG Fats, oils, and grease. When flushed into the sewer system, these materials
accumulate in parts of the sewer system and create blockages.
RWQCP Regional Water Quality Control Plant, the wastewater treatment plant owned and
operated by the City of Palo Alto that serves Palo Alto and several surrounding
communities.
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SECTION 2. EXECUTIVE SUMMARY AND RECOMMENDATIONS
SECTION 2A. EXECUTIVE SUMMARY
This document presents a Financial Plan for the City of Palo Alto’s Wastewater Collection Utility
for the next five years. It provides revenues to cover the costs of operating the utility safely
over that time while adequately investing for the future. It also addresses the financial risks
facing the utility over the short term and long term, and includes measures to mitigate and
manage those risks.
Over the next five fiscal years staff projects that the Wastewater Collection Utility will see
wastewater treatment costs rising 5% per year and other costs rising at roughly 3% to 4% per
year. In addition, capital improvement project costs have increased as the economy has
improved. These costs are shown in Table 1 below.
Table 1: Expenses for FY 2014 to FY 2020
Expenses
($000)
FY 2014
(actual)
FY 2015
(est.)
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Treatment Costs 6,863 8,589 9,018 9,469 9,943 10,440 10,962
Operations, Rent, Debt, Other 5,959 5,981 6,161 6,375 6,596 6,824 7,062
Capital Projects 989 4,067 4,985 5,106 5,221 5,341 5,353
TOTAL 13,811 18,637 20,164 20,950 21,760 22,605 23,377
As shown in Table 1, overall costs are expected to rise by about 5% per year from FY 2015 to FY
2020. While expenses are currently larger than revenues, staff has been drawing down the Rate
Stabilization Reserve in lieu of having rate increases. To ensure that revenues cover these rising
costs, the financial plan includes the rate trajectory shown in Table 2. For FY 2016 to FY 2019
rates are projected to increase 9% per year followed by a 6% increase in FY 2020.
Table 2: Projected Wastewater Collection Rate Trajectory for FY 2016 to FY 2020
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
9% 9% 9% 9% 6%
These projected rate increases result in an increase of $2.48 to $3.42 per month for a
residential customer’s sewer bill. The Wastewater Collection Utility’s Rate Stabilization
Reserves are being used to spread the projected cost increases over several years. This
Financial Plan projects that these reserves will be exhausted by FY 2017.
In addition, this Financial Plan includes updates to the Wastewater Collection Utility Reserves
Management Practices to amend the purpose of the CIP Reserve, as described below.
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SECTION 2B. SUMMARY OF PROPOSED ACTIONS
Staff proposes the following action for the Wastewater Collection Utility in FY 2015:
1. Transfer an additional $264,000 from the Rate Stabilization Reserve to the Operations
Reserve. (Note that $1.9 million was already transferred from the Rate Stabilization
Reserve for FY 2015 in the FY 2015 Financial Plan.)
Staff proposes the following actions for the Wastewater Collection Utility in FY 2016:
1. Increase the Wastewater Collection rates as shown in Section 3A. The changes are
projected to increase average system revenues by 9% effective July 1, 2015.
2. Amend the Reserves Management Practices to modify the purpose of the CIP Reserve,
enabling it to act as a cash flow contingency reserve for capital investment projects as
outlined in Section 3B.
3. Transfer all funds released from the Reappropriations Reserve at the end of FY 2015 to
the CIP Reserve, as outlined in Section 3B.
4. Transfer $2 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 3C for more details.
SECTION 3. RATE AND RESERVE PROPOSALS
SECTION 3A. CURRENT AND PROPOSED RATES
The current rates were adopted July 1, 2012, when the City increased sewer rates by 5%. The
rate change included a revenue-neutral change to the billing methodology for commercial
customers. CPAU’s sewer rates for commercial customers are based on the previous winter’s
water use. This closely approximates non-irrigation water consumption, which represents
actual sewer use.
CPAU has three sewer rate schedules: one for residents (S-1), one for commercial customers
(S-2), and a special schedule for restaurants (S-6), which discharge higher than average amounts
of grease and oil and, therefore, have a greater impact on the sewer system. CPAU also
maintains a rate schedule for industrial dischargers (S-7), but there are currently no customers
required to be on this rate schedule.
Table 3, below, summarizes the current and proposed rates for all customer classes.
Comparisons with neighboring communities are discussed later in Section 4B.
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Table 3: Sewer Rates (Current and Proposed)
Current
(7/1/2012)
Proposed
(7/1/2015)
Change
$/mo. %
Monthly Service and Minimum Charges ($/month)
S-1 (Residential) Service charge $29.31 $31.95 $2.64 9%
S-2 (Commercial),
S-6 (Restaurant)
Minimum $29.31 $31.95 $2.64 9%
Quantity Rates
S-1 (Residential) $/CCF N/A N/A - -
S-2 (Commercial) $/CCF 5.65 6.16 0.51 9%
S-6 (Restaurant) $/CCF 8.73 9.52 0.79 9%
S-7 (Industrial) $/CCF 2.60 2.83 0.23 9%
The Wastewater Collection Utility’s rates are evaluated and implemented in compliance with
the cost of service requirements and procedural rules set forth in the California Constitution
(Proposition 218). Current rates were structured based on staff’s annual assessment of the
wastewater utility’s financial position, as well as the methodology from the January 2011
Wastewater Collection Utility Cost of Service & Rate Study completed by Utility Financial
Solutions1. Staff tentatively plans to review and update this cost of service study in 2 to 3 years,
unless any major changes occur to the utility’s operations or customer base that would
necessitate an earlier study. Before conducting any new cost of service study, staff will review
current rates and the scope of the study with the Utilities Advisory Commission (UAC) and
Council to determine the City’s policy priorities.
SECTION 3B. RESERVES MANAGEMENT PRACTICES, PROPOSED CHANGE
Staff proposes one change to the Wastewater Collection Utility Reserves Management Practices
(Appendix C) in this Financial Plan. Staff recommends changing the CIP Reserve definition and
management practices so that it becomes a cash flow and contingency reserve for CIP projects.
Currently these purposes are served by a combination of the Operations and Reappropriations
Reserves, while the CIP Reserve acts as a sinking fund to accumulate funds for large one-time
future CIP expenditures (which are rare). The City is changing its budgeting practices starting
with FY 2016, and will no longer reappropriate CIP budgets each year. Instead, CIP budgets for
long-term or ongoing projects will be renewed each year through the annual budget process.
This means that the funds in the Reappropriations Reserve ($6.9 million as of June 30, 2014)
will be released after June 30, 2015. These funds acted as a cash flow reserve for CIP projects,
and some or all of it should be retained for that purpose. Staff proposes to retain these funds in
the CIP reserve, and the proposed changes to the Reserves Management Practices will enable
CPAU to do that.
Staff proposes to initially set a minimum and maximum guideline for the CIP reserve that will
enable it to hold similar amounts to what has typically been held within the Reappropriations
1 Staff Report 1399, Finance Committee, March 1, 2011
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Reserve. Staff intends to review the capital management practices at other agencies and revisit
these guideline levels, but initially, staff proposes a minimum guideline level of 12 to 24 months
of CIP expenditure. CIP-related funds in the Commitments Reserve would be allowed to count
toward that guideline. The CIP-related funds in the Commitments Reserve are equal to the total
remaining balance of all CIP contracts currently in progress, and these funds should be taken
into account when determining whether CIP cash flow and contingency reserves are adequate.
The initial maximum guideline level would be 24 months of CIP expenditures, but the maximum
guideline could be exceeded with Council approval.
Figure 1 shows the Reappropriations Reserve level as of June 30, 2014, as well as the CIP
portion of the Reserve for Commitments.
Figure 1: Capital Reserve
SECTION 3C. PROPOSED RESERVE TRANSFERS
In the FY 2015 Financial Plan several transfers between reserves were approved. Funds were
transferred out of the Emergency Plant Replacement and Rate Stabilization Reserve into the
newly-created Operations Reserve. These transfers were mainly related to setting up the new
approved reserves structure, but a transfer from the Rate Stabilization Reserve to the
Operations Reserve of $1.9 million was also approved. This was a planned drawdown so that a
rate increase would not be necessary. As costs have changed in FY 2015, an additional transfer
of $264,000 is proposed from the Rate Stabilization Reserve to the Operations Reserve.
For FY 2016, staff proposes a $2 million transfer from the Rate Stabilization Reserve. This
transfer is included in the financial projections in this Financial Plan. It will enable CPAU to
maintain adequate Operations Reserve levels while moderating the pace of increase in
Wastewater Collection rates. In addition, staff proposes transfers from the Reappropriations
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Reserve to the CIP Reserve as described in the previous section. The impact of these transfers
on reserves levels can be seen in Appendix A.
SECTION 4. CURRENT STATE OF THE UTILITY
SECTION 4A. UTILITY OVERVIEW
The City of Palo Alto’s Wastewater Collection Utility provides sewer service to the residents and
businesses of Palo Alto. It is distinct from the Wastewater Treatment Utility, which provides
treatment services for surrounding communities in addition to Palo Alto. Nearly 23,300
customers are connected to the sewer system, approximately 21,450 (92%) of which are
residential and 1,850 (8%) of which are non-residential. Residential customers pay a flat fee for
service. Non-residential customers are billed for sewer service based on their metered winter
water usage. There is little variability in revenues for this utility.
The Wastewater Collection Utility delivers all the wastewater it collects to the Regional Water
Quality Control Plant (RWQCP) operated by the City of Palo Alto under a partnership agreement
with several surrounding communities. Palo Alto is responsible for 37% to 40% of the
wastewater sent to the RWQCP. The cost of running the RWQCP is contained in the
Wastewater Treatment Utility and is not described in detail in this Financial Plan, but since
these costs are a major driver of CPAU’s sewer rates, there is some discussion of future trends
in treatment costs in Section 6A. Treatment costs make up nearly half of the Wastewater
Collection Utility’s expenses as shown in Table 1 above.
To collect wastewater from its customers and deliver it to the RWQCP, CPAU owns roughly
18,100 sewer laterals (which collect wastewater from customers’ plumbing systems) and 217
miles of sewer mains (which transport the waste to the treatment plant). These laterals and
mains, along with the associated manholes and cleanouts, represent the vast majority of
infrastructure used to collect wastewater in Palo Alto. CPAU conducts a sewer rehabilitation
and replacement program to replace mains over time as they deteriorate or to increase
capacity. For more discussion of this program, see Section 6A. CIP expense accounts for
roughly a quarter of the utility’s expenditures.
In addition to its CIP, CPAU performs various maintenance activities on the sewer system.
These include inspecting and repairing sewer laterals, responding to sewer overflows, regularly
cleaning sections of the system heavily impacted by fats, oils, and grease (FOG), and building
and replacing sewer laterals for new or redeveloped buildings. The utility also shares the costs
of other operational activities (such as customer service, billing, equipment maintenance, and
street restoration) with the City’s other utilities. These maintenance and operations expenses,
as well as associated administration, debt service, rent, and other costs, make up another
quarter of the utility’s expenses.
SECTION 4B. CURRENT RATES AND COMPETITIVENESS
Table 3 shows the sewer bills for residential customers compared to what they would be under
surrounding communities’ rate schedules. The annual sewer bill for a Palo Alto customer is
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$351.72 under current rates, 34% lower than the average neighboring community. Palo Alto
has the third lowest monthly rate of the group.
Table 3: Residential Monthly Sewer Bill Comparison
Palo Alto
Neighboring Communities Neighboring
Community
Average
Menlo
Park
Redwood
City
Mountain
View Los Altos
Santa
Clara Hayward
29.31 74.42 68.77 27.15 33.95 34.65 28.09 44.51
Based on rates as of January 1, 2015
If the proposed rate change as discussed in Section 3A is adopted by Council, and assuming
other agencies do not change their sewer rates, Palo Alto would be 28% lower than the average
neighboring community and retain the third lowest bill.
Table 4 compares the sewer bills for two classes of commercial customers to what they would
be under surrounding communities’ rate schedules. Note that other communities often have
specific rates for industrial customers that discharge high intensity wastewater, such as food
processors or chemical or electronics manufacturers, but Palo Alto does not currently have any
customers that require these special rates. The annual bill for the median Palo Alto commercial
customer is $949, or 2% above the average neighboring community. For the average restaurant
the annual bill is $5,867, or 1% above the average neighboring community.
Table 4: Commercial Monthly Sewer Bill Comparison
Palo Alto
Neighboring Communities Neighboring
Community
Average
Menlo
Park
Redwood
City
Mountain
View Los Altos
Santa
Clara Hayward
General
Commercial
$79.10 $131.68 $90.40 $56.80 $52.29 $56.45 $76.48 $77.35
Restaurant $488.88 $575.12 $767.20 $389.20 $209.16 $442.01 $514.64 $482.89
Based on rates as of January 1, 2015
If the proposed rate change as discussed in Section 3A is adopted by Council, and assuming
other agencies do not change their sewer rates, bills for Palo Alto restaurants would be about
10% higher than the average neighboring community’s restaurants, and bills for other Palo Alto
commercial customers would be about 11% higher than the average neighboring community’s
commercial customers.
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SECTION 4C. CURRENT UTILITY FINANCIAL STATUS
In FY 2014, treatment costs represented nearly half of the Wastewater Collection Utility’s costs,
followed by administration, overhead, and other costs (22%) and Operations (21%). CIP costs
were lower than usual (7% of costs) due to a temporary hold on new funding until existing
projects were completed. These expenditures are shown in Figure 3. They are also displayed
by category of expenditure in Figure 2. The utility’s revenue in FY 2014 came primarily from
sewer charges (86%), with the remainder coming from capacity and connection fees (10%), and
other sources (4%).
Table 5 contains a summary of the Wastewater Collection Utility’s financial outlook for FY 2015.
