HomeMy WebLinkAbout2017-04-04 Finance Committee Agenda PacketFinance Committee
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April 4, 2017
Regular Meeting
Community Meeting Room
7:00 PM
Agenda posted according to PAMC Section 2.04.070. Supporting materials are available in
the Council Chambers on the Thursday 10 days preceding the meeting.
PUBLIC COMMENT
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Call to Order
Oral Communications
Members of the public may speak to any item NOT on the agenda.
Action Items
1. Finance Committee Discussion and Recommendation That Council
Adopt (as Part of the Fiscal Year 2018 Annual Budget) a Resolution
Amending the Residential Refuse Rates for Fiscal Year 2018 to Cover
Program Costs and Keeping all Other Rates the Same
2. Utilities Advisory Commission Recommendation That the City Council
Adopt: (1) a Resolution Approving the Fiscal Year 2018 Water Utility
Financial Plan; and (2) a Resolution Increasing Water Rates by
Amending Rate Schedules W-1 (General Residential Water Service),
W-2 (Water Service From Fire Hydrants), W-4 (Residential Master-
Metered and General Non-Residential Water Service), and W-7 (Non-
Residential Irrigation Water Service) and Removing the Drought
Surcharge
3. Utilities Advisory Commission Recommendation That the City Council
Adopt a Resolution Approving the Fiscal Year 2018 Wastewater
Collection Financial Plan
Future Meetings and Agendas
Adjournment
2 April 4, 2017
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Finance Committee Items Tentatively Scheduled
Meeting
Date
Line No. Item Title Referral Date
4/18/2017 1 Recommendations on Proposed Fiscal Year 2018 Community Development
Block Grant Funding Allocations and the Draft Fiscal Year 2018 Annual Action
Plan (Planning)
2 GULP Update (Utilities)
5/16/2017 3 Electric FY 2018 Financial Plan and Rate Adjustments (Utilities)
4 Gas FY 2018 Financial Plan and Rate Adjustments (Utilities)
6/6/2017 5 3rd Quarter Financial Status Report
12/5/2017 6 Presentation of FY2017 CAFR
City of Palo Alto (ID # 7724)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/4/2017
City of Palo Alto Page 1
Council Priority: Environmental Sustainability
Summary Title: Finance Committee Recommendation to Adopt the Refuse
Rates for FY 2018
Title: Finance Committee Discussion and Recommendation That Council
Adopt (As Part of the Fiscal Year 2018 Annual Budget) a Resolution Amending
the Residential Refuse Rates for Fiscal Year 2018 to Cover Program Costs and
Keeping All Other Rates the Same
From: City Manager
Lead Department: Public Works
Recommendation
Staff recommends the Finance Committee:
Recommend Council adopt (as part of the Fiscal Year 2018 Annual Budget) the
attached resolution (Attachment A) amending Utility Rate Schedule R-1
(Residential Refuse Rates)(Attachment B).
Executive Summary
Staff proposes a 5% increase in FY 2018 to complete the three-year plan of
residential rate adjustments,balancing residential sector revenues and expenses
(SR #5566). The proposed residential rate increase of 5% is less than the
previously projected third-year rate increase of 8%due to program expense
reductions. The 5% residential rate increase brings residential revenues fully in
line with that sector’s expenses, consistent with state law requirements. Staff is
not proposing any changes to the commercial rate at this time.
Background
Refuse Services
Residential and commercial refuse rates pay for more than just garbage
City of Palo Alto Page 2
collection,including the following:
·Garbage service –Curbside collection of the black garbage cart, processing
the garbage at the Sunnyvale Material and Recovery Transfer (SMaRT)
Station and landfilling the residual at Kirby Canyon Landfill in San Jose.
·Recycling service –Curbside collection of the blue recycling cart, sorting the
recyclables into saleable commodities at the GreenWaste Recovery Charles
Street Material Recovery Facility (MRF).
·Compost service –Curbside collection of the green cart;processing and
anaerobic digestion of yard trimmings and food scraps at the Zero Waste
Energy Development (ZWED) facility in north San Jose to produce compost
and green energy.
·Street Sweeping service –Weekly street sweeping services during the leaf
season and bi-weekly sweeping the rest of the year.
·Annual Clean Up Day – Once a year each single-family residential refuse
customer can contact GreenWaste to pick up four large items that cannot
fit in the black garbage cart, in addition to contained garbage, recyclables
and yard trimmings.
·Zero Waste Palo Alto support – Residents and businesses can contact Zero
Waste staff to gain valuable information on home composting, reducing
food waste and zero waste events.
·Household Hazardous Waste (HHW) service –Weekly collection program at
the HHW Station located at the Palo Alto Regional Water Quality Control
Plant.
·Palo Alto Landfill post closure maintenance and monitoring – Ongoing
maintenance and monitoring at the now-closed Palo Alto Landfill.
The cost of refuse services for each program area is listed in Table 1. Zero waste
program support is included in the “Solid Waste” category.
Table 1.Refuse Program Costs Preliminary Budget FY 2018 $31.1 million*
Solid Waste Recycling Compost Landfill Hazardous
Waste
Street
Sweeping
$15.6 m $4.0 m $5.6 m $3.9 m $0.6 m $1.4 m
*The final FY 2018 budget amounts may differ from these estimates.
Single-Family Residential Refuse Rates (R-1)
City of Palo Alto Page 3
In 2015, the City contracted with a consultant to prepare a Solid Waste Rate
Structure and Analysis Report. The report noted the revenue collected from
residential refuse customers was less than the cost to service the residential
customers. The Finance Committee approved staff’s proposed plan to increase
residential rates 28% (for most customers) over three years to provide sufficient
revenue to cover all residential expenses by FY 2018 (SR #5566). Residential rates
were increased 9% in FY 2016, 9% in FY 2017,and in FY 2018 staff proposes a 5%
increase to complete the three-year balancing plan.
Discussion
Commercial Rates (RC)
No changes are recommended to commercial rates at this time.
Single-Family Residential Rates
This proposed 5%rate increase is less than the previously projected increase of
8% primarily due to GreenWaste depreciation expenses and reductions in the
Sunnyvale Materials and Recycling Transfer (SMaRT) Station debt services budget.
As the initial projected FY 2018 budget of $31.1 million is roughly $300,000 more
than the FY 2017 budget of $30.8 million, a 5% rate increase is all that is needed
to fully fund the residential sector refuse expenses. Although a small proportion
of customers will “downsize” their garbage cart, staff does not anticipate this
significantly impacting overall revenue. Table 2 lists the various garbage cart sizes
available and current corresponding rates and recommended rate increases.
Table 2: Recommended FY 2018 Adjustments (R-1 Single-Family Residential Rate
Schedule)
Cart Size Current Rates
(monthly)
Recommended
FY 2018 Rates
(monthly)
Dollar Increase Percentage
Increase
20 gal $26.48 $27.81 $1.33 5%
32 gal $47.69 $50.07 $2.38 5%
64 gal $95.38 $100.15 $4.77 5%
96 gal $143.07 $150.22 $7.15 5%
To cover projected expenses through FY 2021, staff projects residential rate
increases of 5% in FY 2018, 3% in FY 2019, 3% in FY 2020, and 3% in FY 2021.
City of Palo Alto Page 4
The City offers one of the most comprehensive Refuse,Zero Waste, street
sweeping and household hazardous waste collection programs in the region.
Nonetheless, the City’s least expensive rate option, a mini-can,is priced within
the range of neighboring cities (Table 3). The Palo Alto rates are proposed for July
1, 2017. Cities with lower monthly rates generally offer fewer services.
Table 3: Regional Single-Family Residential Monthly Rate+Comparison
City Least Expensive Rate
Palo Alto $27.81
Menlo Park $13.99
Mountain View $20.05
San Jose $32.07*
Santa Clara $19.93
Sunnyvale $38.23*
+As of March 2017
* Does not offer a minican/20 gallon cart
To minimize the need for rate increases, staff implemented several significant
cost saving measures in recent years, including but not limited to (1) accelerating
the filling and closing of the City’s landfill; (2) contracting street sweeping
operations and moving to less frequent sweeping during the non-leaf season; and
(3) improvements and efficiencies gained in the City’s household hazardous waste
collection program.
Note, approximately two-thirds of Refuse Program expenses are based on CPI
increases built into respective agreements. The projections for FY 2018 and near-
term future are based on these 3% CPI increases and are addressed in the
recommended rates.
Timeline Refuse Rate Implementation Schedule
Task Schedule
Finance Committee final rate approval as part
of the budget process
April 4, 2017
Proposition 218 notices mailed May 1, 2017
Council approval June 12, 2017
New Refuse Rates take effect July 1, 2017
City of Palo Alto Page 5
Resource Impact
The impacts of the proposed FY 2018 refuse rate increases will implement the
third year of a three-year phased program to realign rates between the
residential, commercial and roll-off sectors so that residential revenues are
sufficient to cover expenses. Rates in all sectors are sufficient to cover expenses
and continue rebuilding refuse reserves to appropriate levels.
Policy Implications
There are no policy changes contained in the adoption of the proposed new
Refuse Rates.
Environmental Clearance/CEQA
Adjustments of rates are statutorily exempt from the California Environmental
Quality Act (CEQA) (Section 21083, Public Resources Code; Reverence Section
21080(b)(8), Public Resource Code.
Attachments:
·Attachment A: Refuse Rates Resolution
·Attachment B: R1 7-1-2017
Attachment A
Resolution No. ______
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 XX, 2017 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, R-1-2,attached
hereto and incorporated herein. The foregoing Utility Rate Schedules, as amended, shall become effective on
July 1, 2017.
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.
/ /
/ /
/ /
/ /
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:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
_______________________________________________________
City Clerk Mayor
APPROVED AS TO FORM:APPROVED:
_______________________________________________________
City Attorney City Manager
_____________________________
Director of Public Works / City Engineer
_____________________________
Director of Administrative Services
DOMESTIC REFUSE COLLECTION
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City of Palo Alto (ID # 7854)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/4/2017
City of Palo Alto Page 1
Summary Title: FY 2018 Water Financial Plan and Rate Proposals
Title: Utilities Advisory Commission Recommendation That the City Council
Adopt: (1) a Resolution Approving the Fiscal Year 2018 Water Utility Financial
Plan; and (2) a Resolution Increasing Water Rates by Amending Rate
Schedules W-1 (General Residential Water Service), W-2 (Water Service From
Fire Hydrants), W-4 (Residential Master-Metered and General Non-
Residential Water Service), and W-7 (Non-Residential Irrigation Water
Service) and Removing the Drought Surcharge
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) approving the fiscal year (FY) 2018 Water Utility
Financial Plan (Attachment B); and
2. Transfer $1.877 million from the Rate Stabilization Reserve to the Operations Reserve;
and
3. Adopt a resolution (Attachment C) increasing water rates by amending Rate Schedules
W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants),
W-4 (Residential Master-Metered and General Non-Residential Water Service), and
W-7 (Non-Residential Irrigation Water Service) and removing the drought surcharge;
Executive Summary
The FY 2018 Water Utility Financial Plan includes projections of the utility’s costs and revenues
for FY 2018 through FY 2027. Costs are projected to rise by about 3% per year over the next
several years, primarily due to increasing water supply costs. As a result, staff projects the need
for a 4% water rate increase on July 1, 2017 and 6% rate increases in FY 2019 through FY 2023.
Uncertainty about the persistence of lower water usage achieved during the recent drought
makes these rate projections uncertain. The 4% increase for 2017 is needed to bring the unit
cost of water in line with the San Francisco Public Utilities Commission (SFPUC)’s preliminary
City of Palo Alto Page 2
estimates of FY 2018 wholesale water costs ($4.37/CCF).