Sales are very stable since roughly 60% of sales are to residential customers, whose rate
consists of fixed monthly service charges. A component of business sales revenues is based on
winter water use levels, which are fairly stable as well. For FY 2015, no appreciable variances in
sales revenues from budget are projected. Connection and capacity fees associated with new
development and redevelopment continue to be higher than budget, increasing other
revenues. Operations and maintenance costs are projected to be slightly higher, based on
historical trends. Net withdrawals from reserves are projected to be $1.7 million, slightly lower
than the budgeted $1.8 million.
Table 5: Projected Net Revenue, FY 2015
Wastewater Collection -
Operating Activity
All figures in thousands ($000’s)
Adopted
Budget
FY 2015
Projected
FY 2015
Activity
Variance
to
Budget
Net Sales to date 15,010 15,010 -
Other revenues to date 1,565 1,971 406
Treatment costs to date (8,589) (8,589) -
Other expenses to date (9,823) (10,048) (587)
Total (1,837) (1,656) 181
Figure 3: FY 2014 Costs by Activity
Treatment,
50%
CIP, 7%
Operations,
21%
Admin/
Overhead,
18%
Other, 4%
Figure 2: FY 2014 Costs by Category
Treatment,
50%
CIP, 7%
Supplies/
Materials /
Other, 6%
Salaries/
Benefits,
21%
Admin/
Overhead,
16%
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SECTION 4D. STATUS OF RESERVES
Appendix A shows the projected status of the Wastewater Collection Utility’s reserves at the
end of FY 2015. Total reserves at year end (6/30/2015) are projected to be $14.9 million, with
$2.3 million remaining in the Rate Stabilization Reserve for future years and $4.3 million in the
Operations Reserve, which is at the Reserve Target level. As detailed in Appendix C:
Wastewater Collection Utility Reserves Management Practices and in Section 3B, this plan
includes a change to the structure of the utility’s CIP Reserve to make it a cash flow and
contingency reserve for CIP projects .
SECTION 4E. DEBT SERVICE
The Wastewater Collection Utility’s annual debt service is roughly $128,000 per year. This is
related to one bond issuance that will require payments through 2024. This issuance, the 1999
Utility Revenue Bonds, Series A, is a joint issuance between the Storm Drain, Wastewater
Treatment, and Wastewater Collection Utilities refinancing several different earlier bond
issuances. The City is in compliance with all covenants on that bond. Additional detail is
provided in Appendix D.
SECTION 5. LOOKING BACK
SECTION 5A. BACKGROUND
The Wastewater Utility commenced operation in 1899 to serve Palo Alto and Stanford. In its
first three decades the system grew to 60 miles of sewers. Raw sewage was discharged into
Mayfield Slough at the edge of the Bay. In the 1930s, at the behest of the State Department of
Health, Palo Alto built the South Bay’s first wastewater treatment plant. At that time the sewer
system served 20,500 Stanford and Palo Alto residents and a cannery. The plant was upgraded
twice in the 1940s and 1950s to increase capacity.2 At the same time, the postwar population
and industrial boom in the 1950s required rapid expansion of the sewer system. In the first half
of the 1960s Palo Alto’s area doubled, as did wastewater flows, overwhelming the capacity of
several of the utility’s “trunk lines,” which are the largest diameter main sewer lines carrying
wastewater to the treatment plant. This prompted the City, in 1965, to perform the first of its
sewer master plans to identify needed capacity improvements. At that point the Wastewater
Utility’s system comprised more than 150 miles of sewer mains.3
In 1968 the City signed agreements with the Cities of Mountain View and Los Altos to build a
new regional treatment plant, the RWQCP, which is still in operation today. Since 1940 the City
had been providing treatment services to the East Palo Alto Sanitary District through an existing
agreement, and was also serving Stanford University by transporting wastewater across the
City’s sewer system to the treatment plant. Both of these organizations became partners in the
RWQCP as well. At the same time the Town of Los Altos Hills became the sixth partner as it
2 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pp 2-1
through 2-2
3 Wastewater Collection and Storm Drainage, 1965, Brown and Caldwell Consulting Engineers, pp 4, 6-7, 143
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signed an agreement with the City to connect the Town’s sewer system to the City’s sewer
system to carry wastewater to the new RWQCP. The current agreements for the RWQCP
extend through 2035.4
In the 1980s the City directed increased attention to the condition of its sewer system,
performing a series of studies of groundwater inflow and infiltration into the system. The study
found high rates of infiltration, estimating that as much as 40% of the water going to the
RWQCP from Palo Alto’s system was groundwater and stormwater rather than wastewater.5 In
some parts of Palo Alto the land surface had subsided due to groundwater pumping by the
water utility, and though that practice had ceased many years earlier as the water utility
switched to the Hetch Hetchy system, parts of the city had already subsided two to five feet.
This subsidence had damaged several parts of the sewer collection system, leading to reduced
slopes for sewer mains that caused reductions in capacity. In response to these studies the City
commenced an accelerated sewer system rehabilitation program.6 At that point the sewer
system comprised over 190 miles of mains.7
A Master Plan study in 1988 recommended a variety of capacity expansions, and in the 1990s
the City completed about half of them. However, a 2004 Master Plan update found that the
accelerated sewer rehabilitation plan started in the early 1990s had substantially reduced
infiltration, easing the capacity problems that had led the to the recommended capacity
increases in the 1988 study. Several of the outstanding projects were canceled and replaced
with a different set of projects.8 At the same time the City updated its hydraulic model and
developed greater capacity to do system planning in house.
Today, with a system comprising 217 miles of sewer mains, the Wastewater Collection Utility
continues to serve over 23,300 Palo Alto residences and businesses, and transports wastewater
to the RWQCP for Stanford University and the Town of Los Altos Hills.
SECTION 5B. HISTORICAL EXPENSES AND REVENUES
Table 6 shows the Wastewater Collection Utility’s expenses and revenues for the past five
years. Treatment charges made up 41% of total expenses in FY 2010 and have been increasing
by 8% per year on average. FY 2014 treatment costs were lower than average due to a one
time change in accounting for encumbrances. While FY 2014 treatment charges were 50% of
total cost, this was mainly due to a one-year delay in new capital improvement budgeting for
main replacements. Excluding treatment and CIP, costs for this utility have increased by about
8% on average since 2010.
Sales revenues increased in FY 2013, primarily due to rate increases, but the largest item to
note are the continued increases in connection and capacity fees from new construction. These
have increased 38% since FY 2010. Also notable is the negative interest earned in FY 2013,
4 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pg 2-2
5 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-2
6 CMR 183:90, Infrastructure Review and Update, March 1, 1990
7 Master Plan of the Wastewater Collection System, December 1988, Camp Dresser & McKee, Inc., pg 1-2
8 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-3
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which represents a decrease in the market value of the City’s investment portfolio that
accounting rules require the City to recognize at the end of each fiscal year. Given that the City
holds its investments to maturity these “mark to market” gains and losses do not impact the
utility’s long term financial position.
Table 6: Historical Expenses, Wastewater Collection Utility
SECTION 6. LOOKING FORWARD
SECTION 6A. FIVE YEAR FINANCIAL FORECAST
1. OVERVIEW
Staff has prepared a forecast of costs and revenues through FY 2020. As shown in Table 7 (and
Appendix A), the Wastewater Collection Utility’s total costs are projected to increase by 4.6%
per year on average for FY 2016 through FY 2020. The utility’s sales revenue will need to
increase by 8% annually, on average, through FY 2020 since revenues are currently below costs
in a normal year.
Over the last several years actual costs for operations, maintenance, and CIP have been
relatively low. The cost of maintaining and replacing the distribution system in FY 2013 was
almost the same as it was in FY 2009, and this has offset the rising cost of treatment. This was
2010 2011 2012 2013 2014
5 RETAIL SALES REVENUE 14,490 14,287 14,094 15,019 14,588
6 CONNECTION AND CAPACITY FEES 469 1,081 989 1,609 1,703
7 OTHER / TRANSFERS IN 278 307 264 545 361
8 INTEREST 674 454 494 (211) 339
9 TOTAL SOURCES OF FUNDS 15,910 16,129 15,841 16,963 16,991
10
11 PURCHASES/CHARGES OF UTILITIES (TREATMENT)6,519 7,414 8,895 8,314 6,863
12 ALLOCATED CHARGES (CIP&OPERATING)1,535 1,787 791 1,926 2,359
13 CUSTOMER SERVICE 239 281 72 1 133
14 DISTRIBUTION OPERATIONS 1,997 2,227 2,466 2,617 2,570
15 ENGINEERING (OPERATING)220 195 258 271 310
16 DEBT SERVICE 128 128 128 128 129
17 RENT 115 115 106 110 217
18 OTHER/ TRANSFERS OUT 168 267 88 147 241
19 CAPITAL IMPROVEMENT FUNDING 4,935 4,630 4,274 4,094 989
20 ALLOWANCE FOR UNSPENT CAPITAL FUNDS -
21 TOTAL USES OF FUNDS 15,856 17,044 17,079 17,610 13,811
22
23 INTO / (OUT OF) RESERVES 54 (914) (1,238) (647) 3,180
Fiscal Year
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likely due to the economic downturn, which led to lower costs for services and materials. Staff
has seen indications that this trend has reversed. Prices are rising for contract services and
materials, and this means that the utility is more likely to see rising costs in the future. If costs
for operations, maintenance, and CIP increase more quickly than projected in this plan, either
due to the improving economy or other factors, larger rate increases may be required.
Table 7: Five Year Financial Forecast Summary
2. TREATMENT COSTS
Treatment expenses represent the Wastewater Collection Utility’s share of the costs of
operating the RWQCP. Per the partnership agreements between Palo Alto and its partner
agencies, these charges are assessed based on a formula that takes into account the total
amount of wastewater delivered, the amount of organic material in it, its ammonia content,
and the total suspended solids it is carrying. The Wastewater Collection Utility’s assessed share
of the RWQCP’s revenue requirement fluctuates in the 38% to 40% range. Mountain View is
the other large agency served by the RWQCP (39% of the revenue requirement for FY 2014)
with the smaller agencies (Stanford, Los Altos, East Palo Alto, and Los Altos Hills) making up the
remainder of the flow to the treatment plant.
In the next five years treatment costs are expected to rise by 5% per year, primarily due to
increased CIP spending by the RWQCP. In the longer term, treatment costs are expected to
continue to rise at that rate as major upgrade and replacement projects are undertaken at the
plant. These costs are described in more detail in Section 6E.
Actual Adopted Projected
2014 2015 2015 2016 2017 2018 2019 2020
1
2 % CHANGE IN RETAIL RATE 0.0%0.0%0.0%9.0%9.0%9.0%9.0%6.0%
3 PROJECTED CHANGE IN RETAIL SALES REVENUE - - 1,352 1,473 1,606 1,751 1,272
4
5 RETAIL SALES REVENUE 14,588 15,010 15,010 16,305 17,774 19,374 21,119 22,411
6 CONNECTION AND CAPACITY FEES 1,703 954 1,360 1,402 1,445 1,487 1,519 1,578
7 OTHER / TRANSFERS IN 361 302 302 302 302 302 302 302
8 INTEREST 339 309 309 309 309 309 309 309
9 TOTAL SOURCES OF FUNDS 16,991 16,575 16,981 18,319 19,830 21,473 23,249 24,600
10
11 PURCHASES/CHARGES OF UTILITIES (TREATMENT)6,863 8,589 8,589 9,018 9,469 9,943 10,440 10,962
12 ALLOCATED CHARGES (CIP&OPERATING)2,359 1,844 2,576 2,646 2,725 2,807 2,891 2,978
CUSTOMER SERVICE 133 268 147 155 166 177 188 200
13 DISTRIBUTION OPERATIONS 2,570 2,816 2,875 2,960 3,064 3,174 3,286 3,403
ENGINEERING (OPERATING)310 369 325 335 347 360 373 387
14 DEBT SERVICE 129 128 128 128 128 128 128 128
15 RENT 217 223 223 229 236 243 251 258
16 OTHER/ TRANSFERS OUT 241 108 108 108 108 108 108 108
17 CAPITAL IMPROVEMENT FUNDING 989 4,067 4,067 4,985 5,106 5,221 5,341 5,353
ALLOWANCE FOR UNSPENT CAPITAL FUNDS - - (400) (400) (400) (400) (400) (400)
18 TOTAL USES OF FUNDS 13,811 18,412 18,637 20,164 20,950 21,760 22,605 23,377
19
20 INTO / (OUT OF) RESERVES 3,180 (1,837) (1,656) (1,845) (1,120) (287) 644 1,223
Fiscal Year
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3. OPERATIONS
Operations costs include the Customer Service, Distribution Operations, Engineering, and
Allocated Charges categories in Table 7, above. Debt service, rent, and transfers are also
included in this category. Customer Service costs are primarily related to the call center and
collections on delinquent accounts. The Distribution Operations category includes preventative
and corrective maintenance on sewer mains and laterals, investigation of sewer overflows,
regular cleaning of heavily impacted sections of the sewer system, and services shared with
other utilities (such as street restoration and equipment maintenance). Allocated Charges
include the costs of accounting, purchasing, legal, and other administrative functions provided
by the City’s General Fund staff, as well as shared communications services and Utilities
Department administrative overhead and billing system maintenance costs.
Operations costs are projected to increase by 3% per year, on average, over the forecast period.
Underlying these projections are salary and benefit, consumer price index, and other cost
projections used in the City’s long-range financial forecast.
4. CAPITAL IMPROVEMENT PROGRAM (CIP)
The Wastewater Collection Utility’s CIP consists of the following programs:
The Sewer System Replacement/Rehabilitation Program, under which the Wastewater
Collection Utility replaces aging sewer mains.
Customer Connections, which covers the cost when the Wastewater Collection Utility
installs new services or upgrades existing services at a customer’s request in response
to development or redevelopment. CPAU charges a fee to these customers to cover
the cost of these projects.