In addition, as discussed in last year’s financial plan, staff still recommends the transfer of
$1.877 million from the Rate Stabilization Reserve to the Operations Reserve in FY 2017. This
action will reduce the Rate Stabilization Reserve to zero.
The UAC reviewed the Water Financial Plan and Rate Proposals at its meeting on March 1,
2017, and unanimously recommended approval of the proposed rates and financial plan.
Background
Every year staff presents the UAC 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.
The Finance Committee reviewed preliminary financial forecasts at its March 21, 2017 meeting.
Staff has not revised the preliminary projections presented at that meeting.
Discussion
Staff’s annual assessment of the financial position of the City’s water utility is completed to
ensure adequate revenue to fund operations, in compliance with the cost of service
requirements set forth in the California Constitution (Proposition 218). This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. The
current rate proposals are also based on the cost of service methodology described in the 2012
Palo Alto Water Cost of Service & Rate Study, the 2015 Study update, and the 2015 Drought
Rate memorandum completed by Raftelis Financial Consultants.
Staff proposes to adjust water rates to the levels shown in Tables 1 and 2, below, effective July
1, 2017, to recover projected increases in the wholesale cost of water the City purchases from
the San Francisco Public Utilities Commission. These changes are projected to increase the
system average water rate by roughly 4%. These rate changes are included in the proposed
amended rate schedules in Attachment D. Prices are increasing by the same amount across all
rates as the underlying commodity cost is the same for all customers.
City of Palo Alto Page 3
Table 1: Water Consumption Charges in $/CCF (Current and Proposed)
Current
(7/1/16)
Proposed
(7/1/17)
Change*
$/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 6.30 6.66 0.36 6%
Tier 2 Rates 8.82 9.18 0.36 4%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 7.32 7.68 0.36 5%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 7.32 7.68 0.36 5%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 8.72 9.08 0.36 4%
Table 2: Current and Proposed Monthly Service Charge (No Change)
Meter
Size
Monthly Service Charge
($/month based on meter size)
Residential (W-1)
Commercial (W-4)
Irrigation (W-7)
Fire Services
(W-3)
5/8” $16.77 N/A
3/4” $22.60 N/A
1” $34.26 N/A
1 ½” $63.40 N/A
2” $98.37 $3.79
3” $209.11 N/A
4” $372.31 $23.42
6” $762.81 $68.03
8” $1,403.94 $144.97
10” $2,219.92 $260.70
12” $2,919.34 $421.11
Bill Impact of Proposed Rate Changes
Table 5 shows the impact of the proposed July 1, 2017 rate changes on residential bills. The
average increase is projected to be about four percent, which is related to commodity cost
increases. The increase represents the difference between what was projected by staff during
the FY 2017 forecasting process ($4.01/ccf) to the current estimate of what the FY 2018 SFPUC
W-25 (Wholesale Use with Long-Term Contract) rate will be. While staff forecast $4.01/ccf
based on preliminary figures provided by the SFPUC, the final rate SFPUC adopted for FY 2017
was $4.10/ccf, with reserves used to cover the difference in the City’s costs vs. revenues.
City of Palo Alto Page 4
In early January, the SFPUC provided a preliminary range for their FY 2018 increase to the W-25
wholesale rate ($4.10 to $4.37/ccf). The SFPUC will not determine the final rate until May or
June. However, in order to have the City’s rates in place for July 1, staff must provide notice to
customers by the end of April. Staff has chosen to conservatively forecast at the high end of the
SFPUC estimate.
To calculate the rate increase needed as a result of the City’s increased commodity costs, staff,
in coordination with the City’s cost of service consultant, applied the per unit commodity cost
to the volumetric component of the rates, based on the analysis and methodology from the
cost of service study. The per-unit commodity cost is the same for all classes of customers and
across all usage levels. As this proposed increase only reflects changes to commodity costs,
volumetric rates will increase by the same amount per ccf, regardless of customer type or usage
tier.
Table 5 shows the impact of the proposed changes. As the State has removed mandatory usage
restrictions for California agencies, the SFPUC has adequate water supplies, and as the Water
Fund’s reserves are within guideline levels, staff is recommending that Council deactivate the
drought surcharge at this time. The bill comparison below assumes the deactivation of the
drought surcharge.
Table 5: Impact of Proposed Rate Changes on Residential Bills (no drought surcharge)
Usage
(CCF/month)
Bill under
Existing Rates
(7/1/16)
Bill under
Proposed Rates
(7/1/17)
Change
$/mo. %
4 $41.97 $43.41 $1.44 3.4%
(Winter median) 7 63.39 65.91 2.52 4.0%
(Annual median) 9 81.03 84.27 3.24 4.0%
(Summer median) 14 125.13 130.17 5.04 4.0%
25 222.15 231.15 9.00 4.1%
Table 6 shows the impact of the proposed July 1, 2017 rate changes on various representative
commercial customer bills. As with residential rates, this comparison assumes the
discontinuation of the drought surcharge.
City of Palo Alto Page 5
Table 6: Impact of Proposed Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current Rates
(7/1/16)
Bill under
Proposed Rates
(7/1/17)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 $104.61 $108.93 $4.32 4%
(Annual average) 64 485.25 508.29 23.04 5%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 142 145 3 2%
(Summer median) 37 386 399 13 3%
(Winter average) 56 552 572 20 4%
(Summer average) 199 1,799 1,870 72 4%
FY 2018 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 7 shows the projected rate adjustments over the next five years and their impact on the
annual median residential water bill.
Table 7: Projected Rate Adjustments, FY 2018 to FY 2022
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Water Utility 4% 6% 6% 6% 6%
Estimated Bill Impact ($/mo)* $3.24 $5.06 $5.36 $5.68 $6.02
* estimated annual impact on median residential water bill, which is currently $81.03.
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 adopted by the SFPUC, and
generally change on an annual basis. Last year the SFPUC’s wholesale rate rose by 9%, and
current projections range from 0% to 7%. Over the forecast period, though, it is projected to
rise by two to three percent per year. If lower usage persists from the drought, the magnitude
of future increases will be difficult to predict. What is certain is that the SFPUC’s costs to
operate the Regional Water System are primarily fixed costs, so the water rate charged to
wholesale customers like the City of Palo Alto is highly dependent on usage by users of the
Regional Water System. The City’s FY 2018 Water Utility Financial Plan assumes that, while the
drought has ended and usage has started to increase, based on CPAU’s experience,
consumption is not anticipated to return to pre-drought levels.
The Water Utility may also see a $1 million increase in operating costs for a capital lease for
emergency generators for wells and pump stations. Aside from that, operating and CIP costs
are projected to rise roughly 2% to 4% annually over that time.
There remains some uncertainty in the forecasts of capital costs for the water utility in coming
years. Water main replacement costs have risen substantially in recent years, and it is possible
higher CIP expenditures will be required in the future. Higher bid costs and delays in project
schedules have resulted in a projected deferment of main replacement projects by two years,
City of Palo Alto Page 6
starting in FY 2017, meaning that capital investment costs will be lower for those two years.
This delay in main replacement, along with the proposed rate trajectory, should allow for the
Operations Reserve to remain well within the reserve guidelines throughout the forecast
period.
Water Bill Comparison with Surrounding Cities
Table 8 compares water bills for residential customers to those in surrounding communities as
of February 1, 2017 (under current the City’s current water rates). Palo Alto customers have the
highest monthly bills of the group, although bills for smaller water users are lower than in some
surrounding communities. It is unclear at this time what water rate changes may be
implemented in these communities for FY 2018.
Table 8: Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of February 2016
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
4 43.69 44.46 46.47 34.63 33.37 19.80
(Winter median) 7 67.18 63.03 65.43 53.68 45.20 34.65
(Annual median) 9 87.24 75.43 78.07 66.38 53.09 44.55
(Summer median) 14 137.39 107.95 119.47 98.13 73.81 69.30
25 247.72 180.33 229.94 206.08 119.91 123.75
Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable
water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87%
for Mountain View, 10% for Santa Clara and 100% for Hayward.
Changes from Preliminary Financial Forecast
After presenting the preliminary financial forecast to the UAC on February 1, 2017, staff re-
evaluated reserve and cost positions and determined a commodity-only increase could be
performed without negatively impacting the financial health of the utility. The final SFPUC
wholesale rate is not determined until May or June, well after Palo Alto needs to propose and
notice its rate changes to the public under Proposition 218. In the future, staff may
recommend that the SFPUC Schedule W-25 (Wholesale Cost with Long-Term Contract)
commodity cost to Palo Alto be automatically passed -through to ratepayers, similar to how gas
commodity costs are passed through on a monthly basis. Allowing commodity costs to
automatically adjust via a pass-through charge would better match revenues to the City’s
wholesale costs and avoid having to reconcile SFPUC’s commodity cost changes many months
after they are imposed.
California law implementing Prop. 218 (Government Code 53766) allows for automatic
adjustments that pass-through increases or decreases in the City’s wholesale water costs, so
long as customers are informed of the rate adjustment at least 30 days in advance of each rate
adjustment. Customers would be informed of the City’s initial intent to automatically adjust
City of Palo Alto Page 7
these costs via the standard Proposition 218 notice and hearing process. If no majority protest
occurred and Council adopted the proposed rates, future changes to the wholesale rate could
be passed through to customers upon 30 days’ notice to customers, and such notice is typically
included on the utility bill. The automatic pass-through adjustment would need to be
reapproved, via a new Proposition 218 notice and public hearing process, every five years.
Changes from Last Year’s Financial Forecast
Table 9 compares current rate projections to those projected in the last two year’s Financial
Plans. As shown, the FY 2018 rate projections are somewhat lower than projected last year.
The cumulative projected increase in rates through FY 2026 is similar to last year’s projections.
In this year’s projection, however, higher reserves allow rates to be increased gradually over
the entire forecast period, rather than increased quickly in FY 2018, FY 2019, and FY 2020, as in
last year’s projection. The overall rate increase over the forecast period is higher than projected
in the FY 2016 Financial Plan, however, and this is due to the high likelihood of some of the
water conservation habits established during the drought persisting long term, leading to lower
consumption.
Table 9: Projected Water Rate Trajectory for FY 2018 to FY 2027
Projection FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Current
(FY 2018 Financial Plan) 4% 6% 6% 6% 6% 6% 2% 2% 2% 1%
Last year
(FY 2017 Financial Plan) 9% 9% 6% 2% 2% 2% 3% 5% 3% N/A
Two years ago
(FY 2016 Financial Plan) 8% 8% 3% 1% 2% 3% N/A N/A N/A N/A
Commission Review and Recommendation
The UAC reviewed this proposal at its March 1, 2017 meeting. Staff noted that the rate
projection had changed since the February 1, 2017 meeting as a result of new projections for
the balance of the Operations Reserve. The original six percent increase was amended down to
a four percent increase instead.
After brief discussion the UAC voted to recommend that the Council adopt resolutions
approving the FY 2018 Water Financial Plan and increasing water rates by amending Rate
Schedules W-1, W-2, W-4 and W-7. The vote was unanimous (7-0). The draft excerpted minutes
from the UAC’s March 1, 2017 meeting are provided as
Attachment E.
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 State Constitution (added
by Proposition 218). The Financial Plans and rate schedules will then go to the City Council with
City of Palo Alto Page 8
the FY 2018 budget for adoption, at which time the public hearing required by Article XIIID of
the State Constitution 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. Assuming the rate changes are approved, they
will become effective July 1, 2017.
Resource Impact
Normal year sales revenues for the Water Utility are projected to increase by roughly 4% ($1
million) as a result of these rate increases. See the attached FY 2018 Water Financial Plan for a
more comprehensive overview of projected cost and revenue changes for the next ten years.
Policy Implications
The proposed water rate adjustments are consistent with Council-adopted Reserve
Management Practices that are part of the Financial Plans, and were developed using a cost of
service study and methodology consistent with the cost of service requirements of Proposition
218.