Ongoing Projects, which covers the cost of replacing degraded manholes and sewer
laterals, as well as the cost of capitalized tools and equipment.
The Sewer System Replacement and Rehabilitation Program funds the replacement of
deteriorating sewer mains and projects to increase capacity in various parts of the sewer
system. The sewer system consists of over 217 miles of mains, and CPAU uses a variety of tools
to establish which sections are in need of replacement. Maintenance statistics (such as records
of the location and number of sewer overflows on the system) and videotape of sewer mains
during regular cleaning can reveal areas with large amounts of deteriorating pipe. CPAU uses a
scoring system to prioritize which mains to replace first, and coordinates with the Public Works
street maintenance program to avoid cutting into newly repaved streets. A major goal of the
program is to minimize groundwater and rainwater infiltration. As mains deteriorate they
begin to allow groundwater and rainwater to infiltrate the system. Some level of infiltration is
expected on any sewer system, but if there is too much, the combined flow of wastewater and
groundwater/rainwater can overwhelm the capacity of various parts of the sewer system.
Reducing infiltration can reduce the need to expand the system to accommodate increased
flow. To achieve this goal, deteriorating mains are either repaired with a plastic lining or
replaced. CPAU replaces or repairs approximately 25,000 feet of main per year, or 2.5% of the
system.
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The CIP program also funds sewer capacity improvements. CPAU uses a hydraulic model, data
from various flow meters on the system, and land use data to identify sections of the system
that are being overloaded. When sewer mains are operating at or above their capacity on a
regular basis it will increase the likelihood of sewer overflows. CPAU also does occasional
comprehensive master planning studies to identify necessary capacity improvements. The
most recent study, in 2004, identified eight projects, three of which have been completed. The
remaining four projects are low priority projects and will be scheduled and planned as the need
arises.
Over the last few years, main replacement costs have been increasing, for Wastewater as well
as the Gas and Water utilities. The replacement cost per linear foot has increased by between
25 and 50% in some cases. Several factors may be contributing to this. Economic recovery in
the Bay Area, as well as a greater focus on infrastructure improvement by many municipal
agencies and utilities could be creating high demand for contractors in this field. There may be
ongoing greater costs for newer, more leak resistant pipe materials. Should these trends prove
to be less than short-term phenomena, wastewater main replacement budgets may need to be
increased by $1.5 to $1.7 million more per year to keep up the current pace of replacement.
As the last master plan study was updated over a decade ago, and due to these escalating costs,
staff is considering a new master plan study, tentatively planned for 2016, to evaluate the
current state of the sewer system and determine the necessary rate of main replacement in
future years. The process may reveal a need for a higher or lower replacement, or possibly
target areas for more urgent focus. In the case that prices remain high and the updated plan
shows a need for similar rates of replacement that CPAU had previously planned, CIP costs will
rise. Staff analyzed this “High CIP Cost” scenario in Section 6D.
Ongoing Projects and Customer Connections are projected to cost approximately $1.27 million
in FY 2016 and increase by 2.8% each year through the end of the forecast period. Actual
expenses for these projects fluctuate annually depending on how many defective laterals and
manholes are discovered during routine maintenance, as well as how much development and
redevelopment is going on that prompts the replacement or upgrade of sewer laterals. It is
worth noting that property owners pay a fee for sewer lateral replacement or expansion during
redevelopment, so when the number of projects increase, so does fee revenue.
Projected CIP spending is displayed in Table 8 for the 5-year financial forecast period.
Table 8: Projected CIP Spending
Project Category
Current
Budget*
Spending,
Curr. Yr
Remain.
Budget**Committed FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Sewer Rehab/Augmentation 10,338 (334) 10,005 8,828 3,420 3,523 3,620 3,722 3,833
Ongoing Projects 1,510 (272) 1,238 860 882 907 932 958 985
Customer Connections 530 (89) 441 5 383 394 405 416 429
TOTAL 12,379 (695) 11,684 9,692 4,685 4,824 4,957 5,096 5,246
*Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year
**Equal to CIP Reserves (Reserve for Reappropriations + Reserve for Commitments).
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Aside from customer connections, the CIP plan for FY 2016 to FY 2020 is funded by sewer rates
and capacity fees. The details of the plan are shown in Appendix B: Wastewater Collection
Utility Capital Improvement Program (CIP) Detail.
SECTION 6B. REVENUE REQUIREMENT AND SOURCES
The revenue requirement is the total amount of revenue that must be collected from
customers in order to meet the planned expenditures for the Wastewater Collection Utility.
Costs for the Wastewater Collection Utility are projected to increase by nearly 5% per year
through FY 2020. Without rate increases, by FY 2020 costs would exceed revenues by nearly
$6.2 million per year. Matching costs to revenues by FY 2020 will require 9% increases in sales
revenues each year for FY 2016 to FY 2019, as shown in Figure 4, below. There was no rate
increase in FY 2015. Instead, there was a one-time cost savings since there was no new sewer
main replacement project in FY 2014, and there was a one-time decrease in treatment costs
related to a change in billing methodology by the RWQCP. The utility has seen substantial
increases in connection and capacity fee revenues in recent years, offsetting the need for
increased sales revenue, and these are assumed to continue, albeit slightly reduced from
current levels. Each of the projected FY 2016 to FY 2019 rate increases will increase residential
sewer bills by $2.64 to $3.42 per month.
Figure 4: Wastewater Collection Fund Revenue and Cost Projections
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Figure 5 shows the reserve reallocations that implement the current and proposed Reserves
Management Practices.
Figure 5: Wastewater Collection Reserves Projections
SECTION 6C. RISK ASSESSMENT AND RESERVES ADEQUACY
The Wastewater Collection Utility currently has one contingency reserve, the Operations
Reserve, and this Financial Plan maintains reserves within their approved guideline levels
throughout the forecast period, as shown in Figure 6 below. Reserve levels also exceed the
short term risk assessment for the utility.
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Figure 6: Operations Reserve Adequacy
Staff performs an annual assessment of risks for the Wastewater Collection Utility. For this
evaluation, staff estimates the revenue shortfall due to:
1. the maximum observed budget-to-actual variance in one year during the past five years;
2. an increase of 10% in system improvement CIP expenditures for the year; and
3. an increase of 10% in treatment costs.
Table 9 summarizes the risk assessment calculation for the Wastewater Collection Utility. The
Operations Reserve is projected to be adequate to manage these levels of risk over the entire
forecast period.
Table 9: Wastewater Collection Risk Assessment
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Total Revenue ($000) 15,020 16,315 17,784 19,384 21,129
Max. Historical Budget-to-Actual variance 10% 10% 10% 10% 10%
Budget-to-Actual Risk ($000) 1,502 1,632 1,778 1,938 2,113
System Rehabilitation CIP Budget ($000) 3,695 4,602 4,712 4,816 4,925
CIP Contingency @10% ($000) 370 460 471 482 493
Treatment Budget ($000) 8,589 9,018 9,469 9,943 10,440
Treatment Cost Contingency @10% ($000) 859 902 947 994 1,044
Total risk assessment value ($000) 2,731 2,994 3,196 3,414 3,650
Projected Operations Reserve Level ($000) 4,482 3,663 3,376 4,019 5,242
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SECTION 6D. ALTERNATE SCENARIOS
The forecast described in the previous sections assumes that wastewater main replacement
costs are about the same as they were in previous years. There is substantial uncertainty about
this assumption. Staff has created a separate CIP scenario in which main replacement budgets
are 50% higher than the base forecast. As described in Section 6A (Five Year Financial Forecast)
prices for the most recent main replacement projects have been nearly 50% higher than
previous projects. The current forecast assumes that these prices have been temporary spikes
due to the economy picking up, but that may not be the case. The “High CIP Cost” scenario
assumes that CPAU continues its current pace of main replacement and prices remain at these
higher levels.
Figure 7 shows the rate increases under the High CIP Cost scenario and the base case
(inflationary increases in CIP budgets). If this scenario becomes reality, it may be possible to
phase in the increase in CIP budgets over several years to defer the rate impact into later years.
CPAU will be developing a Wastewater Collection System Master Plan, planned for 2016. It will
give CPAU the information it needs to determine the feasibility of these types of strategies.
Figure 7: Rate increases for High CIP Cost scenario
SECTION 6E. LONG TERM OUTLOOK
In the longer term (5 to 35 years) the primary factor that could lead to increased costs for the
Wastewater Collection Utility are major upgrades at the RWQCP, a share of which will be
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allocated to the utility as part of treatment costs. These upgrades includes replacement or
rehabilitation of the parts of the facility that pump raw sewage to the main treatment works
(the headworks), separate out primary sludge (the primary settling tank), process sludge (the
bio-solids facility), and treat wastewater (the fixed film reactors). Upgrades to the laboratories
and operational buildings are planned as well. In addition, the 72-inch regional trunk sewer line
flowing into the plant needs to be evaluated and rehabilitated. Based on detailed project cost
projections provided by RWQCP staff, treatment costs are likely to continue to increase by
roughly 5% per year through at least 2030. Two of Palo Alto’s comparison cities, Mountain
View and Los Altos, are partners in the RWQCP and will see similar increases, but other
comparison agencies may not.
SECTION 6F. COMMUNICATIONS PLAN
The FY 2016 Wastewater Collection Utility communications strategy covers three primary areas:
rates, operations and infrastructure, and safety. Communication about wastewater rate
adjustments will highlight the important infrastructure and operations upgrades that are
occurring at the Regional Water Quality Control Plant to improve wastewater collection utility
services. To keep customers apprised of the status and accomplishments of CIP projects, a
network of project web pages are maintained and updated as needed. Traffic is driven to the
website via ads in publications, newspaper inserts, social media and email blasts.
An important communications topic for the wastewater utility is avoiding sewer back-ups due
to FOG (fats, oil and grease) and trash being dumped down drains and toilets. Safety topics are
emphasized year-round. Staff continues its outreach goal of educating customers about the
utility’s gas-sewer line cross-bore inspection program, including the importance of calling
Utilities first when there is a sewer back-up. Staff ran a successful campaign featuring one of
our primary sewer repair crewmen to highlight this issue.
Promotional activity about wastewater utility maintenance and safety operations includes use
of bill inserts, ads in local print publications, website pages, email blasts and social
media. While print materials and website pages feature prominently, CPAU is increasing the
outreach emphasis on use of direct mail, social media and digital advertising including videos
and short commercials on the local television channels. Staff is also attending more community
safety/emergency preparation events and neighborhood meetings.