Environmental Review
The Finance Committee’s review and recommendation to Council on the FY 2018 Water
Financial Plans and rate adjustments does not meet the definition of a project requiring
California Environmental Quality Act (CEQA) review, under Public Resources Code Section
21065 and is exempt from CEQA review under Public Resources Code Section 21080(b)(8) as an
adoption of rates to meet operating expenses, purchase supplies, meet reserve needs and
obtain capital improvement funds).
Attachments:
Attachment A: Resolution Approving the FY 2018 Water Financial Plan
Attachment B: Proposed FY 2018 Water Financial Plan
Attachment C: Resolution of the Council of the City of Palo Alto Increasing Water Rates
by Amending Rate Schedules W-1, W-2, W-4, and W-7 and Deactivating the Level 2
Drought Surcharge
Attachment D: Proposed Amendments to Rate Schedules W-1_W-2_W-4, and W-7
effective 7-1-2017
Attachment E: Excerpt of Draft March 1, 2017 Utilities Advisory Commission Minutes
Attachment A
* NOT YET APPROVED *
170216 jb 6053918
Resolution No. ______
Resolution of the Council of the City of Palo Alto Approving the
FY 2018 Water Utility Financial Plan
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.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby adopts the FY 2018 Water Utility Financial Plan.
SECTION 2. The Council hereby approves the transfer of $1.877 million in FY 2018 from
the Rate Stabilization Reserve to the Operations Reserve, as described in the FY 2018 Water
Utility Financial Plan approved via this resolution.
SECTION 3. The Council finds that the adoption of this resolution does not meet the
definition of a project requiring California Environmental Quality Act (CEQA) review, under
/ /
/ /
/ /
/ /
/ /
Attachment A
* NOT YET APPROVED *
170216 jb 6053918
California Public Resources Code 21065 and CEQA Guidelines Section 15378(b)(5), because it is
an administrative governmental activity which will not cause a direct or indirect physical change
in the environment.
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
FY 2018 WATER
UTILITY
FINANCIAL PLAN
FY 2018 TO FY 2027
ATTACHMENT B
WATER UTILITY FINANCIAL PLAN
F e b r u a r y 2 0 1 6 2 | P a g e
FY 2018 WATER UTILITY
FINANCIAL PLAN
FY 2018 TO FY 2027
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations................................................................................ 4
Section 2: Executive Summary and Recommendations ........................................................... 4
Section 2A: Overview of Financial Position .................................................................................. 4
Section 2B: Summary of Proposed Actions .................................................................................. 5
Section 3: Detail of FY 2018 Rate and Reserves Proposals ....................................................... 5
Section 3A: Rate Design ............................................................................................................... 5
Section 3B: Current and Proposed Rates ..................................................................................... 6
Section 3C: Bill Impact of Proposed Rate Changes ...................................................................... 8
Section 3D: Proposed Reserve Transfers ................................................................................... 10
Section 4: Utility Overview .................................................................................................. 10
Section 4A: Water Utility History ............................................................................................... 10
Section 4B: Customer Base ........................................................................................................ 11
Section 4C: Distribution System ................................................................................................. 11
Section 4D: Cost Structure and Revenue Sources ...................................................................... 11
Section 4E: Reserves Structure ................................................................................................... 12
Section 4F: Competitiveness ...................................................................................................... 13
Section 5: Utility Financial Projections ................................................................................. 13
Section 5A: Load Forecast .......................................................................................................... 13
Section 5B: FY 2012 to FY 2016 Cost and Revenue Trends ........................................................ 15
Section 5C: FY 2016 Results ....................................................................................................... 16
Section 5D: FY 2017 Projections ................................................................................................ 16
Section 5E: FY 2018 – FY 2027 Projections ................................................................................ 16
Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 18
Section 5G: Alternate ScenarIOS ................................................................................................ 19
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Section 5H: Long-Term Outlook ................................................................................................. 19
Section 6: Details and Assumptions ..................................................................................... 20
Section 6A: Water Purchase Costs ............................................................................................. 20
Section 6B: Operations .............................................................................................................. 21
Section 6C: Capital Improvement Program (CIP) ....................................................................... 22
Section 6D: Debt Service ............................................................................................................ 24
Section 6E: Other Revenues ....................................................................................................... 26
Section 6F: Sales Revenues ........................................................................................................ 26
Section 7: Communications Plan .......................................................................................... 26
Appendices ......................................................................................................................... 28
Appendix A: Water Utility Financial Forecast Detail ................................................................. 29
Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 31
Appendix C: Water Utility Reserves Management Practices ..................................................... 33
Appendix D: Description of Water Utility Operational Activities ............................................... 36
Appendix E: Sample of Water Utility Outreach Communications ............................................. 37
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SECTION 1: DEFINITIONS AND ABBREVIATIONS
BAWSCA Bay Area Water Supply and Conservation Agency
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
O&M Operations and Maintenance
RFC Raftelis Financial Consultants, Inc.
SFPUC San Francisco Public Utilities Commission
SFWD San Francisco Water Department
UAC Utilities Advisory Commission
WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the
transmission lines of the Hetch Hetchy regional water system.
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City’s Water Utility for the next ten 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 2A: OVERVIEW OF FINANCIAL POSITION
Overall costs in the Water Utility are expected to rise by about 3% per year from fiscal year (FY)
2017 to 2027. Excluding FY 2018 (which, unlike a normal year, does not include a water main
replacement project), most costs are projected to rise by two to three percent annually through
the projection period. The costs for the Water Utility are shown in Table 1 below.
Table 1: Expenses for FY 2016 to FY 2027 (Thousand $’s)
Expenses
($000)
FY
2016
(act.)
FY
2017
(est.)
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Water
Purchases
17,626
19,246
21,347
22,756
22,850
22,933
23,016
23,120
23,367
23,625
23,890
24,495
Operations
15,895
17,601
18,064
18,535
19,023
19,475
19,905
20,349
20,798
21,260
21,734
22,220
Capital
Projects
9,082
4,110
4,082
10,314
10,067
10,364
10,671
10,986
11,310
11,645
11,989
12,343
TOTAL
42,603
40,610
43,494
51,605
51,940
52,773
53,591
54,455
55,475
56,529
57,613
59,059
This proposed financial plan projects that the rate increases shown in Table 2 are needed to
ensure that revenues cover rising costs and reserves remain healthy. The table also shows rate
projections from last year’s Financial Plan. Last year’s plan projected earlier, more aggressive
rate increases. However, the delay of the planned FY 2017 and FY 2018 water main
replacement projects resulted in an increase in reserves, which enabled the more gradual
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increases projected in the current plan. This also means that the Rate Stabilization Reserve will
be drawn down over a longer time frame than projected in last year’s financial plan.
Table 2: Projected Water Rate Trajectory for FY 2018 to FY 2027
Projection FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Current 4% 6% 6% 6% 6% 6% 2% 2% 2% 1%
Last year 9% 9% 6% 2% 2% 2% 3% 5% 3% N/A
2 years 8% 8% 3% 1% 2% 3% N/A N/A N/A N/A
The Water Utility has a Rate Stabilization Reserve that can be used to smooth rate increases
over several years. This Financial Plan projects that these reserves will be exhausted by the end
of FY 2017. The Water 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 2020. Table 3 shows the projected reserve transfers over the forecast period.
Table 3: Transfers To/(From) Reserves for FY 2017 to FY 2027 ($000)
Reserve FY 2017 FY 2018 FY 2019 to FY 2027
Capital Improvement - (2,726)
Rate Stabilization (1,877) - -
Operations 1,867 - 2,726
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Water Utility in FY 2018:
1. Increase rates by 4%, reflecting proposed increases to SFPUC wholesale rates. This is
described in more detail in Section 3B: Current and Proposed Rates.
2. Transfer $1.877 million from the Rate Stabilization Reserve to the Operations Reserve.
See Section 3D: Proposed Reserve Transfers for more details.
SECTION 3: DETAIL OF FY 2018 RATE AND RESERVES PROPOSALS
SECTION 3A: RATE DESIGN
The Water Utility’s rates are evaluated and implemented in compliance with the cost of service
requirements and procedural rules set forth in the California Constitution under Article 13 (per
Proposition 218). Current rates were structured based on staff’s assessment of the financial
position of the Water Utility, and updated using the methodology from the March 2012 Palo
Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc. (Staff Report
2676), as well as Raftelis’ 2015 Memorandum: Proposed Water Rates updating the 2012 Study
and analyzing drought rates (Staff Report 5951). 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
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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.
In 2015 Council adopted a drought surcharge to assist the water utility in recovering its costs
due to decreased revenue due to lower water consumption resulting from conservation
measures. Recent rains have dramatically improved the water supply outlook for the Hetch
Hetchy system, eliminating local drought impacts. Mandatory usage restrictions have been
lifted by the State of California, and while voluntary measures may still remain in place ,
customers’ usage of water has started to increase. The increasing usage, the end of the
drought, and the healthy level of Operations reserves indicate to staff that the drought
surcharge can be removed at this time.
SECTION 3B: CURRENT AND PROPOSED RATES
The current rates and surcharges were effective on July 1, 2016. Rates were adjusted in
accordance with the results of an updated cost of service study performed by Raftelis Financial
Consultants, Inc. (RFC) in 2015. The 2015 study both developed the drought surcharges and
validated the City’s water rate methodology and structure in light of court decisions
interpreting provisions of the State Constitution applicable to water rates. RFC recommended
only minor adjustments to ensure that peaking costs were equitably allocated to each customer
class and residential rate tier.
CPAU has five rate schedules: one for separately metered residential customers (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 at the 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 consumption charges.
The average increase is projected to be about four percent, which is related to commodity cost
increases. The increase represents the difference between what was projected by staff during
the FY 2017 forecasting process ($4.01/ccf) to the current estimate of what the FY 2018 SFPUC
W-25 (Wholesale Use with Long-Term Contract) rate will be. While staff forecast $4.01/ccf
based on preliminary figures provided by the SFPUC, the final rate adopted for FY2017 was
$4.10/ccf, with reserves used to cover the difference in cost vs. revenues.
In early January, the SFPUC provided a preliminary range for their FY 2018 increase to the W-25
wholesale rate ($4.10 to $4.37/ccf). The SFPUC will not determine the final rate until May or
WATER UTILITY FINANCIAL PLAN
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June. However, in order to have rates in place for July 1, staff must notice customers by the end
of April. Staff has chosen to conservatively forecast at the high end of the SFPUC estimate.
The SFPUC does not typically provide it’s final, annual change to its wholesale rate until the
City’s retail rate is already proposed to Council for adoption. To meet Palo Alto’s timeline to
increase rates by July 1, staff has historically set retail rates based on early estimates from the
SFPUC, which are subject to change.
Changes in the SFPUC’s wholesale rate require staff to reconcile costs and revenues well after
the fact. To calculate the rate increase needed as a result of the City’s increased commodity
costs, staff, in coordination with the City’s cost of service consultant, applied the per-unit
commodity cost to the volumetric component of the rates, based on the analysis and
methodology from the cost of service study. The per-unit commodity cost is the same for all
classes of customers and across all usage levels. As this proposed increase only reflects changes
to commodity costs, volumetric rates will increase by the same amount per ccf, regardless of
customer type or usage tier.
California law implementing Prop. 218 (Government Code 53766) allows for automatic
adjustments that pass-through increases or decreases in the City’s wholesale water costs, so
long as customers are informed of the rate adjustment at least 30 days in advance of each rate
adjustment. Customers would be informed of the City’s initial intent to automatically adjust
these costs via the standard Proposition 218 notice and hearing process. If no majority protest
occurred and Council adopted the proposed rates, future changes to the wholesale rate could
be passed through to customers upon 30 days’ notice, which is typically included on the utility
bill. The automatic pass-through adjustment would need to be reapproved, via a new Prop.
218 notice and public hearing process, every five years.
Table 4: Current and Proposed Water Consumption Charges
Current
(7/1/16)
Proposed
(7/1/17)
Change*
$/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 6.30 6.66 0.36 6%
Tier 2 Rates 8.82 9.18 0.36 4%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 7.32 7.68 0.36 5%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 7.32 7.68 0.36 5%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 8.72 9.08 0.36 4%
Table 5 shows the current monthly service charges for all rate schedules. Staff is not
recommending a change to the monthly service charge schedule at this time, as they are not
affected by the SFPUC’s wholesale water rate changes.
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Table 5: Current Monthly Service Charges
Meter
Size
Monthly Service Charge
($/month based on meter size)
Residential (W-1)
Commercial (W-4)
Irrigation (W-7)
Fire Services
(W-3)
5/8” $16.77 N/A
3/4” $22.60 N/A
1” $34.26 N/A
1 ½” $63.40 N/A
2” $98.37 $3.79
3” $209.11 N/A
4” $372.31 $23.42
6” $762.81 $68.03
8” $1,403.94 $144.97
10” $2,219.92 $260.70
12” $2,919.34 $421.11
SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES
Table 6 shows the impact of the estimated July 1, 2017 rate changes on the median residential
bill. The average increase is projected to be about four percent, but some customers may see
slightly higher or lower increases due to slight changes in the composition of the utility’s costs.
To allow for effective comparison, the sample bills shown in Table 6 do not include the
temporary drought surcharge, since this would make the bills based on the July 1, 2016 rates
appear artificially high and obscure the effects of the increases to long-term rates effective July
1, 2017. In reality, though, many customers will see a decrease in their bills due to the removal
of the drought surcharge. This is shown in Table 7.
Table 6: Impact of Proposed Water Rate Changes on Residential Bills (no surcharge)
Usage
(CCF/month)
Bill under
Current Rates
(7/1/16)
Bill under
Proposed
Rates (7/1/17)
Change
$/mo. %
4 $41.97 $43.41 $1.44 3.4%
(Winter median) 7 63.39 65.91 2.52 4.0%
(Annual median) 9 81.03 84.27 3.24 4.0%
(Summer median) 14 125.13 130.17 5.04 4.0%
25 222.15 231.15 9.00 4.1%
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Table 7: Impact of Proposed Water Rate Changes on Residential Bills (with 20% drought
surcharge)
Usage
(CCF/month)
Bill under
Current Rates
(7/1/16)
Bill under
Proposed
Rates (7/1/17)
Change
$/mo. %
4 $43.69 $43.41 ($0.28) -0.6%
(Winter median) 7 67.18 65.91 (1.27) -1.9%
(Annual median) 9 87.24 84.27 (2.97) -3.4%
(Summer median) 14 137.39 130.17 (7.22) -5.3%
25 247.72 231.15 (16.57) -6.7%
Error! Reference source not found. shows the impact of the proposed July 1, 2017 rate changes
on various representative commercial customer bills. As for the residential comparison in Table
6 above, this comparison does not include the drought surcharge. A comparison with the
existing 20% surcharge is shown in Table 9.
Table 8: Impact of Proposed Water Rate Changes on Commercial Bills (no surcharge)
Usage
(CCF/month)
Bill under
Current Rates
(7/1/16)
Bill under
Proposed Rates
(7/1/17)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 $104.61 $108.93 $4.32 4%
(Annual average) 64 485.25 508.29 23.04 5%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 142 145 3 2%
(Summer median) 37 386 399 13 3%
(Winter average) 56 552 572 20 4%
(Summer average) 199 1,799 1,870 72 4%
Table 9: Impact of Proposed Water Rate Changes on Commercial Bills (with 20% drought
surcharge)
Usage
(CCF/month)
Bill under
Current Rates
(7/1/16)
Bill under
Proposed Rates
(7/1/17)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 $110.97 $108.93 ($2.04) -2%
(Annual average) 64 519.17 508.29 (10.88) -2%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 153 145 (8) -5%
(Summer median) 37 432 399 (33) -8%
(Winter average) 56 622 572 (50) -8%
(Summer average) 199 2,047 1,870 (177) -9%
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SECTION 3D: PROPOSED RESERVE TRANSFERS
In the FY 2017 Financial Plan, staff proposed transferring $1.87 million from the Rate
Stabilization Reserve to the Operations Reserve in FY 2017. This transfer will exhaust the Rate
Stabilization Reserve, as planned for and discussed in Section 4E: Reserves Structure, and 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.
However, a proposed $4 million transfer from the CIP Reserve to the Operations Reserve was
also discussed in the FY 2016 Financial Plan. As the Operations reserve is projected to end the
year at its maximum allowed level, this transfer is no longer required at this time. These funds
will be retained for unexpected CIP expenses. The impact of these transfers on reserves levels
can be seen in Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast
Detail.
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information and to help readers better understand the forecasts in Section 5:
Utility Financial Projections and Section 6: Details and Assumptions.
SECTION 4A: WATER UTILITY HISTORY
The Water Utility was established on May 9, 1896, two years after the city was incorporated.
Voters of the 750 person community approved a $40,000 bond to buy local, private water
companies who operated one or more shallow wells to serve the nearby residents. The city
grew 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
replacement was increased from one mile per year to three. A plan to replace 75 miles of
deficient mains within 25 years was begun.
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Figure 1: Cost Structure (FY 2016)
42%
37%
21%
Water Purchases
Operations
Capital
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, completed in 2013,
which involved a new underground reservoir in El Camino Park, the siting and construction of
several emergency supply wells, and the upgrade of several existing wells and the Mayfield
pump station. Upon completion, the City began to focus its reliability efforts on its system of
water storage reservoirs and transmission lines in the Foothills.
At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in
consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy water
system, which crosses two major fault lines between the Sierras and the Bay Area. That
evaluation concluded that major upgrades to the system were required. This planning process
culminated in the SFPUC’s $4.8 billion Water System Improvement Project (WSIP), which is
ongoing. The SFPUC continues to evaluate its aging system for other needed infrastructure
improvements.
SECTION 4B: CUSTOMER BASE
CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a
handful of residential customers not in Palo Alto (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.
Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is
used for irrigation, and that consumption is heavily weather dependent. It also varies
significantly by season. As a result of these two factors, there is significant variability in the
amount of water that is demanded from the system month to month and year to year.
SECTION 4C: DISTRIBUTION SYSTEM
To deliver water to its customers, 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.
SECTION 4D: COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 1, water purchase
costs accounted for roughly 42% of the
Water Utility’s costs in FY 2016.
Operational costs represented roughly
37%, and capital investment was
responsible for the remaining 21%. These
percentage distributions are projected to
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Figure 2: Revenue Structure (FY 2016)
99%
1%
Sales of Water
Other Revenue
remain roughly the same over the forecast period.
The Water Utility receives nearly all 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
constitutes at most 30% of the utility’s total revenue from all charges1.
SECTION 4E: 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:
Reserve for Commitments: A reserve equal to the utility’s outstanding contract
liabilities for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including
the General Fund, have a Reappropriations Reserve.
Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to
accumulate funds for future expenditure on CIP projects and is anticipated to be empty
unless a major one-time CIP expenditure is expected in future years. This CIP can also
act as a contingency reserve for the CIP. This type of reserve is used in other utility funds
(Electric, Gas, and Wastewater Collection) as well.
Rate Stabilization Reserve: This reserve is intended to be empty unless 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.
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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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 4F: COMPETITIVENESS
Table 10 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.
Note that Palo Alto’s rates include the Level 2 (20%) drought surcharge currently in effect.2
Table 10: Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of February 2017
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
4 43.69 44.46 46.47 34.63 33.37 19.80
(Winter median) 7 67.18 63.03 65.43 53.68 45.20 34.65
(Annual median) 9 87.24 75.43 78.07 66.38 53.09 44.55
(Summer median) 14 137.39 107.95 119.47 98.13 73.81 69.30
25 247.72 180.33 229.94 206.08 119.91 123.75
* All comparisons use the 5/8” meter size.
SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: LOAD FORECAST
Figure 3 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 during the 2007-2009 recession and during the current drought. Water use is
down by similar amounts among both commercial and residential customers. Both summertime
and wintertime use have decreased for all customer classes.
2 The City’s water rate schedules allow for drought surcharges to be activated by Council at Level One
(10%-15% water use reduction level), Level Two (20%), or Level Three (25%)
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Figure 3: Historical Water Consumption
Figure 4 shows the forecast of water consumption through FY 2027, as denoted by the dotted
line.
Figure 4: Forecast Water Consumption
California has until recently been experiencing drought conditions, and the State had mandated
a 24% water use restriction for Palo Alto up until May 2016. Customers continue to conserve,
but water usage has been increasing. Based on patterns experienced in previous droughts and
in recognition of continued state-level calls for conservation, this forecast assumes
consumption will only return to 50% of its pre-drought levels, then resume with the previous
trend of decreasing usage over time.
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SECTION 5B: FY 2012 TO FY 2016 COST AND REVENUE TRENDS
Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs
have changed during the last five years as well as how they are projected to change over the
next decade.
The annual expenses for the water utility rose substantially between 2012 and 2016. The
increases were primarily related to water purchase costs, which increased 18% from $14.9
million in FY 2012 to $17.6 million in FY 2016. A more in-depth discussion of water purchase
costs will be found in Section 6A: Water Purchase Costs. Operations cost increased by about 3%
annually, while CIP costs stayed relatively flat, except in FY 2013 when water main replacement
projects were delayed to permit completion of a backlog of projects budgeted in prior years.
Figure 5: Water Utility Expenses, Revenues, and Rate Changes:
Actual Costs through FY 2016 and Projections through FY 2027
Actual Projected
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SECTION 5C: FY 2016 RESULTS
Forecasted revenues for FY 2016 were only slightly lower than projected ($39.4 million vs.
$39.6 million) due to customers conserving more than requested during the drought. Savings in
CIP spending as well as operations and maintenance expenses were the main drivers. Table 11
summarizes the variances from forecast.
Table 11: FY 2016, Actual Results vs. Financial Plan Forecast
Net Cost/
(Benefit)
Type of
change
Lower sales revenues $175,000 Revenue decrease
Capital improvement costs lower than expected ($1,957,000) Cost savings
Admin and general costs lower than expected ($715,000) Cost savings
Operations and maintenance costs lower than expected (852,000) Cost savings
Net Cost / (Benefit) of Variances ($3,349,000)
SECTION 5D: FY 2017 PROJECTIONS
The most notable change from the FY 2017 budget identified at this time is the deferral of
Water Main Replacement Project 27. Originally budgeted at $6.2 million, this project is now
anticipated to start in FY 2019. Also deferred to FY 2019 will be the design phase of Project 28,
budgeted at $585,000. Table 12 summarizes the changes from last year’s forecast.
Table 12: FY 2016 Change in Projected Results, 2016 Forecast vs 2017 Forecast
Net Cost/
(Benefit)
Type of
Change
Higher purchase costs $343,000 Cost increase
Higher sales and misc. revenues (interest
income, fees)
($327,000) Revenue increase
Capital project deferments ($6,106,000) Cost decrease
Higher Operations budgets $536,000 Cost increase
Net Cost / (Benefit) of Variances ($5,553,000)
SECTION 5E: FY 2018 – FY 2027 PROJECTIONS
As can be seen in Figure 5 above, costs for the Water Utility are not projected to change
significantly through the rest of the forecast period. Water supply costs are the largest
component, but generally projected to grow steadily by two to three percent over the coming
years. Operations and capital investment costs are also expected to increase at the same rate of
inflation used in the City’s long-term financial plans (2.5% to 3.0% per year), though there is still
uncertainty with regard to the utility’s future costs for main replacement. See Section 6: Details
and Assumptions for more detail on the costs that make up these projections, as well as the
various assumptions underlying the projections.