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APPENDICES
Appendix A: Wastewater Collection Financial Forecast Detail
Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP)
Detail
Appendix C: Wastewater Collection Utility Reserves Management Practices
Appendix D: Wastewater Collection Debt Service Details
Appendix E: Sample of Wastewater Collection Outreach Materials
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APPENDIX A: WASTEWATER COLLECTION FINANCIAL FORECAST DETAIL
Actual Adopted Projected
2014 2015 2015 2016 2017 2018 2019 2020
1
2 % CHANGE IN RETAIL RATE 0.0%0.0%0.0%9.0%9.0%9.0%9.0%6.0%
3 PROJECTED CHANGE IN RETAIL SALES REVENUE - - 1,352 1,473 1,606 1,751 1,272
4
5 RETAIL SALES REVENUE 14,588 15,010 15,010 16,305 17,774 19,374 21,119 22,411
6 CONNECTION AND CAPACITY FEES 1,703 954 1,360 1,402 1,445 1,487 1,519 1,578
7 OTHER / TRANSFERS IN 361 302 302 302 302 302 302 302
8 INTEREST 339 309 309 309 309 309 309 309
9 TOTAL SOURCES OF FUNDS 16,991 16,575 16,981 18,319 19,830 21,473 23,249 24,600
10
11 PURCHASES/CHARGES OF UTILITIES (TREATMENT)6,863 8,589 8,589 9,018 9,469 9,943 10,440 10,962
12 ALLOCATED CHARGES (CIP&OPERATING)2,359 1,844 2,576 2,646 2,725 2,807 2,891 2,978
CUSTOMER SERVICE 133 268 147 155 166 177 188 200
13 DISTRIBUTION OPERATIONS 2,570 2,816 2,875 2,960 3,064 3,174 3,286 3,403
ENGINEERING (OPERATING)310 369 325 335 347 360 373 387
14 DEBT SERVICE 129 128 128 128 128 128 128 128
15 RENT 217 223 223 229 236 243 251 258
16 OTHER/ TRANSFERS OUT 241 108 108 108 108 108 108 108
17 CAPITAL IMPROVEMENT FUNDING 989 4,067 4,067 4,985 5,106 5,221 5,341 5,353
ALLOWANCE FOR UNSPENT CAPITAL FUNDS - - (400) (400) (400) (400) (400) (400)
18 TOTAL USES OF FUNDS 13,811 18,412 18,637 20,164 20,950 21,760 22,605 23,377
19
20 INTO / (OUT OF) RESERVES 3,180 (1,837) (1,656) (1,845) (1,120) (287) 644 1,223
21
24 ENDING COMMITMENTS & REAPPROPRIATIONS 8,312 8,312 1,454 1,454 1,454 1,454 1,454 1,454
23 ENDING PLANT REPLACEMENT RESERVE - - - - - - - -
ENDING CIP RESERVE - - 6,858 6,858 6,858 6,858 6,858 6,858
22 ENDING RATE STABILIZATION RESERVE 4,556 2,322 2,322 301 - - - -
ENDING OPERATIONS RESERVE 3,728 4,127 4,306 4,482 3,663 3,376 4,019 5,242
25 UNASSIGNED RESERVES - - - - - - - -
26 RISK ASSESSMENT VALUE 2,230 2,722 2,722 2,876 3,043 3,221 3,409 3,598
27
28 OPERATIONS RESERVE GUIDELINES
29 MIN (60 DAYS TREATMENT/O&M EXP)1,915 2,358 2,461 2,561 2,670 2,785 2,904 3,029
TARGET (105 DAYS TREATMENT/O&M EXP)3,352 4,127 4,306 4,482 4,673 4,873 5,082 5,300
30 MAX (150 DAYS TREATMENT/O&M EXP)4,788 5,895 6,152 6,402 6,675 6,961 7,260 7,571
31
Fiscal Year
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APPENDIX B: WASTEWATER COLLECTION UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Project #Project Name
Reappropriated /
Carried Forward from
Previous Years
Current Year
Funding
Budget
Amendments
Spending,
Current Year
Remaining in
CIP Reserve
Fund Commitments FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
SEWER SYSTEM REHABILITATION AND AUGMENTATION (SSR/A) PROGRAM
WC-07004 SSR/A - Project 20 39,293 - - - 39,293 - - - - - -
WC-08012 SSR/A - Project 21 188,809 - - (23,087) 165,722 - - - - - -
WC-09001 SSR/A - Project 22 (37,132) - - (43,777) (80,909) 6,087 - - - - -
WC-10002 SSR/A - Project 23 1,187,290 - - (95,978) 1,091,312 1,160,999 - - - - -
WC-11000 SSR/A - Project 24 2,512,435 - - (67,577) 2,444,858 2,282,801 - - - - -
WC-12001 SSR/A - Project 25 2,854,977 - - (74,366) 2,780,611 2,296,851 - - - - -
WC-13001 SSR/A - Project 26 272,550 3,000,000 - (28,745) 3,243,805 3,040,000 - - - - -
WC-14001 SSR/A - Project 27 - 320,000 - - 320,000 40,950 3,090,000 - - - -
WC-15001 SSR/A - Project 28 - - - - - - 330,000 3,183,000 - - -
WC-16001 SSR/A - Project 29 - - - - - - - 340,000 3,270,000 - -
WC-17001 SSR/A - Project 30 - - - - - - - - 350,000 3,362,000 -
WC-19001 SSR/A - Project 31 - - - - - - - - - 360,000 3,462,500
WC-20000 SSR/A - Project 32 - - - - - - - - - - 370,000
Subtotal, Sewer Rehab./Augmentation 7,018,222 3,320,000 - (333,530) 10,004,692 8,827,688 3,420,000 3,523,000 3,620,000 3,722,000 3,832,500
ONGOING PROJECTS
WC-13002 Fusion & Gen. Equip./Tools 28,132 50,000 - - 78,132 - 50,000 50,000 50,000 50,000 50,000
WC-15002 WW System Improvements 281,702 225,000 - (48,054) 458,648 75,653 232,000 239,000 246,000 253,000 260,000
WC-99013 Sewer / Manhole Rehab.825,516 100,000 - (224,261) 701,255 784,358 600,000 618,000 636,000 655,000 675,000
Subtotal, Ongoing Projects 1,135,350 375,000 - (272,315) 1,238,035 860,011 882,000 907,000 932,000 958,000 985,000
CUSTOMER CONNECTIONS (FEE FUNDED)
WC-80020 Sewer System Extensions 158,227 372,000 - (89,334) 440,893 4,572 383,000 394,000 405,000 416,000 428,500
Subtotal, Customer Connections 158,227 372,000 - (89,334) 440,893 4,572 383,000 394,000 405,000 416,000 428,500
GRAND TOTAL 8,311,799 4,067,000 - (695,179) 11,683,620 9,692,271 4,685,000 4,824,000 4,957,000 5,096,000 5,246,000
Funding Sources
Connection/Capacity Fees 750,000 - 871,000 894,000 917,000 940,000 986,534
Funded by Rates and Other Revenue 3,695,000 - 3,814,000 3,930,000 4,040,000 4,156,000 4,259,466
CIP-RELATED RESERVES DETAIL
6/30/2014
(Actual)12/31/2014
Reappropriations 6,858,799 1,991,349
Commitments 1,453,000 9,692,271
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 24 | P a g e
APPENDIX C: WASTEWATER COLLECTION UTILITY RESERVES
MANAGEMENT PRACTICES
(Amendments to this section are proposed. See the proposed resolution adopting this Financial
Plan. This section will be added to the Financial Plan following adoption of any amendments to
this section.)
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 25 | P a g e
APPENDIX D: WASTEWATER COLLECTION DEBT SERVICE DETAILS
The Wastewater Collection Utility currently makes payment on its share of one bond issuance,
the 1999 Utility Revenue Bonds, Series A, which is due to be retired in 2024. This $17.7 million
issuance refinanced various earlier Storm Drain, Wastewater Treatment, and Wastewater
Collection Utility bond issuances. The Wastewater Collection Utility’s share of the issuance was
roughly $1.9 million, which represented the second refinancing of the remaining principal of a
1990 bond issuance that itself was a refinancing of a 1985 issuance that financed a variety of
improvements to the sewer system. The cost of debt service for the Wastewater Collection
Utility’s share of this bond issuance for the financial forecast period is as follows:
Table 100: Wastewater Collection Utility Debt Service ($000)
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
1999 Utility
Revenue Bonds,
Series A
128 128 128 128 128 128
The 1999 Utility Revenue Bonds include two covenants stating that 1) the Wastewater
Collection Utility will maintain a debt coverage ratio of 125% of debt service, and 2) that the
City will maintain “Available Reserves”9 equal to five times the annual debt service. The current
financial plan maintains compliance with both covenants throughout the forecast period.
Compliance with covenant one is shown below in Table 11, below. Due to the small size of the
annual debt service payment for these bonds, the Wastewater Collection Utility’s Operations
Reserve alone more than satisfies the second covenant at more than 30 times annual debt
service throughout the forecast period.
Table 111: Debt Service Coverage Ratio ($000)
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Revenues 16,981 18,319 19,830 21,473 23,249 24,600
Expenses (Excl. CIP
and Debt Service) (14,842) (15,451) (16,115) (16,811) (17,537) (18,296)
Net Revenues 2,139 2,868 3,715 4,662 5,712 6,304
Debt Service 128 128 128 128 128 128
Coverage Ratio 1671% 2241% 2902% 3642% 4463% 4925%
The Wastewater Collection Utility’s reserves (but not its net revenues) are also considered
security for the Storm Drain and Wastewater Treatment Utilities’ shares of the debt service on
the 1999 bonds. Throughout the term of the bonds there remains a small risk that the
Wastewater Collection Utility’s reserves could be called upon to make a debt service payment
on behalf of one of those utilities if it cannot meet its debt service obligations. Staff does not
foresee this occurring based on the current financial condition of those utilities. If the
9 Available Reserves as defined in the 1999 Utility Revenue Bonds included reserves for the Water, Wastewater
Treatment, Wastewater Collection, Refuse, Storm Drain, Electric, and Gas Utilities
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 26 | P a g e
Wastewater Collection Utility’s reserves were used this way, any amounts advanced would
have to be repaid by the borrowing utility.
One other bond series is secured by the net revenues (but not the reserves) of the Wastewater
Collection Utility. The 1995 Series A Utility Revenue Bonds issued for the Storm Drain utility
was secured by the net revenues of the City’s “Enterprise,” which was defined as the City’s
water, gas, wastewater, storm drain, and electric utilities, and are senior to the 1999 bonds
referenced above. Debt service payments of roughly $680,000 per year are made on the 1995
Series A bonds by the City’s Storm Drain Utility, and staff does not currently foresee any risk of
that utility being unable to make payment.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
APPENDIX E: SAMPLE OF WASTEWATER COLLECTION OUTREACH MATERIALS
Attachment D
* NOT YET APPROVED *
150223 mf 6053246
Resolution No. _____
Resolution of the Council of the City of Palo Alto Amending Rate
Schedules S-1 (Residential Wastewater Collection and Disposal), S-2
(Commercial Wastewater Collection and Disposal), S-6 (Restaurant
Wastewater Collection and Disposal) and S-7 (Commercial
Wastewater Collection and Disposal – Industrial Discharger)
R E C I T A L S
A. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of
the City of Palo Alto may by resolution adopt rules and regulations governing utility services,
fees and charges.
B. Pursuant to Article XIIID Sec. 6 of the California Constitution, on ________, 2015,
the City of Palo Alto held a public hearing to consider all protests against the proposed
wastewater collection rate amendments.
C. The total number of written protests presented by the close of the public
hearing was less than fifty percent (50%) of the total number of customers and property
owners subject to the proposed wastewater collection rate amendments.
The Council of the City of Palo Alto RESOLVES, as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule S-1 (Residential Wastewater Collection and Disposal) is hereby amended to read
as attached and incorporated. Utility Rate Schedule S-1, as amended, shall become effective
July 1, 2015.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule S-2 (Commercial Wastewater Collection and Disposal) is hereby amended to read
as attached and incorporated. Utility Rate Schedule S-2, as amended, shall become effective
July 1, 2015.
SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule S-6 (Restaurant Wastewater Collection and Disposal) is hereby amended to read
as attached and incorporated. Utility Rate Schedule S-6, as amended, shall become effective
July 1, 2015.
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) is
hereby amended to read as attached and incorporated. Utility Rate Schedule S-7, as amended,
shall become effective July 1, 2015.
Attachment D
* NOT YET APPROVED *
150223 mf 6053246
SECTION 5. The Council finds that the revenue derived from the adoption of this
resolution shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of
the City of Palo Alto.
SECTION 6. The Council finds that the fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
SECTION 7. The Council finds that the adoption of this resolution changing
wastewater collection rates to meet operating expenses, purchase supplies and materials, meet
financial reserve needs and obtain funds for capital improvements necessary to maintain
service is not subject to the California Environmental Quality Act (CEQA), pursuant to California
Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec.
15273(a). After reviewing the staff report and all attachments presented to Council, the
Council incorporates these documents herein and finds that sufficient evidence has been
presented setting forth with specificity the basis for this claim of CEQA exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
RESIDENTIAL WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-1-1 Effective 7-1-20125
dated 7-1-20112 Sheet No S-1-1
A. APPLICABILITY:
This schedule applies to each occupied residential dwelling unit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides wastewater service.
C. RATES:
Per Month
Each domestic dwelling unit ..................................................................................................
$29.3131.95
D. SPECIAL NOTES:
1. Any dwelling unit being individually served by a water, gas, or electric meter will be
considered continuously occupied.
2. For two or more occupied dwelling units served by one water meter, the monthly wastewater
charge will be calculated by multiplying the current wastewater rate by the number of
dwelling units.
3. Each developed separate lot shall have a separate service lateral to a sanitary main or
manhole.
{End}
ATTACHMENT E
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-2-1 Effective 7-1-20125
dated 7-1-20112 Sheet No S-2-1
A. APPLICABILITY:
This schedule applies to all commercial establishments other than those served under Utility Rate
Schedule S-1 (Domestic Wastewater Collection and Disposal), Rate Schedule S-6 (Restaurant
Wastewater Collection and Disposal) or Rate Schedule S-7 (Commercial Establishments
Wastewater Disposal – Industrial Discharger).
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides wastewater services.
C. RATES:
1. Minimum Charge per connection per month .............................................................$29.3131.95
2. Quantity Rates, per 100 cubic feet (See Section D.1) .............................................$5.656.16D. SPECIAL NOTES:
1. The monthly charge for the quantity rate set forth in Section C.2 of this rate schedule will
be based upon the average water usage for the months of January, February and March,
and applied in the following July. If a water meter is identified as exclusively serving
irrigation landscaping, such meter will be exempted from wastewater charge calculations.
Customers without an applicable usage history will be charged at the minimum monthly
charge until such time as such usage may reasonably be established by the City of Palo
Alto Utilities Department.
2. The City of Palo Alto Utilities Department may require wastewater metering facilities, in
which case service will be governed by terms of a special agreement between the City
and the Customer.
{End}
RESTAURANT WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-6
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-6-1 Effective 7-1-20125
dated 7-1-2012 Sheet No S-6-1
A. APPLICABILITY:
This schedule applies to all restaurants.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides wastewater services.
C. RATES:
1. Minimum charge per connection per month ......................................................... $29.3131.95
2. Quantity Rates, per 100 cubic feet of monthly metered water usage .........................$ 8.739.52
D. SPECIAL NOTES:
1. The City of Palo Alto Utilities Department may require wastewater metering facilities, in
which case service will be governed by terms of a special agreement between the City and
the Customer.
{End}
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL
–INDUSTRIAL DISCHARGER
UTILITY RATE SCHEDULE S-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-7-1 Effective 7-1-20125
dated 7-1-2012 Sheet No S-7-1
A. APPLICABILITY:
This schedule applies to any establishment requiring sampling of industrial discharges in excess
of 25,000 gallons per day, or special discharge monitoring, as defined in Rule and Regulation 23,
Section D.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides wastewater services.
C. RATES:
1. Collection System Operation, Maintenance, and Infiltration Inflow:
$2,077.54 per million gallons ($1.5578 per 100 cubic feet of metered water use).
2. Advanced Waste Treatment Operations and Maintenance Charge:
$1,403.74 per million gallons ($1.05 per 100 cubic feet of metered water use
3. $ 247.56 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand)
4. $ 596.62 per 1000 lbs of SS (Suspended Solids)
5. $ 3,983.85 per 1000 lbs of NH3 (Ammonia)
6. $ 14,781.25 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc)
D. SPECIAL NOTES:
1. Water usage will be determined as defined in Rule and Regulation 23, Section D. If a
water meter is identified as exclusively serving irrigation landscaping, such meter will be
exempted from wastewater charge calculations.
2. The City of Palo Alto Utilities Department may require wastewater metering facilities, in
which case service will be governed by terms of a special agreement between the City of
Palo Alto and the Customer.
3. Charges for large discharges will be determined on the basis of sampling as outlined in
Utilities Rule and Regulation 23, Section D. However, for purposes of arriving at an
accurate flow estimate, discharge meters, if installed, can be utilized to measure outflow
for billing purposes. Annual charges will be determined and allocated monthly for billing
purposes.
{End}
EXCERPTED DRAFT MINUTES OF THE MARCH 4, 2015
UTILITIES ADVISORY COMMISSION MEETING
ITEM: 5: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt: (1) a Resolution Approving the Fiscal year 2016 Wastewater
Collection Financial Plan and Amending the Wastewater Collection Utility Reserve Management
Practices, and (2) a Resolution amending State Schedules S-1 (Residential Wastewater
Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant
Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal
–Industrial Discharger)
Resource Planner Eric Keniston summarized the WWC financial projection, noting that rate
increases of 9%/year for the next four years are required as presented in February when staff
presented the preliminary financial forecasts. Costs are increasing at 3 to 5% per year, but
revenues are currently below costs so rates must increase at a higher rate than costs.
ACTION:
Chair Foster made a motion to recommend that the City Council Adopt: (1) a Resolution
Approving the Fiscal year 2016 Wastewater Collection Financial Plan and Amending the
Wastewater Collection Utility Reserve Management Practices, and (2) a Resolution amending
State Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial
Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and
S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger). Vice Chair
Waldfogel seconded the motion. The motion carried unanimously (6-0 with Chair Foster,
Commissioners Chang, Eglash, Hall, Melton and Vice Chair Waldfogel voting yes, Commissioner
Cook absent).
ATTACHMENT F
City of Palo Alto (ID # 5566)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/7/2015
City of Palo Alto Page 1
Summary Title: Council Adoption of a Resolution Amending the R-1
Residential Refuse Rates for Fiscal Year 2016
Title: Council Adoption of a Resolution Amending the R-1 Residential Refuse
Rates for Fiscal Year 2016 to Cover a New Food Scrap Collection Program and
Other Program Costs, and to Incorporate Structural Changes
From: City Manager
Lead Department: Public Works
Recommendation
Staff recommends the Finance Committee:
Recommend the Council’s adoption of the attached resolution (Attachment
A) amending Utility Rate Schedule R-1 (Residential Refuse Rate)
(Attachment B) to implement a rate increase and remove the listing of
Individual Program Charges on the Refuse bill.
Executive Summary
Residential refuse rates have not increased since July 1, 2012,and were
decreased in November 2014 due to cost savings related to the street sweeping
program. Staff is recommending a rate increase for residential refuse rate
customers in FY 2016 to begin implementation of a three-year plan to balance
residential sector revenues with expenses.The rate increase will also cover a new
residential food scrap collection program and inflation related increases in
existing programs. Preliminarily, staff is recommending a residential rate increase
of approximately 9% in FY 2016,9% in FY 2017,and 8% in FY 2018 for customers
with minican (20 gallon) and 32 gallon service levels,which together comprise
85% of all residential customers. Staff is also recommending a structural change
to the residential refuse portion of the bill eliminating the listing of individual
program charges (which currently include street sweeping, household hazardous
waste, and annual clean-up day)on monthly bills.This change is needed because
too many similar individual program costs have now been identified to make
City of Palo Alto Page 2
showing them all on the monthly bill workable,and because this new billing
approach will be consistent with the other City utilities.Commercial rates have
not increased since October 2010 and would remain unchanged for FY 2016.
Recommended Residential Rate Increase for FY 2016
Cart
Size
Current
Rates
Recommended
FY 2016 Rates
20 gal $22.29 $24.30
32 gal $40.14 $43.75
64 gal $76.34 $87.51
96 gal $110.26 $131.26
Background
Residential Refuse service includes:
·Garbage service –weekly curbside collection of the black garbage cart by
GreenWaste of Palo Alto (GreenWaste), the City’s contract hauler;
processing the garbage at the Sunnyvale Material and Recovery Transfer
(SMaRT) Station; and landfilling the residual material at the Kirby Canyon
Landfill.
·Recycling service –weekly curbside collection of the blue recycling cart by
GreenWaste; sorting the recyclables into saleable commodities at the
GreenWaste Recovery Charles Street Material Recovery Facility (MRF); and
electronic waste collection.
·Compost/Yard Trimming service –in FY 2016 Staff is recommending a new
program that would allow residents to place food scraps and food soiled
paper into the green, yard trimmings cart as part of the weekly collection.
Residents will also receive a small kitchen bucket for food scraps; and the
green cart materials collected by GreenWaste will be digested and
composted at the Zero Waste Energy Development (ZWED)facility in north
San Jose.
·Household Hazardous Waste (HHW) service –every Saturday from 9 am to
11 am and the first Friday of the month residents can take up to 15 gallons
or 125 pounds of HHW to the HHW Station at 2501 Embarcadero Way. The
HHW is safely recycled or disposed. A reuse cabinet is also available to
residents at the HHW Station during operating hours where residents can
pick up usable household products like paints, cleaners, and unused motor
oil.
City of Palo Alto Page 3
·Street Sweeping service –street sweepers remove trash, leaves, and other
debris from streets to ensure that the storm drains stay clear keeping trash
from the Bay and ensuring that city streets do not flood.
·Annual Clean-up Day –each refuse customer can contact GreenWaste to
pick up large items that cannot fit in the black, garbage cart, once a year.
·Zero Waste Palo Alto support –residents can contact Zero Waste Palo Alto
City staff to gain valuable information on home composting, reducing food
waste, and zero waste events.
Staff has recently contracted with a consultant to prepare a Solid Waste Rate
Structure and Analysis Report (Attachment C).The report noted that the revenue
collected from residential refuse customers was less than the cost to service the
residential customers. The following residential rates have been in effect since
July 1, 2012:
Table 1: Current Residential Monthly Refuse Rates
Variable Individual Programs Total
Cart Size Current
Monthly
Street
Sweeping*
HHW Annual
Clean-up Day
20 gallon (minican)$13.79 $5.26 $1.07 $2.17 $22.29
32 gallon (standard)$31.64 $5.26 $1.07 $2.17 $40.14
64 gallon $67.84 $5.26 $1.07 $2.17 $76.34
96 gallon $101.76 $5.26 $1.07 $2.17 $110.26
*Street Sweeping was reduced from $6.66 per month on November 1, 2014, when the price
was lowered to reflect the current cost of street sweeping service.
In 2014, staff (with consultant support)re-examined the allocations among the
three solid waste sectors, residential, commercial, and roll-off. Staff identified a
number of programs where a greater percentage of costs should be allocated to
the commercial and roll-off sectors. The most significant program cost shift was
relative to the landfill closure and ongoing maintenance, which are costs that
should have been,in large part, allocated to the commercial and roll-off sectors –
the sectors that contributed the most material to the landfill.
Discussion
It is currently estimated that single-family residential customers will provide $8.7
million in revenue in FY 2016. Based on the Solid Waste Rate Structure and
Analysis Report, the cost associated with servicing these customers is
City of Palo Alto Page 4
$10,689,241. The Refuse Fund receives some revenue ($322,183) from non-rate
sources; therefore, the residential revenue requirement that is, (the amount of
money the City needs to cover residential expenses) is $10,367,058 for FY 2016.
Staff is presenting a three-year plan that will provide for sufficient revenues in the
residential sector to cover all residential expenses. The proposed three-year rate
plans include inflation as calculated by the current San Francisco-Oakland-San
Jose MSA consumer price index all urban consumers (CPI-U) increases at 2.5% for
FY 2017 and FY 2018. The projected FY 2018 revenue requirement is $10,908,201,
net of revenues from non-rate sources. To simplify the Refuse portion of the
utility bill, and present the billing consistent with all other City utilities, staff also
recommends not showing the separate program charges of street sweeping,
household hazardous waste, and annual clean-up day that are currently shown on
the residential utility bills.These programs, along with recycling collection and
processing, compost collection and processing, ongoing maintenance for the
closed Palo Alto landfill, and zero waste programs, would all be included in the
one charge for the garbage cart.
Staff suggests adjusting the residential monthly rates in the table below to cover
all residential expenses, while encouraging zero waste behavior changes. Staff
proposes that this rate adjustment be spread over a three year period to soften
the cost increases for residents and in consideration of the accumulative impacts
of all City utility rate adjustments. These residential rate increases also include the
cost of a vital new program:a residential curbside food scrap collection program.
Table 3: Recommended Adjustments (Single-Family Residential Rates)
Cart
Size
Current
Monthly
Rate*
Projected
FY 2016
Projected
FY 2017
Projected
FY 2018
Projected
Increase over 3
years
20 gal $22.29 $24.30 9%-
$2.01 $26.48 9%-
$2.18 $28.60 8%-
$2.12 $6.31 28%
32 gal $40.14 $43.75 9%-
$3.61 $47.69 9%-
$3.94 $51.51 8%
$3.82 $11.37 28%
64 gal $76.34 $87.51 14.6%-
$11.17 $95.38 9%-
$7.88 $103.01 8%-
$7.63 $26.67 35%
96 gal $110.26 $131.26 19%-
$14.54 $143.07 9%-
$11.81 $154.52 8%-
$11.45 $44.26 40%
Notes
City of Palo Alto Page 5
1.Rates include street sweeping, household hazardous waste, and the annual clean-up
day.
2.The table above shows projected rate modification over 3 years. Staff would bring
forward rate adjustments one year at a time for review and approval by City Council.
3.Projected fees assume a revenue loss from the migration of 5% of residents moving to
smaller carts. However, based on actual customer choices to move to smaller cart sizes,
the annual increases may be different.
FY 2018 Revenue Requirement (net of revenues from non-rate sources): $10,908,201
FY 2018 Projected Revenue:$10,908,581
Projected Surplus/<Deficit>(surplus to rate stabilization reserves)$380
Staff also proposes eliminating rates for residential services larger than 96 gallons.
This change will ensure that the customer’s service levels better match the actual
number of carts a customer uses. The largest cart available to a customer is 96
gallons. Customers may still elect to have more garbage capacity. For example, a
customer with 160 gallon garbage service would now need to subscribe to a
quantity 5 of 32 gallon service. Staff is also proposing to eliminate multiple week
pick-ups for residential customers. Currently, only five customers have their
garbage picked up twice a week. These changes will simplify the R-1 Refuse Rate
Schedule. The rate for backyard service would increase from $3.35 per month to
$3.66 per month to fully cover costs.
Currently, 34% of the nearly 18,000 single-family residential customers subscribe
to minican service while 52% subscribe to 32-gallon cart service. Due to the
relatively large number of customers with smaller carts, staff estimates that five
percent of customers will downsize their garbage cart (e.g., change service from a
32-gallon cart to a minican).If a greater percentage of customers switch to
smaller carts, staff will need to reexamine the projected revenue and may
recommend an additional increase to the minican rate.
Rate Structure Modification
Staff proposes that the monthly Refuse Rate include all of the residential services
costs in the one price (listed in the table above), instead of separating individual
program charges for street sweeping, household hazardous waste, and the annual
clean-up day currently shown on the bill. When there are year-to-year changes in
these costs (contract pricing, CPI adjustments, etc.),staff will not be required to
raise the refuse rates in each of these years if staff can make offsetting reductions
in other programs.In addition, staff has identified many other costs such as
City of Palo Alto Page 6
recycling service, compostable service, some SMaRT Station costs, and landfill
maintenance costs that could also be listed separately as a fixed fee but would
not be practical or possible with the SAP current billing system.
Staff calculated the single family residential monthly rates (listed in the table
above) with the following three-step method:
1)First, add the fixed costs per single family residences for street sweeping,
household hazardous waste program, annual Clean Up-Day,recyclables in
the blue cart service, yard trimmings in the green cart service to determine
a combined fixed cost per residence.
Table 4: FY 2018 Fixed Costs
Recycling Compostables Household
Hazardous
Waste
Street
Sweeping
Annual
Clean-Up
Day
Monthly
cost
per
household
$3,024,949 $2,231,286 $462,405 $307,305 $464,267 $30.38
2)Second, calculate a cost-per-gallon for the garbage cart by dividing the
overall costs of residential refuse service by the total number of gallons of
service within the City. This would yield a variable cost per gallon that
would be used to calculate the variable cost per service for refuse
collection.
Table 5: FY 2018 Variable Costs
Solid Waste Landfill Monthly cost
per household
$4,769,176 $435,262 $21.40
3)Finally, calculate the final monthly fee by adding the fixed cost per
residence to the variable cost of the black garbage cart to generate the
monthly fee for the 32-gallon cart. Other service levels (various garbage
cart sizes) would be based on the 32-gallon base rate. The 64-and 96-
gallon cart customers will pay respectively double and triple the 32-gallon
rate. A minican (20-gallons) is roughly two-thirds the size of a standard 32-
gallon cart. Therefore, the minican customers will pay roughly 2/3rds of
City of Palo Alto Page 7
the 32-gallon rate less minor cost adjustments to the mini-can rate thus
incentivizing recycling and composting.
Table 6: Cart Size Costs
Cart
Size
Solid
Waste
Recycling Compostable Annual
Clean-Up Day
HHW Street
Sweeping
Total Rate
FY 2018
20 $28.79
32 $21.40 $14.16 $10.45 $2.17 $2.16 $1.44 $51.78
64 $103.56
96 $155.34
The FY 2018 rate is designed to ensure that residential revenues fully cover the
anticipated costs. The rates for FY 2016,FY 2017, and FY 2018 are calculated by
taking the difference between the FY 2018 rates and current rates, and adjusting
the 32-gallon rate by whole percentage increases to yield a rate sufficient to cover
projected costs. The rate for FY 2016 is increased at 9%, FY 2017 at 9%, and FY
2018 at 8%. The overall recommended rate increase for the minican and 32-gallon
customers is 28% over the three years.
At this point, staff is only recommending that Council adopt the first year
increases as noted in the R-1 Refuse Rate Schedule and Table 7 below.