As shown in Figure 5, above, revenues are currently below normal year expenses. Revenues
match expenses in FY 2017 and FY 2018 due to delays in water main replacement projects,
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leading to much lower annual CIP spending in those years. As main replacement resumes,
revenues are projected to be below expenses in the future and will require annual rate
increases of around 6% per year through FY 2023 to bring revenues up to match annual
expenses. This forecast assumes the use of the Rate Stabilization Reserve to spread the
increases over multiple years.
Reserves trends based on these revenue projections are shown in Figure 6 below. The Rate
Stabilization Reserve is projected to have a zero balance by the end of FY 2017, and the CIP
Reserve is projected to decrease by $2.7 million by the end of FY 2019. Assuming these
increases in revenue, the Operations Reserve, the main contingency reserve, is expected to
remain above the minimum reserve level and will be adequate to meet all identified risks, as
discussed in Section 5F: Risk Assessment and Reserves Adequacy.
These projections assume that drought restrictions are not re-imposed by the State. The
forecast also assumes that water main projects can be resized such that costs do not increase
by more than inflation.
Figure 6: Water Utility Reserves
Actual Reserve Levels for FY 2016 and Projections through FY 2027
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SECTION 5F: 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 7. Reserve levels also exceed the
short term risk assessment for the utility.
Figure 7: Operations Reserve Adequacy
Table 13 summarizes the risk assessment calculation for the Water Utility through FY 2022. The
same methodology is used for FY 2023 through FY 2027 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.
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Table 13: Water Risk Assessment ($000)
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Total non-commodity revenue $18,406 $18,239 $19,829 $21,415 $23,129
Max. revenue variance, previous ten years 13% 13% 13% 13% 13%
Risk of revenue loss $1,819 $1,802 $1,959 $2,116 $2,285
CIP Budget $4,110 $4,082 $10,314 $10,067 $10,364
CIP Contingency @10% $411 $408 $1,031 $1,007 $1,036
Total Risk Assessment value $2,230 $2,210 $2,991 $3,123 $3,322
SECTION 5G: ALTERNATE SCENARIOS
At its February 2017 meeting, staff presented an earlier scenario with a 6% rate increase in FY
2018 followed by 6% rate increases in outer years. However, with the Operations reserve
projected to be above the target level and well within the guideline levels adopted by Council,
staff feels that a lower rate increase would be feasible, and is only proposing to increase City
retail rates to match the increase in SFPUC wholesale water rates.
SECTION 5H: LONG-TERM OUTLOOK
CPAU has put its Water Utility on strong footing by investing in its distribution system
infrastructure and emergency water facilities over the last 20 years. The Water System Master
Plan, recently completed and under review, will give CPAU a better picture of the long-term
outlook for its infrastructure and will result in a plan for an appropriate schedule for
infrastructure replacement and upgrades. In addition, CPAU’s water supplier, the SFPUC, has
replaced and seismically strengthened its water transmission infrastructure, which will benefit
Palo Alto and all Hetch Hetchy 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. Availability of water from SFPUC’s Regional Water System may change with changing
seasonal precipitation patterns. Water consumption patterns may change. Consumption could
increase due to drier weather or decrease as customers become even more focused on water
conservation. Droughts may become more frequent. The risk of wildfire in the foothills could
increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level
rise could result in greater exposure of utility infrastructure to 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.
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SECTION 6: DETAILS AND ASSUMPTIONS
SECTION 6A: WATER PURCHASE COSTS
CPAU purchases all of the potable water supplies from the SFPUC, which owns and operates the
Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water
from the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation
Agency (BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA
member agencies.
The Hetch Hetchy Regional Water System begins with a system of reservoirs and tunnels in the
high Sierra in Yosemite County and is transported by a gravity-fed pipeline to the Bay Area.
Currently, the SFPUC is in the midst of a $4.8 billion bond-financed capital improvement
program (the Water System Improvement Program, or WSIP) to seismically retrofit the facilities
that transport water to the Bay Area. As of December 2016, nearly 60% of the program (by
dollar value) had been completed, while 40% was under construction.3 This has resulted 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 $4.10 per CCF in FY 2017, and is forecasted to
increase to over $5.00 per CCF by FY 2025. Figure 8 shows the SFPUC’s actual wholesale water
rate since FY 2009 and a projection through FY 2027. Note that the wholesale water rate
decreased in FY 2014, but the apparent rate decrease is due to a part of the debt being directly
paid by the BAWSCA agencies. This cost is paid in addition to the wholesale water rate and
adds about $0.35 to $0.45 per CCF to the wholesale rate.
The SFPUC’s water rate projections show a less steeply increasing rate trajectory after all of the
debt for the WSIP has been issued. 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 conducting condition assessments of other “up-country” 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.
In January 2016, the SFPUC provided an early estimate for FY 2018 wholesale water rates of
$4.37 per CCF. Staff has yet to receive a new estimate, but there is much uncertainty
surrounding continued lower water usage by the BAWSCA agencies. While drought restrictions
ended in May 2016, customers’ behavior changes and wet weather may keep water usage low.
SFPUC’s rates will invariably need to increase since its costs are almost entirely fixed with no
relation to the quantity of water that delivered by the system.
As shown in Figure 8, this year’s projection of SFPUC wholesale rates has increased from the
previous year’s projection. As the drought ostensibly ended in FY 2017 and sales have started
3 Second Quarter FY 2017 WSIP Regional Quarterly Report, http://www.sfwater.org/index.aspx?page=307
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increasing, rate projections are projected to level out. However, if snow and rain do not
materialize in future years, current calls for restricted usage may continue or even be increased.
Figure 8: Historical and Projected SFPUC Wholesale Water Rate
SECTION 6B: OPERATIONS
CPAU’s Water Utility operations include the following activities:
Administration, a category that includes charges allocated to the Water Utility for
administrative services provided by the General Fund and for Utilities Department
administration, as well as debt service and other transfers. Additional detail on Water
Utility debt service is provided in Section 6D: Debt Service
Customer Service
Engineering work for maintenance activities (as opposed to capital activities)
Operations and Maintenance of the distribution system; and
Resource Management
Appendix D: Description of Water Utility Operational Activities includes detailed descriptions of
the work associated with each of these activities.
From FY 2012 to FY 2016 Operations costs (excluding debt service, rent, and transfers)
increased 3.5% per year on average (see Figure 9). The increases were driven by allocated
charges, which increased by 6% 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
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have varied from year to year, but are expected to remain relatively low and stable through the
forecast period.
In FY 2017 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 9: Historical and Projected Operational Costs
SECTION 6C: 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.
Actual
Regio
nal
Water
Syste
m
Projected
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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 2017 projected budget and the five year CIP spending plan, although
these figures are preliminary pending budget discussions starting in May. The ‘committed’
column represents funds committed to contracts for which work has not yet been completed or
invoices paid.
Table 14: Budgeted Water Utility CIP Spending ($000)
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:
Fire Code regulations now mandate fire sprinklers for new residential units. To
accommodate increased fire flows, new main replacement projects require larger
diameter pipe.
CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs
for this material are slightly higher, though lifecycle costs are lower, and the material
performs better. Joints in distribution mains are the most likely place for failure, and
sections of HDPE pipe can be fused together rather than connected with fittings. In the
long run, this will reduce losses and maintenance costs.
To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along
with the water mains with new HDPE services. In the past, the existing services were
reconnected, regardless of the material. This new practice costs more in the short run,
but will provide long term benefits.
Lastly, costs have escalated after the recession.
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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%. 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, and it was
completed in 2016. Currently the utility replaces about 1.3% of the system each year, which is
an 80-year replacement cycle.
Increases in CIP cost are a partial reason for the projected two year delay in projects. The most
recent project, when put out for bid, resulted in very few contractors competing, and project
bids were larger than budgeted. Staff will redesign this and future projects into smaller
segments to keep budgets lower, while not compromising on overall system integrity. The
other reason for delay is the University Avenue Business District project, and getting
coordination amongst all departments is taking more time than expected. Finally, there has
been an ongoing issue with keeping and maintaining qualified staff to design and work on
projects.
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.
Ongoing Projects and Customer Connections are projected to cost approximately $2.5 million in
FY 2018 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 2017 to FY 2022 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 6D: 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. CPAU is in
compliance with all covenants on both bonds.
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The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance
construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new
wells, rehabilitation of existing wells and tanks, etc.) 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 shown in Table 15:
Table 15: Water Utility Debt Service ($000)
FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
2009 Water Revenue Bonds,
Series A (net of grants) 2,012 2,031 2,046 2,064 2,079 2,101 2,151 2,151
2011 Utility Revenue Bonds,
Series A 657 656 654 656 657 657 657 658
Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available
Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available
Reserves shall be at least 5 times the maximum annual debt service. Note that “Available
Reserves,” as defined for both bonds, include the reserves for the Gas and Electric systems, not
just the Water system. This Financial Plan maintains compliance with these covenants
throughout the forecast period, as shown in Appendix A: Water Utility Financial Forecast Detail.
The net revenues (but not the reserves) of the Water Utility are also pledged for one other
bond as shown in Table 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.
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
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SECTION 6E: OTHER REVENUES
The Water Utility receives most of its revenues from sales of water. The next largest source is
connection and capacity fees, which in FY 2016 represented 51% of revenue from sources other
than water sales. The remainder consisted of a variety of miscellaneous charges, transfers and
interest income.
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 increased connection fees that 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.
SECTION 6F: SALES REVENUES
Sales revenue projections are based on the load forecast in Section 5A: Load Forecast and the
projected rate changes shown in Figure 5. Except where stated otherwise, these load forecasts
are based on normal precipitation. Precipitation can vary substantially, 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 7: COMMUNICATIONS PLAN
In FY 2018, communications will continue to focus on water utility rate increases, including the
reasons why and how rates may change contingent upon continued drought conditions. The
City will also communicate how infrastructure costs and rising rates from our wholesale water
supplier, the San Francisco Public Utilities Commission, increases CPAU costs and must be
recovered through rate increases. 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
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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 newsletters, 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: Description of Water Utility Operational Activities
Appendix E: Sample of Water Utility Outreach Communications
APPENDIX A: WATER UTILITY FINANCIAL FORECAST DETAIL
1 FISCAL YEAR FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027
2
3 WATER SUPPLY
4 Purchases 5,538,305 5,532,947 5,507,153 4,671,433 4,127,085 4,164,524 4,388,840 4,618,793 4,548,794 4,477,618 4,407,222 4,342,411 4,307,346 4,274,401 4,242,367 4,274,975
5 Sales 5,062,873 5,097,392 5,047,148 4,433,016 3,858,825 3,852,185 4,037,731 4,318,572 4,253,123 4,186,573 4,120,753 4,060,155 4,027,369 3,996,565 3,966,613 3,997,101
6
7 BILL AND RATE CHANGES
8 Variable Charge (Supply)38%11%-16%25%22%9%7%2%2%2%2%2%2%2%2%2%
9 Variable Charge (Distribution)-12%17%30%-16%10%5%0%9%9%9%9%8%2%1%1%0%
10 Service Charge (Distribution)72%75%9%0%-10%3%0%7%8%8%8%7%1%1%1%1%
11 Change in System Average Rate 12%22%8%0%11%7%3%6%6%6%6%6%2%2%2%1%
12 Change in Average Residential Bill 12%21%7%-1%17%4%-3%5%5%5%5%4%1%1%1%1%
13
14 STARTING RESERVES
15 Reappropriations (Non-CIP)20,000 - - - - - - - - - - - - - - -
16 Commitments (Non-CIP)765,000 714,000 2,000 347,000 347,000 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273
17 Restricted for Debt Service 3,348,000 3,225,000 3,225,000 3,331,000 3,316,000 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194
18 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 1,000,000 - - - - - - - - - - - -
19 Capital Reserve - - - - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 - - - - - - -
20 Rate Stabilization Reserve 10,639,000 7,996,000 17,272,000 20,133,000 6,567,000 1,877,437 - - - - - - - - - -
21 Operations Reserve - - - - 11,663,836 14,606,828 12,734,948 13,741,252 11,719,450 11,584,505 10,055,718 10,036,283 11,372,030 12,259,805 12,625,012 12,452,508
22 Unassigned - - - - - - 4,645,111 2,536,339 - - - - - - - -
23 TOTAL STARTING RESERVES 15,772,000 12,935,000 21,499,000 24,811,000 25,893,836 22,686,828 23,582,622 22,480,154 17,922,013 15,060,972 13,532,185 13,512,750 14,848,497 15,736,272 16,101,479 15,928,975
24
25 REVENUES
26 Net Sales 30,673,882 36,647,924 39,029,262 33,654,549 36,136,644 38,472,811 38,957,254 43,554,523 45,527,612 47,631,527 49,893,912 52,045,952 52,530,594 52,972,178 53,425,127 54,321,702
27 Other Revenues and Transfers In 5,892,133 6,811,461 4,053,920 7,504,848 3,258,936 3,376,354 3,433,864 3,492,074 3,550,893 3,611,902 3,677,134 3,743,736 3,831,586 3,921,772 4,014,356 4,109,403
28 TOTAL REVENUES 36,566,015 43,459,385 43,083,182 41,159,397 39,395,579 41,849,165 42,391,118 47,046,597 49,078,505 51,243,429 53,571,045 55,789,688 56,362,180 56,893,950 57,439,483 58,431,104
29
30 EXPENSES
31 Water Purchases 14,889,399 16,605,351 15,705,288 15,669,935 17,626,020 19,242,650 21,347,331 22,755,908 22,849,411 22,932,958 23,015,268 23,119,511 23,365,972 23,624,549 23,889,660 24,494,388
32 Operating Expenses
33 Administration
34 Allocated Charges 2,003,116 2,422,880 2,366,077 2,342,985 2,953,291 2,278,910 2,336,257 2,395,035 2,455,296 2,516,847 2,579,804 2,644,346 2,710,515 2,778,341 2,847,864 2,919,126
35 Rent 2,156,887 1,911,963 2,192,454 2,249,457 1,803,087 2,876,500 2,962,795 3,051,679 3,143,229 3,237,526 3,334,652 3,434,691 3,537,732 3,643,864 3,753,180 3,865,775
36 Debt Service 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 3,224,553 3,224,553 3,224,553 3,224,553
37 Transfers and Other Adjustments 301,963 2,241,793 335,808 63,612 (74,782) 383,630 391,302 399,129 407,111 415,253 423,558 432,030 432,030 432,030 432,030 432,030
38 Subtotal, Administration 7,847,952 9,795,801 8,114,546 7,874,923 7,904,202 8,758,356 8,913,023 9,066,700 9,226,274 9,392,469 9,561,576 9,735,619 9,904,830 10,078,787 10,257,626 10,441,484
39 Resource Management 552,972 557,910 570,040 488,331 592,744 955,380 987,746 1,020,939 1,055,358 1,085,650 1,113,619 1,142,552 1,172,547 1,203,329 1,234,919 1,267,339
40 Operations and Mtc 4,900,606 4,944,064 4,986,274 5,283,426 5,038,570 5,835,064 6,037,842 6,245,861 6,461,794 6,649,627 6,821,437 6,999,319 7,183,933 7,373,416 7,567,897 7,767,508
41 Engineering (Operating)301,278 338,659 381,502 358,128 282,472 372,459 385,617 399,118 413,142 425,250 436,259 447,663 459,507 471,664 484,143 496,952
42 Customer Service 1,544,608 1,584,759 1,677,926 1,821,447 2,076,559 2,106,862 2,181,487 2,258,058 2,337,605 2,406,207 2,468,516 2,533,069 2,600,120 2,668,946 2,739,594 2,812,112
43 Allowance for Unspent Budget - - - - - (427,532) (441,610) (456,050) (471,013) (484,354) (496,795) (509,652) (522,968) (536,631) (550,651) (565,038)
44 Subtotal, Operating Expenses 15,147,415 17,221,192 15,730,288 15,826,254 15,894,546 17,600,589 18,064,105 18,534,625 19,023,161 19,474,849 19,904,612 20,348,569 20,797,968 21,259,512 21,733,529 22,220,358
45 Capital Program Contribution 9,366,201 1,068,841 8,335,605 8,580,372 9,082,021 4,110,131 4,082,150 10,314,204 10,066,974 10,364,408 10,670,600 10,985,862 11,310,465 11,644,682 11,988,797 12,343,106
46 TOTAL EXPENSES 39,403,015 34,895,385 39,771,182 40,076,561 42,602,588 40,953,371 43,493,586 51,604,738 51,939,546 52,772,216 53,590,481 54,453,941 55,474,405 56,528,743 57,611,987 59,057,851
47 9.04 11.04
48 ENDING RESERVES
49 Reappropriations (Non-CIP)- - - - - - - - - - - - - - - -
50 Commitments (Non-CIP)714,000 2,000 347,000 347,000 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273
51 Restricted for Debt Service 3,225,000 3,225,000 3,331,000 3,316,000 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194 3,299,194
52 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 - - - - - - - - - - - - -
53 Capital Reserve - - - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 - - - - - - - -
54 Rate Stabilization Reserve 7,996,000 17,272,000 20,133,000 6,567,000 1,877,437 - - - - - - - - - - -
55 Operations Reserve - - - 11,663,836 14,606,828 12,734,948 13,741,252 11,719,450 11,584,505 10,055,718 10,036,283 11,372,030 12,259,805 12,625,012 12,452,508 11,825,761
56 Unassigned - - - - - 4,645,111 2,536,339 - - - - - - - - -
57 TOTAL ENDING RESERVES 12,935,000 21,499,000 24,811,000 25,893,836 22,686,828 23,582,622 22,480,154 17,922,013 15,060,972 13,532,185 13,512,750 14,848,497 15,736,272 16,101,479 15,928,975 15,302,228
58
59 OPERATIONS RESERVE
60 Min (60 days of non-capital expenses)- - - 5,230,611 5,447,741 6,320,551 6,805,571 7,121,003 7,223,351 7,318,139 7,409,255 7,506,449 7,620,837 7,739,213 7,860,713 8,040,147
61 Target (90 days of non-capital expenses)- - - 9,395,240 8,849,765 9,527,750 10,273,411 10,734,869 10,891,793 11,037,461 11,177,725 11,327,238 11,511,321 11,701,700 11,897,086 12,179,700
62 Max (120 days of non-capital expenses)- - - 13,559,870 12,251,790 12,734,948 13,741,252 14,348,735 14,560,236 14,756,784 14,946,195 15,148,027 15,401,806 15,664,187 15,933,458 16,319,253
63 Risk Assessment Value 2,481,768 2,677,436 2,229,786 2,210,426 2,990,773 3,122,798 3,321,829 3,535,280 3,739,581 3,798,452 3,858,547 3,919,900 3,982,541
64
65 DEBT SERVICE COVERAGE RATIO
66 Net Revenues (125% of Debt Service)787%951%876%878%940%1044%1123%1182%1200%1216%1231%1248%1270%1292%1315%1349%
67 Available Reserves (5x Debt Service)*2.7 5.7 6.6 6.9 6.0 6.2 5.9 4.5 3.6 3.1 3.1 3.5 3.8 3.9 3.9 3.7
*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.
Appendix A (continued)
1 FISCAL YEAR FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027
2
3 REVENUES
4 Net Sales 84%84%91%82%92%92%92%93%93%93%93%93%93%93%93%93%
5 Other Revenues and Transfers In 16%16%9%18%8%8%8%7%7%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%100%
7
8 EXPENSES
9 Water Purchases 38%48%39%39%41%47%49%44%44%43%43%42%42%42%41%41%
10 Operating Expenses
11 Administration
12 Allocated Charges 5%7%6%6%7%6%5%5%5%5%5%5%5%5%5%5%
13 Rent 5%5%6%6%4%7%7%6%6%6%6%6%6%6%7%7%
14 Debt Service 9%9%8%8%8%8%7%6%6%6%6%6%6%6%6%5%
15 Transfers and Other Adjustments 1%6%1%0%0%1%1%1%1%1%1%1%1%1%1%1%
16 Subtotal, Administration 20%28%20%20%19%21%20%18%18%18%18%18%18%18%18%18%
17 Resource Management 1%2%1%1%1%2%2%2%2%2%2%2%2%2%2%2%
18 Operations and Mtc 12%14%13%13%12%14%14%12%12%13%13%13%13%13%13%13%
19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%
20 Customer Service 4%5%4%5%5%5%5%4%5%5%5%5%5%5%5%5%
21 Allowance for Unspent Budget 0%0%0%0%0%-1%-1%-1%-1%-1%-1%-1%-1%-1%-1%-1%
22 Subtotal, Operating Expenses 38%49%40%39%37%43%42%36%37%37%37%37%37%38%38%38%
23 Capital Program Contribution 24%3%21%21%21%10%9%20%19%20%20%20%20%21%21%21%
24 TOTAL EXPENSES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
25
26 RISK ASSESSMENT DETAIL
27 Distribution Revenue Variance 1,623,731 1,769,234 1,818,772 1,802,211 1,959,352 2,116,101 2,285,389 2,468,220 2,640,995 2,667,405 2,694,079 2,721,020 2,748,230
28 10% CIP Program Contingency 858,037 908,202 411,013 408,215 1,031,420 1,006,697 1,036,441 1,067,060 1,098,586 1,131,047 1,164,468 1,198,880 1,234,311
29 Total Risk Asssessment Value 2,481,768 2,677,436 2,229,786 2,210,426 2,990,773 3,122,798 3,321,829 3,535,280 3,739,581 3,798,452 3,858,547 3,919,900 3,982,541
30 Projected Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,252 11,719,450 11,584,505 10,055,718 10,036,283 11,372,030 12,259,805 12,625,012 12,452,508 11,825,761
31 Operations Reserve, % of Risk Value 470%546%571%622%392%371%303%284%304%323%327%318%297%
32
33 OPERATIONS RESERVE
34 Min (60 days of non-capital expenses)- - - 5,230,611 5,447,741 6,320,551 6,805,571 7,121,003 7,223,351 7,318,139 7,409,255 7,506,449 7,620,837 7,739,213 7,860,713 8,040,147
35 Target (90 days of non-capital expenses)- - - 9,395,240 8,849,765 9,527,750 10,273,411 10,734,869 10,891,793 11,037,461 11,177,725 11,327,238 11,511,321 11,701,700 11,897,086 12,179,700
36 Max (120 days of non-capital expenses)- - - 13,559,870 12,251,790 12,734,948 13,741,252 14,348,735 14,560,236 14,756,784 14,946,195 15,148,027 15,401,806 15,664,187 15,933,458 16,319,253
37 Risk Assessment Value 2,481,768 2,677,436 2,229,786 2,210,426 2,990,773 3,122,798 3,321,829 3,535,280 3,739,581 3,798,452 3,858,547 3,919,900 3,982,541
38
39 DEBT SERVICE COVERAGE RATIO
40 Net Revenues (125% of Debt Service)787%951%876%878%940%1044%1123%1182%1200%1216%1231%1248%1270%1292%1315%1349%
41 Available Reserves (5x Debt Service)*2.7 5.7 6.6 6.9 6.0 6.2 5.9 4.5 3.6 3.1 3.1 3.5 3.8 3.9 3.9 3.7
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.