Subsequent year rate increases may need to be modified based on changes in the
budget, inflation, and other costs that cannot be anticipated at this time and will
be brought to Council each year.
Table 7: Proposed FY 2016 Residential Rates (R-1 Refuse Rate Schedule)
Cart
Size
Proposed
FY 2016
20 gal $24.30
32 gal $43.75
64 gal $87.51
96 gal $131.26
The proposed FY 2016 rates compare favorably with other communities. The
following table compares the minican rate with the least expensive rate available
to the residents of these cities. It should also be noted that Palo Alto offers
different and often more extensive services than many of these other cities. For
City of Palo Alto Page 8
example, Mountain View only provides customers with every other week
recycling and yard trimmings collection. Mountain View and Sunnyvale, both
partners with Palo Alto in the operation of the SMaRT Station, do not provide for
residential curbside compost collection.
Table 8: Rate Comparison
City Least Expensive Rate
Palo Alto $24.36
Menlo Park $13.99
Mountain View $15.95
Santa Clara $31.91*
Sunnyvale $34.88*
Hayward $20.40
Redwood City $11.38
Roseville $23.40*
Alameda $28.46
* Does not offer a minican.
Commercial Rates
In order to bring the Refuse Fund Reserve to the required percentage, Staff
recommends that commercial garbage rates should be maintained at the current
rates until FY 2017.
City of Palo Alto Page 9
Table 9: Refuse Rate Increase in the Context of Other Utility Rate Increases
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Electric (preliminary
projection)0%6%6%1%1%
Gas1 (preliminary
projection)0%7%4%4%4%
Wastewater (FY16 proposed,
FY17-20 projected)9%9%9%9%6%
Water (FY16 proposed,
FY17-20 projected)12%8%8%8%3%
Refuse2 (FY16 proposed,
FY17-20 projected)9%9%8%2% to 3%2% to 3%
Storm Drain3 (FY16 proposed,
FY17-20 projected)2.7%2% to 3%2% to 3%2% to 3%2% to 3%
Total Bill
Change4
(%)6%8%7%5%3%
($/mo)$14.73 $18.91 $18.53 $14.39 $9.55
(1) Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates will
vary monthly with wholesale market fluctuations
(2) No forecast available past FY 2018, inflationary increases assumed.
(3) Storm Drain Rates increase annually by CPI; existing rates sunset in June 2017 unless
reauthorized by a majority vote of property owners.
(4) Change in estimated median residential bill, $230.76 as of June 30, 2014
City of Palo Alto Page 10
Alternatives
On March 3, 2015, staff presented an outline of the three-year rate plan to the
Finance Committee as part of an overall update on Zero Waste Programs (see
Staff Report #5546). The Finance Committee requested that staff explore
reducing the percentage increase for the residential rate increase by spreading
the rate increases over four or five years, instead of three. Staff continues to
recommend three years. However, the annual rate increases can be lowered if
Council elects to balance the residential costs and revenues in four or five years,
as shown on the following charts:
Table 10: Three Year Adjustment (staff recommendation)
Cart
Size
Current
Monthly
Rate
Projected
FY 2016
Projected
FY 2017
Projected
FY 2018
32 gal $40.14 $43.75 $47.69 $51.51
% Inc average
$3.79/yr 9%9%8%
Table 11: Four Year Adjustment
Cart
Size
Current
Monthly
Rate
Projected
FY 2016
Projected
FY 2017
Projected
FY 2018
Projected
FY 2019
32 gal $40.14 $43.37 $46.61 $49.84 $53.07
% Inc $3.23/yr 8.1%7.5%6.9%6.5%
Table 12: Five Year Adjustment
Cart
Size
Current
Monthly
Rate
Projected
FY 2016
Projected
FY 2017
Projected
FY 2018
Projected
FY 2019
Projected
FY 2020
32 gal $40.14 $42.99 $45.84 $48.70 $51.55 $54.40
% Inc $2.75/yr 7.1%6.6%6.2%5.9%5.5%
City of Palo Alto Page 11
Staff strongly recommends the three-year rate adjustment plan. The four-and
five-year rate adjustment schedules present the following challenges. They will:
·Take longer to generate sufficient revenue to fully cover the residential
expenses;
·Result in additional pressure on the commercial sector to stabilize the
Refuse Fund;and
·May require significant increases in the commercial rates to keep the
overall Refuse Fund in balance.
For these reasons, staff does not recommend the four-and five-year adjustment
options.
Timeline
Residential Rate Implementation Schedule
Task Schedule
Finance Committee approval –concepts March 3, 2014
Finance Committee final rate approval as part
of the budget process
April 7, 2015
Proposition 218 notices mailed May 1, 2015
Council approval June 15, 2015
New Residential Rates take effect July 1, 2015
Resource Impact
The proposed Residential Rate increase for FY 2016 has three main impacts. First,
it allows Palo Alto to continue to rebuild its Rate Stabilization Reserve. Second, it
moves Palo Alto closer to having the Residential revenues fully cover the
Residetial program expenses. Third, it provides funding for new programs and
inflationary increases. The three are covered separately below:
1)The Refuse Fund is in the process of rebuilding its financial reserves. The
Rate Stabilization Reserve in the Refuse Fund, as reported in the Adopted
Operating Budget, currently has a negative balance. This negative balance is
attributable to liabilities associated with maintaining the closed landfill, as
mandated by the California Public Resources Code and the California Code
of Regulations. As revenues are realized and maintenance activities are
City of Palo Alto Page 12
completed, the liabilities will be reduced and the Rate Stabilization Reserve
negative balance will become positive.
2)The staff is recommending a residential rate increase in FY 2016 which is
consistent with a three-year plan for having residential refuse revenues
cover residential refuse expenses. More than two-thirds of the 3-year
increase is for the purpose of achieving this goal. At the request of the
Finance Committee,Staff has also shown (in the Discussion Section) the
rate increases needed for a four year and a five year plan.
3)The third impact of the residential rate increase is to allow a major new
program to be initiated, and to provide for inflationary increases. The
largest new program cost is associated with the collection of residential
food scaps and food soiled paper. This material will be placed in the green
cart along with yard trimmings, and taken to the Zero Waste Energy
Development facility in north San Jose. Here energy will be produced from
digestion of the material, and compost made from residuals.Less than
one-third of the residential rate increase is to cover this major new
program and to cover inflationary increases through the Greenwaste
Contract (Palo Alto’s residuals hauler).
Policy Implications
There are no policy changes contained in the adoption of the proposed new
Refuse Rates. New steps are being taken to more fully implement the Zero Waste
policies already adopted by Council in the Zero Waste Plan and Zero Waste
Operations Plan.
Attachments:
·A -Resolution -Refuse rates effective 70115(DOCX)
·B -R-1 Rate Schedule to be effective 7-1-2015 (DOC)
·C -Solid Waste Rate Structure and Analysis Report (PDF)
·D -Public e-mail (PDF)
Attachment A
Resolution No. XXXX Resolution of the Council of the City of Palo Alto Amending the Utility Rate Schedule R-l for
a Refuse Rate Increase
RECITIALS
A. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the City Council
may by resolution adopt rules and regulations governing utility services and the fees and charges therefore; and
B. The Council has considered the need for an adjustment in refuse collection rates to avoid a
decrease in the Refuse Fund Rate Stabilization Reserve levels; and
C. Pursuant to Article XIIID Sec. 6 of the California Constitution, on June 15,2015 the Council of the
City of Palo Alto held a public hearing to consider all protests against the proposed refuse rate fee increases; and
D. The total number of written protests presented by the close of the public hearing was less than fifty
percent (50%) of the total number of customers subject to the proposed refuse rate fee increases.
The Council of the City of Palo Alto RESOLVES as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule R-l
(Domestic Refuse Collection) is hereby amended to read in accordance with Sheets R-l-l and R-1-2, attached
hereto and incorporated herein. The foregoing Utility Rate Schedules, as amended, shall become effective on July
1, 2015.
SECTION 2. The rates contained in the attached Rate Schedules shall be in effect until Council
adopts a new rate structure.
SECTION 3. The Council finds that the revenue derived from the authorized adjustments of the refuse
collection rates shall be used only for the purposes set forth in Article VII, Section 2, of the Charter of the City of
Palo Alto.
II
II
II
II
1
Attachment A
SECTION 4.The Council finds that the adoption of this resolution does not constitute a project under the
California Environmental Quality Act, California Public Resources Code section 21080, subdivision (b)(8).
INTRODUCED AND PASSED:
DOMESTIC REFUSE COLLECTION
UTILITY RATE SCHEDULE R-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-01-15
Supersedes Rate Schedule R-1 dated
11-01-14 Sheet No. R-1-1
A.APPLICABILITY:
This schedule applies to each occupied domestic dwelling as required by City ordinance, including
separate single-family domestic dwelling and multi-unit dwellings (4 units or less). An occupied
dwelling unit is defined as any home, apartment unit, cottage, flat or duplex unit, having kitchen,
bath, and sleeping facilities, and to which gas or electric service is being rendered.
B.TERRITORY:
Within the incorporated limits of the City of Palo Alto and on land owned or leased by the City.
C. RATES:
The refuse rates below provide weekly collection, processing and disposal of materials properly
deposited in the number of garbage containers indicated below,as well as weekly collection and
processing of recyclables from blue carts (standard service includes one 64-gallon blue cart),weekly
collection and processing of compostables (yard trimmings, food scraps, and food soiled paper) from
green carts (standard service includes one 96-gallon green cart), ongoing maintenance of the closed
Palo Alto Landfill, zero waste programs, street sweeping service, the household hazardous waste
program, and the annual Clean Up Day.
Monthly Refuse Services Cost
Garbage Cart Sizes
Mini-can/20-gallon cart *24.36
1 32-gallon cart**43.86
1 64-gallon cart 85.09
1 96-gallon cart 124.80
*Mini-can service cannot be combined with any other cart service
**Standard cart service is one 32-gallon cart.
Attachment B
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-01-15
Supersedes Rate Schedule R-1 dated
11-01-14 Sheet No. R-1-2
D.SPECIAL ITEM CHARGES:
1. Stove/washer/dryer/water heater pick up *......................................................................25.00
2. Freezer/refrigerator/air conditioner/garbage compactor pick up *..................................35.00
3. Upholstered furniture pick up (per unit) *.......................................................................15.00
4. Mattress pick up *............................................................................................................15.00
5. Tire pick up (per tire, limit of 4 tires) *...........................................................................20.00
6. Pallet pick up *................................................................................................................5.00
* “Surcharge special” fee (see E5.below) applies when special item is not collected under the annual
Clean Up Day Program guidelines.
E.SPECIAL LABOR CHARGES:
1.Return trip (next day service)……………………………………………………..........24.00
2.Return trip (same day service)……………………………………………………........36.00
3.Urgent special (for service outside standard weekly collection; charged per cubic yard)55.00
4.Miscellaneous 2 person service rate (waiting time)..................................................3.20/min
5.Miscellaneous 1 person service rate (pull out service).............................................2.20/min
6.Surcharge special (one time pick up of large or non-standard items; or delivery of containers
for special events)………….....................................................................................77.00
7. Repair rate................................................................................................2.20/min + material
8.Extra can…………………………………………………................................................10.60
9.Back/side yard collection of garbage (monthly charge per residence –available to current
back/side yard service customer only) ………………....................................................3.66
F.SPECIAL CART CHARGES:
1.32-gallon cart rental***…………………………….........................................................3.00
2. 64-gallon cart rental***…………………………….........................................................3.00
3. 96-gallon cart rental***…………………………….........................................................3.00
4. 20-gallon cart purchase ......................................................................................................60.00
5. 32-gallon cart purchase……………………………………………………………........51.00
6. 64-gallon cart purchase……………………………………………………………. ......57.00
7. 96-gallon cart purchase……………………………………………………………........62.00
8. Cart wash …………………………………………………………………………........25.00
9.Cart clean out (by hand)……………………………………………………………......15.00
10.Recycling cart contamination (entire cart dumped)……………………………….........30.00
11. Damaged cart exchange (one allowed per customer each calendar year at no cost).......20.00
12. Monthly key service (customer provided lock) ………………………………………..15.00
13. Lock (Collector provided)…………………………………………………………......25.00
14. Cart lock installation………………………………………………………………........40.00
***Monthly charge for each additional cart of service above three carts for the compostable
materials or recycling cart.
Attachment C
201 N. Civic Drive, Suite 230
Walnut Creek, California 94596
Telephone: 925/977-6950
Fax: 925/977-6955
www.hfh-consultonts.com
March 19, 2015
Mr. Ron Arp
Zero Waste Manager
City of Palo Alto
P.O. Box 10250
Palo Alto, CA 94303
:
Subject: Solid Waste Rate Structure and Analysis Report
Reference Number: 53850
Dear Mr. Arp:
Managing Tomorrow's Resources Today
Robert D. Hilton, CMC
John W. Farnkopf, PE
Laith B. Ezzet, CMC
Richard J. Simonson, CMC
Marva M. Sheehan, CPA
Robert C. Hilton, CMC
HF&H Consultants, LLC is pleased to present this report documenting our findings and recommendations
to the City of Palo Alto (City) from our solid waste rate structure and analysis project.
This letter report is organized into the following sections:
1. Executive Summary
2. Solid Waste Rates
1. EXECUTIVE SUMMARY
The City of Palo Alto (City) contracts for solid waste services to residents and businesses primarily
located inside the city limits. In order to increase rates for these services, the City must comply with
Article XlllD, Section 6 of the California Constitution, which was enacted by Proposition 218 in 1996.
This Constitutional Section requires: (1) Revenues derived from fees or charges for property related
service shall not exceed the cost to provide service; (2) Revenues derived from fees or charges shall not
be used for any purpose other than that for which it was imposed; and, (3) The amount of a fee or
charge upon a parcel shall not exceed the proportional cost of the service attributable to the parcel. The
last rate studies to analyze these types of property related fees and services were completed in 2012.