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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
Proposed Budget
Amendments
Spending, Current
Year
Remaining in CIP
Reserve Fund Commitments FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
ONE TIME PROJECTS
WS-07000 Regulation Station Imp.1,092,430 - (135,541) (136,529) 820,360 624,149 - - - - -
WS-07001 Water Recycling Facilities 193,358 200,000 2,291 - 395,649 - - - - - -
WS-08001 Water Reservoir Coating 1,919,605 - (304,403) (823,254) 791,948 1,088,707 - - - - -
WS-09000 Seismic Water System 4,452,355 - (317,178) (431,985) 3,703,192 2,213,969 - - - - -
WS-13003 GPS Equipment Upgrade - - - - - - - - - - -
WS-13004 Asset Mgmt. Mobile Sys.- - - - - - - - - - -
WS-13006 Meter Shop Renovations - - - - - - - - - - -
WS-15004 Water System Master Plan 202,469 - (681) (358) 201,430 46,592 - - - - -
WS-08002 Emergency Water Supply 601,701 - - - 601,701 330,493 - - - - -
Subtotal, One-time Projects 8,461,919 200,000 (755,513) (1,392,126) 6,514,280 4,303,910 - - - - -
WATER MAIN REPLACEMENT PROGRAM
WS-20000 WMR - Project 32 - - - - - - - - - - -
WS-11000 WMR-Project 25 1,165,085 - (725,386) (270,754) 168,945 - - - - - -
WS-12001 WMR- Project 26 5,904,489 - (18,731) (51,224) 5,834,534 1 - - - - -
WS-13001 WMR - Project 27 568,065 5,680,651 (6,206,216) (42,500) - - - 6,216,841 - - -
WS-14001 WMR - Project 28 - 585,107 (585,107) - - - - 585,107 5,851,070 - -
WS-15002 WMR - Project 29 - - - - - - - - 602,660 6,026,602 -
WS-16001 WMR - Project 30 - - - - - - - - - 620,740 6,207,400
WS-19001 WMR - Project 31 - - - - - - - - - - 639,362
Subtotal, Water Main Replacement Prog.7,637,639 6,265,758 (7,535,440) (364,478) 6,003,479 1 - 6,801,948 6,453,730 6,647,342 6,846,762
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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 2018 FY 2019 FY 2020 FY 2021 FY 2022
ONGOING PROJECTS
WS-80014 Services/Hydrants - 400,000 - (171,657) 228,343 50,533 412,000 424,360 437,091 450,204 463,710
WS-80015 Water Meters 252,092 565,000 - (26,213) 790,879 - 565,000 500,000 515,000 530,450 546,364
WS-02014 W-G-W Utility GIS Data 82,817 366,025 (0) (87,607) 361,235 295,211 402,628 442,890 456,177 469,862 483,958
WS-13002 Equipment/Tools 20,685 50,000 - - 70,685 - - - - - -
WS-11003 Dist. Sys. Improvements 131,508 739,000 (602) (5,000) 864,906 163,985 247,000 254,000 261,620 269,469 277,553
WS-11004 Supply Sys. Improvements 95,884 239,000 (190) (73,156) 261,538 8,136 247,000 254,000 261,620 269,469 277,553
Subtotal, Ongoing Projects 582,986 2,359,025 (792) (363,633) 2,577,586 517,865 1,873,628 1,875,250 1,931,508 1,989,454 2,049,138
CUSTOMER CONNECTIONS (FEE FUNDED)
WS-80013 Water System Extensions 18,736 690,000 - (320,117) 388,619 112,897 710,700 732,021 753,981 776,601 799,899
Subtotal, Customer Connections 18,736 690,000 - (320,117) 388,619 112,897 710,700 732,021 753,981 776,601 799,899
GRAND TOTAL 16,701,281 9,514,783 (8,291,745) (2,440,354)15,483,964 4,934,673 2,584,328 9,409,219 9,139,219 9,413,397 9,695,799
Funding Sources
Connection/Capacity Fees 690,000 - 902,280 929,348 957,228 985,946 1,015,524
Other Utility Funds (Asset Mgmt, GIS Systems)244,109 - 268,418 295,260 304,118 313,242 322,640
Utility Rates 9,514,783 (8,291,745) 1,413,630 8,184,611 7,877,873 8,114,209 8,357,635
CIP-RELATED RESERVES DETAIL
6/30/2016
(Actual)
6/30/2017
(Unaudited)
Reappropriations (excl. Bond Funded)10,529,905 10,549,291
Commitments (excl. Bond Funded)6,171,376 4,934,673
WATER UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 33 | P a g e
APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Water Utility
Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, for the Water Utility Financial Plan
delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial
Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Water Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Water Utility’s Capital
Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 8 (Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all contracts in force for the Water Utility at
that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
WATER UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 34 | P a g e
Section 5. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels
are calculated for each fiscal year of the Financial Planning Period 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.
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.
WATER UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 35 | P a g e
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves
described in Section 3-Section 6 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for
that year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Water Utility shall be designed
to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Water Utility’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section
8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the
City Council must include a plan to assign them to a specific purpose or return them to the
Water Utility ratepayers by the end of the first fiscal year of the next Financial Planning
Period. For example, if there were funds in the Unassigned Reserves at the end of FY 2015,
and the next Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall
include a plan to return or assign any funds in the Unassigned Reserve by the end of
FY 2016. Staff may present an alternative plan that retains these funds or returns them over
a longer period of time.
WATER UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 36 | P a g e
APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES
This appendix describes the activities associated with the various operational activities referred
to in Section 6B: Operations of this Financial Plan.
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City’s General Fund staff, as well as shared communications services, CPAU administrative
overhead, and billing system maintenance costs. This category also includes Water Utility debt
service and rent paid to the General Fund for the land associated with reservoirs and various
other facilities.
Customer Service: This category includes the Water Utility’s share of the call center, meter
reading, collections, and billing support functions. Billing support encompasses staff time
associated with bill investigations and quality control on certain aspects of the billing process. It
does not include maintenance of the billing system itself, which is included in Administration.
This category also includes CPAU’s key account representatives, who work with large
commercial customers who have more complex requirements for their water services.
Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
Operations and Maintenance: This category includes the costs of a variety of distribution
system maintenance activities, including:
investigating reports of damaged mains or services and performing emergency repairs;
testing and operating valves;
monitoring water quality and reservoir levels;
monitoring the status of the different pressure zones;
flushing water at hydrants and other closed end points of the system;
building and replacing water services for new or redeveloped buildings; and
testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
the Field Services team (which does field research of various customer service issues);
the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal tanks and reservoirs); and
the General Services team (which manages and maintains equipment, paves and
restores streets after gas, water, or sewer main replacements, and provides welding
services)
Resource Management: This category includes water procurement, contract management,
water resource planning, interaction with BAWSCA, the SFPUC, and the SCVWD, and tracking of
legislation and regulation related to the water industry.
J u n e 1 6 , 2 0 1 4 37 | P a g e
APPENDIX E: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS
Attachment C
* NOT YET APPROVED *
170216 jb 6053919
Resolution No. _________
Resolution of the Council of the City of Palo Alto Increasing Water
Rates by Amending Rate Schedules W-1 (General Residential Water
Service), W-2 (Water Service from Fire Hydrants), W-4 (Residential
Master-Metered and General Non-Residential Water Service), and
W-7 (Non-Residential Irrigation Water Service) and Repealing
Resolution No. 9542 to Deactivate the Level 2 Drought Surcharges
R E C I T A L S
A. On January 17, 2014 the Governor of the State of California proclaimed a State of
Emergency due to severe drought conditions. On April 1, 2015 the Governor issued an
Executive Order proclaiming that severe drought conditions continued to exist, and ordering
the State Water Resources Control Board to adopt regulations imposing mandatory water use
restrictions on water suppliers to achieve a 20% reduction in statewide potable water use
through February 28, 2016, or as continued or modified by the Governor.
B. On May 5, 2015, the State Water Resources Control Board adopted regulations
imposing upon Palo Alto a mandatory 24% reduction in potable water consumption from
Jun 1, 2015 through February 28, 2016. This action by the Board triggered the City Council’s
authority to activate one of the three drought surcharges available in its water rate schedules.
C. On August 17, 2015, Council adopted Resolution 9542 which established that the
Level 2 (20%) drought surcharges set forth on the City's schedule of water rates would be
collected on all City of Palo Alto Utilities water customer bills as of September 1, 2015, and
declared that the surcharge would remain in effect until rescinded or modified by the City
Council.
D. On May 9, 2016 Governor Brown issued an Executive Order calling for the State
Water Resources Control Board to adjust emergency water conservation regulations through
the end of January 2017, in recognition of the different water supply conditions across the
state. The State Board subsequently revised its regulations allowing suppliers to self-certify
that there would be no supply shortfall, assuming 3 additional dry years. . The San Francisco
Regional Water System (RWS) supply availability enabled the City of Palo Alto to self-certify a
conservation standard of zero which remains in effect.
E. While the State’s emergency regulation remains in effect, hydrological conditions as
of February 2017 indicate that the State will be largely out of drought conditions, and customer
demand has started to rise from peak conservation levels. Water storage in the RWS is at
maximum capacity.
F. Staff therefore recommends the deactivation of the level 2 drought surcharge at this
time, via the repeal of Resolution No. 9542.
Attachment C
* NOT YET APPROVED *
170216 jb 6053919
G. 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.
H. On ____, 2017, the City Council held a full and fair public hearing regarding the
proposed rate increase and considered all protests against the proposals.
I. As required by Article XIII D, Section 6 of the California Constitution and applicable
law, notice of the ________ 2017 public hearing was mailed to all City of Palo Alto Utilities
water customers by _______, 2017.
J. The City Clerk has tabulated the total number of written protests presented by the
close of the public hearing, and determined that it was less than fifty percent (50%) of the total
number of customers and property owners subject to the proposed water rate amendments,
therefore a majority protest does not exist against the proposal.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
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, 2017.
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, 2017.
SECTION 3. 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, 2017.
SECTION 4. 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, 2017.
SECTION 5. The City Council finds as follows:
a. Revenues derived from the water rates approved by this resolution do not exceed
the funds required to provide water service.
b. Revenues derived from the water rates approved by this resolution shall not be used
for any purpose other than providing water service, and the purposes set forth in
Article VII, Section 2, of the Charter of the City of Palo Alto.
Attachment C
* NOT YET APPROVED *
170216 jb 6053919
c. The amount of the water rates imposed upon any parcel or person as an incident of
property ownership shall not exceed the proportional cost of the water service
attributable to the parcel.
SECTION 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. Each of the rate schedules adopted by this resolution includes a structure
of drought surcharges that correspond to different levels of water use reduction in the City.
Effective July 1, 2017, each of the drought surcharges in the water rate schedules adopted by
this resolution are deactivated and shall not be added to applicable water rates, unless and
until such time as Council again approves both their use and the appropriate reduction level.
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 7-1-20176
dated 97-1-20165 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 ..................................................................................................... $ 16.77
For 3/4 inch meter ..................................................................................................... 22.60
For 1 inch meter ........................................................................................................ 34.26
For 1 1/2 inch meter .................................................................................................. 63.40
For 2-inch meter ........................................................................................................ 98.37
For 3-inch meter ........................................................................................................ 209.11
For 4-inch meter ........................................................................................................ 372.31
For 6-inch meter ........................................................................................................ 762.81
For 8-inch meter ........................................................................................................ 1,403.94
For 10-inch meter ...................................................................................................... 2,219.92
For 12-inch meter ....................................................................................................... 2,919.34
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 ........................................................................................................................$6.6630
Tier 2 usage (All usage over 100% of Tier 1) ........................................................................ 89.182
ATTACHMENT D
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 7-1-20176
dated 97-1-20165 Sheet No W-1-2
Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable Commodity Rate for Tier 1 and Tier
2 water usage when the City Council has determined that a water reduction level is in effect for the
City as described in Section D.3. The drought surcharges in the table below are measured in dollars
per hundred cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Tier 1 0.20 0.43 0.64
Tier 2 0.58 1.21 1.85
Temporary unmetered service to residential
subdivision developers, per connection ........................................................................ $6.00
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2. 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.