City staff directed us to focus primarily on the Residential customer class. Therefore, the rate structures
presented are for Residential rate payers only.
1 l St• "'y QurposP and Objertives
The purpose of this study is to conduct a comprehensive analysis of the City's solid waste rates,
including documentation of the analysis, underlying assumptions, and the rationale for the
recommended rates. The study is required to demonstrate that the recommended rates result in fees
Mr. Ron Arp
March 19, 2015
Page 2of11
Managing Tomorrow's Resources Today
and charges that are proportionate to the cost of service for each customer class (Residential,
Commercial or Roll-off).
This study has several key objectives:
• Determine revenue that is necessary to meet the City's requirements, including O&M, capital
improvement, and reserve funds.
• Determine the cost of service for the Residential customer class.
• Evaluate alternative rate structures that will ensure that the Residential customer class is paying its
proportionate share of the revenue requirements.
• Ensure that the proposed rate structure is compatible with conservation pricing and Proposition 218
mandates for proportionality.
These objectives are met by applying industry standards and by complying with all applicable laws.
1.2 Methodology
This rate study included three analytic stages:
1. Revenue Requirement Projections. The expenses and revenues are projected based on the City's
fund projections for the solid waste enterprises, incorporating expected cost escalation factors and
growth rates. The difference between expenses and revenues must be offset by annual revenue
in creases.
2. Cost of Service Analysis. The revenue requirement for the coming rate year is allocated to each
customer class based on the cost of service.
3. Rate Design. Rates are designed for each customer class to recover its share of the cost of service.
The analyses were performed in a spreadsheet model. The tables presented in this report are derived
from information within the model.
1.3 Qate-structure Objectives
The following are several rate-structure objectives that the recommended rates are designed to achieve:
• Revenue Sufficiency. Rates need to be sufficient to fund operating and capital costs and maintain
adequate reserves.
• Revenue Stability. Rates are designed to recover revenue from the City's fixed and variable charges
that will cover its fixed and variable costs.
• Diversion Signal. Rates are designed to reward customers for efficiency and to encourage diversion.
• Administrative Ease. Rates are designed to enable easy implementation and ongoing
administration, including monitoring and updating.
: lo : :
Managing Tomorrow's Resources Today
Mr. Ron Arp
March 19, 2015
Page 3of11
• Affordability. Rates need to be as affordable as possible while maintaining the City's sound financial
position and credit rating.
• Customer Acceptance. Rates are designed to be as simple as possible to facilitate customer
understanding and acceptance.
• Fairness. Rates are designed so that each customer cl ass pays its proportionate share of the
required revenue in compliance with legally prescribed rate-structure requirements.
1.4 Findings and Recommendations
Revenue Requirement Projections
Our review of the City's current financial projections identified Residential expenditures exceeded
revenues. In order to balance the revenues with expenditures a significant rate increase (approximately
18%) would be required. Therefore, we recommend a three year plan to achieve the revenue and
expenditure balance. In order to calculate the required increases for the three year period, we
projected the revenue requirement for the third year (FY 2017-2018), the expected year for revenues to
cover expenditures. Figure 1 summarizes the annual Residential revenue requirement projected for FY
2017-18 that rates must be set to fund.
Figure 1. Residential FY 2017-18 Revenue Requirement Projections
~-------~-~ Projected FY 2017-18 Residential Expense
Solid Waste Recycling Composting HHW Street Sweeping Total
Refuse Fund -Fund Level $ 120,980 $
Allocated G&A
Solid Waste Administration
Landfill Operations
Zero Waste/Recycling
Hazardous Waste
Composting
Collect/Hauling/Disposol Admin
Collections & Hauling Contract
Off site Mtrl Recovery/Disposal
REF Street Sweeping
Administration
REF Street Sweep Maintenance
606,875
159,518
435,262
237,632
19,158
2,212,116
1,412,897
25,973
2,998,977
$
12
19,158
2,212,116
$ $
462,405
11,317
295,949
$ 120,980
606,875
159,518
435,262
237,632
462,405
12
64,289
7,423,210
1,412,897
11,317
295,949
Str Sweep Parking Districti-------------------------3_9 ____ 3_9~
$ 5,204,438 $ 3,024,949 $ 2,231,286 $ 462,405 $ 307,305 $11,230,384
Cost of Service Analysis
The cost of service analysis for Solid Waste indicated that the Residential customer rates are not
generating sufficient revenue to cover the cost of providing service to Residential customers. Therefore
rates for the majority of customers needs to be increased by approximately 8 to 9% per year for each of
Managing Tomorrow's Resources Today
Mr. Ron Arp
March 19, 2015
Page 4of11
the next 3 years (2016, 2017, and 2018) in o rder to balance the revenues and costs within this customer
class.
Figure 2. Residential Proposed Rates
Current Rates % % %
Cart Size (gal.)* FY 2014-15 . FY 2015-16 Iner FY 2016-17 Iner FY 2017-18 Iner
20 $ 22.29 $ 24.30 9.0% $ 26.48 9.0% $ 28.60 8.0%
32 40.14 43.75 9.0% 47.69 9.0% 51.51 8.0%
64 76.34 87.51 14.6% 95.38 9.0% 103.01 8.0%
96 110.26 131.26 19.0% 143.07 9.00/o 154.52 8.00/o
Implementation
We recommend that City staff confirm the need for each year's rate increase prior to adopting the
change. The City has the option to implement a lower rate increase than was adopted but cannot adopt
an increase that is higher than the adopted amount without conducting a Proposition 218 notification
procedure.
1.5 Limitations
The City staff provided all of the financial and operation data used to perform the rate study, including
budgeted revenue and expenditure data, projections of future expenditures and allocation percentages.
Projections of future conditions and actual results may be different, and this difference may be material.
2. SOLID WASTE RATES
2,1 Background
The City provides its 17,800 residential customers with weekly solid waste, recycling, and yard trimmings
collection. The City currently charges its residents $22.29 per month for once a week servicing of a 20
gallon solid waste container; $40.14 for a 32-gallon solid waste container; $76.34 for a 64-gallon
container; or, $110.26 for a 96-gallon solid waste container. All residential customers receive weekly
recycling service (commonly a 64-gallon cart) and yard trimmings service (commonly a 96-gallon cart).
The City also provides solid waste, mixed recycling, and cardboard collection service to Commercial and
multi-family customers at varying frequencies in a range of container sizes to meet each customer's
needs. These Commercial and multi-family customers are cha rged a monthly rate based on their
subscription level (e .g., 1 cubic yard bin, serviced 1 time per week; 3 cubic yard bin, serviced 3 times per
week).
2.2 Residential Revenue Requirement Projections
To determine whether additional rate revenue is required, projected operating and capital expenses are
compared with projected revenue from cu rrent rates. Rates are then increased so that the revenues
will satisfy the projected and maintain operating and capital reserves.
Mr. Ron Arp
March 19, 2015
Page 5of11
Managing Tomorrow's Resources Today
The following table summarizes the projected FY2017-2018 allocated revenue and expense by customer
class. The projection assumptions are listed below. Figure 3 shows a residential sector revenue shortfall
of $2M in FY18 ifthe residential rates are not increased.
Figure 3. Allocated FY2017-18 Projected Revenue and Expenses by Customer Class
Projected FY 2017-18
CustomerType Revenue 1 Expense 2 To/(From) %
Residential $
Commercial
9,074,811 $
and Roll-off 21,028,491
Total $ 30,103,303 $
11,230,384 $
19,694,403
30,924, 787 $
(2,155,573)
1,334,088
(821,484)
24%
-6%
3%
1 Revenue is based on FY 2013-14 actual levels and budgeted amounts for non-rate revenue (e.g.
Investment income).
2Expenses are generally based on a 2.5% escalation over the FY 2014-2015 budgeted expenditures, except
as noted below.
Key Projection Assumptions
The City's solid waste fund projections served as the basis for determining the revenue requirement
projections for the four-year planning period from FY 2014-15 through FY 2017-18. The projection of
annual revenues and expenditures during this period was conducted by the City's staff and provided to
HF&H. Figure 3, above, summarizes the projected expenditure trends based upon a 2.5% escalation over
the budgeted FY 2014-15 expenditures, with the following exceptions:
• Facilities Rent expenditure (Landfill rent) was held constant for the projection period;
• Collection Hauling Contract -a net $326k was added to the Green Waste contract ($150k for
Commercial billing, $189k incentive payment, $62k for ZWED, offset by a reduction of $75k for
special events and hard to service expenses). Staff has recommended these contract scope and fee
modifications to the Finance Committee on March 3, 2015;
• Material Recovery/Disposal -$532k for the new food scraps program was added in FY 2015-16 and,
• Street Sweeping -$522k cost savings to the Refuse Fund (a reduction to expense) was assumed in FY
2015-16 for recent modifications to the sweeping program.
Mr. Ron Arp
March 19, 2015
Page 6of11
Managing Tomorrow's Resources Today
Figure 4. Solid Waste Fund Annual Projected Expenses
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
$-
FY2014-15 FY2015-16 FY2016-17 FY2017-18
Projected Expense
Cl Street Sweeping
HHW
nJLandfill
D Solid Waste
Figure 5. Projected Expenses for FY2014-15 through FY2017-18
Projected Expense
FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18
Solid Waste $ 25,354,018 $ 26,862,182 $ 27,460,577 $ 28,073,931
Landfill 898,674 858,478 879,940 901,938
HHW 691,976 684,637 701,753 719,297
Street Sweeping 1,790,289 1,169,990 1,199,240 1,229,221
Total $ 28, 734,958 $ 29,575,287 $ 30,241,509 $ 30,924,387
To generate the necessary revenue to cover the expenses shown in Figure 3 above, a percentage
increase cou ld be applied across-the-board to all current Residential, Commercial, and Roll-off service
rates. However, the City's current rate structure requires some minimal restructuring so that each
customer class is paying its proportionate share of the total revenue requirement as calculated above.
Section 2.2 of this report discusses the rate structuring analysis conducted to apportion the revenue
requirement to each customer class (e.g., Residential and Commercial) and the resulting rate increases.
Methodology for the Allocation of Costs to Customer Class
The following table summarizes the methodology used to allocate Solid Waste Program cost categories
to each customer class and to each service level within the customer class.
•••1$t:llJltiSdU&•""&_..---n---
_:-~w Managing Tomorrow's Resources Today
Mr. Ron Arp
March 19, 2015
Page 7of11
Figure 6. Summary of Allocation Methodology
Cost Category Allocation Methodology to Customer Class
50050001 -Refuse Fund -Fund Level
50050002 -Allocated General &
Administrative
50050101 -Solid Waste Administration
50050301-Collect/Hauling/Disposal Admin
50050102 -Solid Waste Permit/Enforcement
50050103 -Landfill Operations
Cost categories that can be identified as benefiting
a specific division will be allocated directly
between the divisions. For example, Facility Rent
paid to the City's General Fund was allocated 100%
to Landfill Operations.
The remainder of expenditures should be allocated
based upon its evaluation of office labor activity
(comments, tickets, billing adjustments, efforts to
address challenges in Commercial billing).
Expenditures in these cost categories would be
incurred regardless of volume collected, number
of customers or lines of business. The following
percentages based on work hours to resolve
customer issues were used in the model:
• Residential -29.0%
• Commercial -62.0%
• Roll-off-9.0%
Direct to specific division receiving benefit.
Allocated 100% to Landfill Operations in the
model.
Landfill revenue and expenses are allocated to
Residential, Commercial, and Roll-off based on
tonnage of material actually accepted (and buried}
at the Palo Alto Landfill from 1995 to 2011 (the
date range that electronic tollbooth records are
available). Historical landfill tonnage and revenue
reports yielded the following percentages used in
the model:
• Residential -10.9%
• Commercial -69.9%
• Roll-off-19.2%
Mr. Ron Arp
March 19, 2015
Page 8of 11
:
Managing Tomorrow's Resources Today
Cost Category Allocation Methodology to Customer Class
50050104 -Zero Waste/ Recycling
50050105 -Hazardous Waste
50050201 -CIP _REF System Improvement
50050302 -Collect & Hauling Contract
50050304 -Offsite Mtrl Recovery/Disposal
50050401 -REF Street Sweeping
Administration
50050410 -REF Street Sweep Maintenance
50050411-Str Sweep Parking District
Allocated based on Solid Waste Division's focus
towards Zero Waste recycling goals. City staff
reported that more effort is spent on the
Commercial activities to impact zero waste goals
than the residential sector. The City estimated 70%
of effort to Commercial activities with the
remaining 30% to Residential activities. The City
represented no measurable effort to Roll-off
activities.
Revenue and expenses are allocated based on the
number of dwellings (Single-family and Multi-
family). The Multi-family units are categorized
within the Commercial sector. There are
approximately 28,000 dwellings; 18,000 Single-
family (64.3% Residential) and 10,000 Multi-family
(35.7% Commercial).
Direct to specific division receiving benefit.
Allocated 100% to Landfill Operations in the
model.
Used GreenWaste's Consolidated "Confidential"
Statement percentages by Residential,
Commercial, and Roll-off lines of business for FY
2012-13 as shown below:
• Residential -44.8%
• Commercial -38.1%
• Roll-off-17.1%.
Allocation based on SMaRT FY 2013-14 tons by
customer class:
• Residential -29%
• Commercial -43%
• Roll-off-28%.
Allocation of revenue and expense based on City-
provided percentages, which addresses the major
sources of litter, are as follows:
• Residential-25%
• Commercial-75%
The preceding modeling assumptions lead to the projected Residential Net Revenue -surplus/(shortfall)
shown in Figure 7. The need for the series of revenue increases in Figure 4 is demonstrated by the
Managing Tomorrow's Resources Today
Mr. Ron Arp
March 19, 2015
Page 9of11
resulting Resident ial Net Revenue -surplus/(shortfall). Without the revenue increases, the Net Revenue
-(shortfall) would be at an unacceptable level.
Figure 7. Projected -Residential Solid Waste Net Revenue Without Rate Increases
$500,000
$· 1 Breakeven
~ Target
0 $(500,000) .r: .!!).
"' :I $(1,000,000) ~ :I "' Q, $(1,500,000)
:I c
QI > $(2,000,000) QI a:: ...
QI z $(2,500,000)
$(3,000,000)
FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18
Without Increases $(1,619,856) $(1,916,272) $(2,151,274) $(2,392,151)
2.3 Rate Design and Projected Rate Increases
Optional Rate Design and Projected Rate Increases Presented to City
After presenting to City staff multiple rate designs and rate adjustments based upon various approaches
to fixed and variable costs and an overview of the model, City staff developed an additional option as
described below. All of the program costs can be considered variable and charged by the size of the
garbage cart. The garbage cart, City staff found, was indicative of the use of other services included in
the Refuse bill. HF&H reviewed the model with the City's revisions for mathematical accuracy and logical
consistency. Any exceptions were resolved after discussions with City staff. The model uses concepts
consistent with those used throughout the industry.
Rate Design and Projected Rate Increases Selected by City
The final rate model establishes a base rate for a 32 gallon container (the most common service level at
53% of residents) and an incremental charge for additional ga llons of service. The 20 gallon rate is
approxi mately 55% of the 32 gallon rate and the 64 and 96 gallon rates are approximately 2 and 3 times
the 32 gallon rate. The conservation pricing of the minican acknowledges the reduced expenses related
to the need for less zero waste outreach efforts and operational efficiencies. Since there are a significant
number of customers currently su bscribed to minicans; lowest level of service, therefore the potential
for further numbers migrating to lower subscription levels is minimal. A 5% customer migration to lower
cart size has been built into the model to capture this potential reduction to revenue.
Mr. Ron Arp
March 19, 2015
Page 10 of 11
Managing Tomorrow's Resources Today
The annual percentage increases to the Residential customer class and basic rate category are listed in
Figure 8. The initial rate restructuring results in a larger than desired one-time increases and the City is
proposing to phase the required increase over three years to smooth the annual adjustments, thereby
avoiding "rate shock" with potential effects to customers and migration to smaller containers.
Figure 8. Schedule of Residential Adjustments to Monthly Rates
Current Rates % % %
' Cart Size (gal.)* FY 2014-15 FY 2015-16 Iner FY 2016-17 Iner FY 2017-18 Iner
20 $ 22.29 $ 24.30 9.0% $ 26.48 9.0% $ 28.60 8.0%
32 40.14 43.75 9.00/o 47.69 9.00/o 51.51 8.0%
64 76.34 87.51 14.6% 95.38 9.00/o 103.01 8.0%
96 110.26 131.26 19.0% 143.07 9.00/o 154.52 8.00/o *
With these increases, rates should cover more of ongoing contractual and operating cost increases and
provide some contribution to reserves by FY 2017-18. Each year, prior to implementing the rate
increases, City staff should confirm the need for the rate increase. The City can implement a lower rate
increase, if conditions warrant, without going through the Proposition 218 notification process. If higher
rate increases are needed that exceed the adopted rates, the City will need to initiate a new Proposition
218 proceeding.
Figure 9 indicates that the Residential Net Revenue is below breakeven with costs in FY 2014-15. The
shortfall grows dramatically starting in FY 2015-16 if revenues are not increased. With the projected
revenue increases, the Residential Net Revenue will be at its lowest point in FY 2014-15 and will
continue to grow and approach the target balance in FY 2017-18. This balances rate increases over time
without the need for significant rate fluctuations and customer impacts which would potentially create
"rate-shock", (when sudden changes in rates have distorting effects in customers and economic activity,
decreasing demand and generating diseconomies of scale).
Mr. Ron Arp
March 19, 2015
Page 11of11
Managing Tomorrow's Resources Today
Figure 9. Projected -Residential Solid Waste Net Revenue With and Without Rate Increases
$500,000
~ $-
t 0 $(500,000) ~ ~
"' ::i $(1,000,000) Q. :;
VI .. $(1,500,000)
::i c: llJ $(2,000,000) > QI a: .... llJ $(2,500,000) z
$(3,000,000)
- -With Rate Increases
-.-Without Increases
I Breakeven
Target
FY 2014-15
$(1,619,856)
$(1,619,856)
* *
FY 2015-16
$(1,174,650)
$(1,916,272)
* *
FY 2016-17
$(570,782)
$(2,151,274)
FY2017-18
$381
${2,392,151)
We would like to express our appreciation to you and City staff for assistance and guidance during the
course of the review. Should you have any questions, please call me directly at 925-977-6961 or email
me at msheehan@hfh-consultants.com.
Very truly yours,
HF&H CONSULTANTS, LLC
~cul/i'J ~~
Marva M. Sheehan, CPA
Vice President
Cc:
Attachment D
Carnahan, David
From:
Sent:
To:
Subject:
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Larry and Zongqi Alton < lalton@pacbell.net> 15 HAR 25 AM 11: 5,
Wednesday, March 25, 2015 11:46 AM
Council, City
garbage recycling
City of Palo Alto (ID # 5592)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/7/2015
City of Palo Alto Page 1
Council Priority: City Finances
Summary Title: Storm Drain Fee Increase for FY 2016
Title: Adoption of a Resolution Amending Utility Rate Schedule D -1 (Storm
and Surface Water Drainage) Reflecting a 2.7 Percent Consumer Price Index
Rate Increase to $12.63 Per Month Per Equivalent Residential Unit for Fiscal
Year 2016
From: City Manager
Lead Department: Public Works
Recommendation
Staff recommends that the Finance Committee recommend that Council adopt
the attached resolution (Attachment A) amending Utility Rate Schedule D-1
(Storm and Surface Water Drainage), to implement a 2.7% rate increase
consistent with the applicable Consumer Price Index – Urban Consumers,
increasing the monthly charge per Equivalent Residential Unit by $0.33, from
$12.30 to $12.63 for Fiscal Year 2016.
Background
On April 26, 2005, a majority of Palo Alto property owners approved a ballot
measure authorizing an increase in the monthly Storm Drainage Fee to fund
storm drain capital improvements and augmented maintenance. Council certified
the results of the ballot proceeding on May 9, 2005. The approved ballot
measure contained an annual fee escalator clause that permits the Council to
consider raising the Storm Drainage Fee each year to account for inflationary cost
increases. Specifically, the ballot measure stated:
City of Palo Alto Page 2
“In order to offset the effects of inflation on labor and material costs, the
proposed fee increase would be subject to annual increases beyond the initial
$10.00 per Equivalent Residential Unit (ERU) rate as of July 1 of each year, starting
in 2006. Inflation adjustments would be based on the lesser of the local rate of
inflation (based on the change in the Consumer Price Index [CPI-U] for the San
Francisco-Oakland-San Jose CMSA, published by the United States Department of
Labor, Bureau of Labor Statistics) or 6 percent. The City Council would have the
authority and discretion to implement inflation adjustments on an annual basis as
part of the City budget process.”
On May 9, 2005, Council adopted a resolution increasing the Storm Drainage rate
schedule to $10.00 per month per ERU, effective June 1, 2005. The Council
approved rate for FY 2015 is $12.30 per month per ERU.
Discussion
Staff has determined from Bureau of Labor Statistics records that the CPI-U for
the San Francisco-Oakland-San Jose CMSA increased by 2.7% between December
2013 and December 2014. As the CPI-U rate is substantially lower than 6%,
consistent with the ballot measure, staff recommends that the Storm Drainage
Fee be increased by the CPI-U in order to keep fund revenues consistent with
general cost increases and to provide sufficient funds for planned storm drain
capital expenditures. In particular, the increased revenue is needed to cover
rising construction costs for the remaining storm drain capital improvement
projects. Approval of the rate increase will help to ensure that staff can complete
all seven of the capital projects specified in the 2005 ballot measure before the
fee increase sunsets in June 2017. A table summarizing projected rate increases
for all of the City’s utilities for the period of FY 2016 through FY 2020 is attached
for reference (Attachment B). In order to enact the Storm Drainage Fee increase,
Council must adopt the attached resolution amending Utility Rate Schedule D-1
(Storm and Surface Water Drainage). The new rate for the Storm Drainage Fee
will be $12.63 per month per ERU. Single-family residential properties are billed a
monthly amount based on parcel size, in accordance with the following table:
RESIDENTIAL RATES (Single-Family Residential Properties)
City of Palo Alto Page 3
PARCEL SIZE (sq. ft.) ERU FY2015 RATE FY2016 RATE
< 6,000 sq. ft. 0.8 ERU $9.84/month $10.11/month
6,000-11,000 sq. ft. 1.0 ERU $12.30/month $12.63/month
> 11,000 sq. ft. 1.4 ERU $17.22/month $17.68/month
Commercial, industrial, institutional, and multi-family residential properties are
billed on a monthly basis at a rate of 1.0 ERU for each 2,500 square feet of
impervious surface on the parcel.
Resource Impact
The 2.7 percent increase in rates is expected to increase annual revenue to the
Storm Drainage Fund by approximately $161,000 and, if recommended, will be
included in the Public Works Department Storm Drainage Fund FY 2016 proposed
operating budget.
Timeline
The Storm Drainage Fee increase will take effect on July 1, 2015.
Environmental Review
Adoption of changes to utility rate schedules does not represent a project under
the California Environmental Quality Act (CEQA).
Courtesy Copies
Storm Drain Oversight Committee
Palo Alto Chamber of Commerce
Attachments:
A - Resolution Amending Utility Rate Schedule D-1 (PDF)
B - Overview of Projected City of Palo Alto Utility Rate Increases (PDF)
NOT YET APPROVED
1
150225 mf 00710563
Attachment A
Resolution No. ______
Resolution of the Council of the City of Palo Alto Amending Utility Rate
Schedule D‐1 (Storm and Surface Water Drainage) to Increase Storm
Drain Rates by 2.7% Per Month Per Equivalent Residential Unit for
Fiscal Year 2016
The Council of the City of Palo Alto RESOLVES, as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule D‐1 (Storm and Surface Water Drainage) is hereby amended to read in
accordance with sheet D‐1‐1, attached hereto and incorporated herein. The foregoing Utility
Rate Schedule, as amended, shall become effective July 1, 2015.
SECTION 2. The Council finds that this rate increase is being imposed to offset the
effects of inflation on labor and material costs pursuant to the annual inflationary fee escalator
provision of the Storm Drainage Fee ballot measure, which was approved by a majority of Palo
Alto property owners on April 26, 2005.
SECTION 3. The Council finds that the revenue derived from the authorized
adoption enumerated herein shall be used only for the purpose set forth in Article VII, Section
2, of the Charter of the City of Palo Alto.
/ /
/ /
/ /
/ /
NOT YET APPROVED
2
150225 mf 00710563
SECTION 4. The Council finds that modification and approval of this change to the
Utility Rate Schedule D‐1 (Storm and Surface Water Drainage) for the purpose of meeting
operating expenses is statutorily exempt from California Environmental Quality Act (CEQA)
review, pursuant to Public Resources Code Section 15273(a).
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
__________________________ _____________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ _____________________________
Senior Asst. City Attorney City Manager
_____________________________
Director of Public Works
_____________________________
Director of Administrative
Services
GENERAL STORM AND SURFACE WATER DRAINAGE
UTILITY RATE SCHEDULE D-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-1-2015
Supersedes Sheet No.D-1-1 dated 7-1-2014 Sheet No. D-1-1
A. APPLICABILITY:
This schedule applies to all storm and surface water drainage service, excepting only those
users and to the extent that they are constitutionally exempt under the Constitution of the
State of California or who are determined to be exempt pursuant to Rule and Regulation 25.
B. TERRITORY:
Inside the incorporated limits of the city of Palo Alto and land owned or leased by the city.
C. RATES:
Per Month:
Storm Drainage Fee per Equivalent Residential Unit (ERU) .......................................................$12.63
D. SPECIAL NOTES:
1. An Equivalent Residential Unit (ERU) is the basic unit for computation of storm
drainage fees for residential and non-residential customers. All single-family residential
properties shall be billed the number of ERUs specified in the following table, based on
an analysis of the relationship between impervious area and lot size for Palo Alto
properties.
RESIDENTIAL RATES (Single-Family Residential Properties
PARCEL SIZE (sq.ft.) ERU
<6,000 sq.ft. 0.8 ERU
6,000 - 11,000 sq.ft. 1.0 ERU
>11,000 sq.ft. 1.4 ERU
All other properties will have ERU's computed to the nearest 1/10 ERU using the
following formula:
No. of ERU = Impervious Area (Sq. Ft.)
2,500 Sq. Ft.
2. For more details on the storm drainage fee, refer to Utilities Rule and Regulation 25.
{End}
Attachment B
Rate Adjustments for All Utilities: FY 2016 Proposed, FY 2017 to FY 2020 Projected
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Electric 0% 6% 6% 1% 1%
Gas1 0% 7% 4% 4% 4%
Wastewater 9% 9% 9% 9% 6%
Water 12% 8% 8% 8% 3%
Refuse2 9% 9% 8% 2% to 3% 2% to 3%
Storm Drain3 2.7% 2% to 3% 2% to 3% 2% to 3% 2% to 3%
Total Bill
Change4
(%) 6% 8% 7% 5% 3%
($/mo) $14.73 $18.91 $18.53 $14.39 $9.55
(1) Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates will vary
monthly with wholesale market fluctuations
(2) No forecast available past FY 2018, inflationary increases assumed.
(3) Storm Drain Rates increase annually by CPI; existing rates sunset in June 2017 unless reauthorized by a
majority vote of property owners.
(4) Change in estimated median residential bill, $230.76 as of June 30, 2014