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-3 Effective 7-1-20176
dated 97-1-20165 Sheet No W-1-3
3.Drought Surcharge
During period of water shortage or restrictions on local water use, the City Council may,
by resolution, declare the need for citywide water conservation at the 10/15%, 20% or
25% level. While such a resolution is in effect, a drought surcharge will apply. The
purpose of the Drought Surcharge is to recover revenues lost as a result of reduced
consumption.
{End}
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 7-1-20176
dated 97-1-20165 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) ................................................................ $7.6832
3. Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable Commodity Rate when the
City Council has determined that a water reduction level is in effect for the City as described in
Section D.5. The drought surcharges in the table below are measured in dollars per hundred
cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.26 0.53 0.77
D. SPECIAL NOTES:
1.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
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-2-2 Effective 7-1-20176
dated 97-1-20165 Sheet No W-2-2
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.
5.During period of water shortage or restrictions on local water use, the City Council may, by
resolution, declare the need for citywide water conservation at the 10/15%, 20% or 25% level.
While such a resolution is in effect, a drought surcharge will apply. The purpose of the Drought
Surcharge is to recover revenues lost as a result of reduced consumption.
{End}
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 7-1-20176
dated 97-1-20165 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 .................................................................................... $ 16.77
For 3/4-inch meter .................................................................................... 22.60
For 1-inch meter .................................................................................... 34.26
For 1 ½-inch meter .................................................................................... 63.40
For 2-inch meter .................................................................................... 98.37
For 3-inch meter .................................................................................... 209.11
For 4-inch meter .................................................................................... 372.31
For 6-inch meter .................................................................................... 762.81
For 8-inch meter .................................................................................... 1,403.94
For 10-inch meter .................................................................................... 2,219.92
For 12-inch meter .................................................................................... 2,919.34
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 7.6832
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 7-1-20176
dated 97-1-20165 Sheet No W-4-2
Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable Commodity Rate when the City
Council has determined that a water reduction level is in effect for the City as described in Section
D.2. The drought surcharges in the table below are measured in dollars per hundred cubic feet
(ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.26 0.53 0.77
D. SPECIAL NOTES:
1.Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2.Drought Surcharge
During period of water shortage or restrictions on local water use, the City Council may,
by resolution, declare the need for citywide water conservation at the 10/15%, 20% or
25% level. While such a resolution is in effect, a drought surcharge will apply. The
purpose of the Drought Surcharge is to recover revenues lost as a result of reduced
consumption.
{End}
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 7-1-20167
dated 97-1-20165 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 .................................................................................... $ 16.77
For 3/4-inch meter .................................................................................... 22.60
For 1-inch meter .................................................................................... 34.26
For 1 1/2 inch meter .................................................................................... 63.40
For 2-inch meter .................................................................................... 98.37
For 3-inch meter .................................................................................... 209.11
For 4-inch meter .................................................................................... 372.31
For 6-inch meter .................................................................................... 762.81
For 8-inch meter .................................................................................... 1,403.94
For 10-inch meter .................................................................................... 2,219.92
For 12-inch meter .................................................................................... 2,919.34
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 89.0872
Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable Commodity Rate when the City
Council has determined that a water reduction level is in effect for the City as described in Section
D.2. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf).
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 7-1-20167
dated 97-1-20165 Sheet No W-7-2
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.53 1.25 2.02
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2. Drought Surcharge
During period of water shortage or restrictions on local water use, the City Council may,
by resolution, declare the need for citywide water conservation at the 10/15%, 20% or
25% level. While such a resolution is in effect, a drought surcharge will apply. The
purpose of the Drought Surcharge is to recover revenues lost as a result of reduced
consumption.
{End}
Attachment E
EXCERPTED DRAFT MINUTES OF THE MARCH 1, 2017
UTILITIES ADVISORY COMMISSION
ITEM 3: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2018 Water Utility
Financial Plan; and (2) a Resolution Increasing Water Rates by Amending Rate Schedules W-1
(General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-4 (Residential
Master-Metered and General Non-Residential Water Service, and W-7 (Non-Residential
Irrigation Water Service) and Removing the Drought Surcharge
Acting Senior Resource Planner Eric Keniston gave a presentation on the financial forecasts for
the water utility. Forecasted rate increases for July 1, 2017 had decreased from 6% to 4% from
the last year’s forecast. Future year rate increases were projected to be roughly 6% per year.
Cost increases by rising wholesale costs due to major capital expenditures for seismic
improvements and rehabilitation to the Hetch Hetchy water system. Expenditures were
projected to be lower than normal in FY 2017 and FY 2018 due to delays in water main
replacement investments. This would result in an increase in reserves, which would allow rate
increases to be phased in over multiple years. Lastly, water demand had decreased during the
drought, but with recent precipitation and an end to mandatory reduction requirements,
demand was beginning to slowly rise again. It was not clear whether it would return to pre-
drought levels. As a result, staff would recommend removing the drought surcharge.
Commissioner Schwartz said it was important to remove the drought surcharge given the
recent precipitation.
Keniston said that even with the 4% rate increase, the removal of the drought surcharge meant
that customers would see an overall decrease in their bills.
ACTION: Commissioner Schwartz moved, seconded by Commissioner Trumbull to recommend
that the City Council adopt the staff recommendation. The motion carried unanimously (6-0,
with Vice Chair Danaher and Commissioners Trumbull, Forssell, Danaher, Schwartz, Ballantine,
and Johnston voting yes and Commissioner Cook absent).
City of Palo Alto (ID # 7855)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/4/2017
City of Palo Alto Page 1
Summary Title: FY 2018 Wastewater Collection Financial Plan and Rate
Proposals
Title: Utilities Advisory Commission Recommendation That the City Council
Adopt a Resolution Approving the Fiscal Year 2018 Wastewater Collection
Financial Plan
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) approving the fiscal year (FY) 2018 Wastewater
Collection Financial Plan (Attachment B);
Executive Summary
The FY 2018 Wastewater Collection Utility Financial Plan includes projections of the utility’s
costs and revenues through FY 2027. Treatment costs are projected to rise substantially over
the forecast period due to increasing operating costs and capital replacement needs at the
Regional Water Quality Control Plant, as well as gradually increasing capital and operating cost
increases for the wastewater collection system. However, this utility’s Operating Reserves are
higher than required by the reserve guidelines due to a one-time savings resulting from delays
in the utility’s annual main replacement program. As a result, staff projects the need for no
wastewater rate increase in FY 2018. Rate increases of 7% are projected for FY 2019 through FY
2023. Rates for FY 2024 and beyond are projected to increase by 3 to 5%.
The UAC reviewed the Wastewater Collection Financial Plan and Rate Proposals at its meeting
on March 1, 2017, and unanimously recommended approval of the proposed financial plan.
Background
Every year staff presents the 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,
City of Palo Alto Page 2
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.
The Finance Committee reviewed preliminary financial forecasts at its March 21, 2017 meeting.
Staff has not revised the preliminary projections presented at that meeting.
Discussion
Staff’s annual assessment of the financial position of the City’s wastewater collection 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 rates are based on the methodology described in the 2011 Wastewater Collection
Utility Cost of Service and Rate Study completed by Utility Financial Solutions (Staff Report
1399).
Proposed Actions for FY 2018
1. No rate increase
These proposed actions are described in more detail in the FY 2018 Wastewater Collection
Financial Plan (Attachment B).
Staff proposes no adjustments to wastewater rates at this time. Current rates are shown in
Table 1 below.
Table 1: Current Wastewater Collection Charges
Current
(7/1/2016)
City of Palo Alto Page 3
Monthly Service and Minimum Charges
($/month)
S-1 (Residential) Service
charge
$34.83
S-2 (Commercial),
S-6 (Restaurant)
Minimum 34.83
Quantity Rates
S-1 (Residential) $/CCF N/A
S-2 (Commercial) $/CCF 6.71
S-6 (Restaurant) $/CCF 10.38
S-7 (Industrial) $/CCF 3.08
(1) Monthly charges for S-1 are fixed monthly charges, and those for S-2 and S-6
are minimum monthly charges.
(2) Currently there are no customers on the S7 rate schedule, however, CPAU
continues to maintain it in case there is a need for the rate schedule in the
future.
FY 2018 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 2 shows the projected rate adjustments included in the Wastewater Collection Utility
Financial Plans and their impact on a residential wastewater bill.
Table 2: Projected Rate Adjustments and Residential Bill Impact, FY 2018 to FY 2022
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Wastewater Utility 0% 7% 7% 7% 7%
Estimated Bill Impact for
Residential Customers ($/mo) $- $2.44 $2.61 $2.79 $2.99
The main drivers for the increase in the Wastewater Collection Utility’s costs (and therefore
rates) over the next several years are the costs for wastewater treatment, which are projected
to go up by 5 to 6% per year as the Regional Water Quality Control Plant makes several
upgrades to their facilities, as well as capital improvement costs for the wastewater collection
system. Operating and CIP costs are projected to rise roughly 2%-4% annually.
As mentioned above, staff is not proposing a rate increase for FY 2018 because the Wastewater
Collection Utility’s Operations Reserve is well above the target level set forth in the Reserve
Guidelines. The Operations Reserve is projected to be $5.3 million, as compared to the reserve
target of $4.6 million. Wastewater main replacement projects are temporarily delayed for a
variety of reasons: The University Avenue Business District project is taking longer to coordinate
than planned; fewer, more expensive competitive bidders on proposed projects have required
staff to re-plan those projects; and hiring and retention of qualified staff has been an issue.
There is uncertainty related to capital costs for the Wastewater Collection Utility in coming
years. Wastewater main replacement costs have risen substantially in recent years, and it is
possible higher CIP expenditures will be required in the future.
City of Palo Alto Page 4
Wastewater Bill Comparison with Surrounding Cities
The annual sewer bill for a Palo Alto resident is $418 under current rates, 31% lower than the
average neighboring community. Table 3 shows the monthly sewer bills for residential
customers compared to what they would be in surrounding communities.
Table 3: Residential Monthly Sewer Bill Comparison (based on rates as of January 1, 2017)
Palo Alto
Neighboring Communities Neighboring
Community
Average
Menlo
Park
Redwood
City
Mountain
View Los Altos
Santa
Clara Hayward
34.83 85.91 75.11 34.30 33.93 41.65 29.80 50.12
Staff has no information at this time as to whether or when the surrounding communities are
planning wastewater rate changes.
Changes from Prior Financial Forecasts
Staff has projected the need for wastewater rate increases for several years. Table 4 compares
current rate projections to those projected in the last two year’s Financial Plans.
Table 4: Projected Wastewater Rate Trajectory for FY 2018 to FY 2027
Projection FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Current
(FY 2018 Financial Plan) 0% 7% 7% 7% 7% 7% 5% 5% 4% 3%
Last Year
(FY 2017 Financial Plan) 10% 9% 7% 6% 4% 4% 4% 4% 4% N/A
Two years ago
(FY 2016 Financial Plan) 9% 9% 6% 6% N/A N/A N/A N/A N/A N/A
Commission Review and Recommendation
The UAC reviewed this proposal at its March 1, 2017 meeting. Staff noted that the rate
projection had changed since the February 1, 2017 meeting, as a further review of Operations
reserves indicated a 2% increase was not required at this time.
After the presentation, the UAC voted to recommend that the Council adopt the resolution
approving the FY 2018 Wastewater Collection Financial Plan. The vote was unanimous (7-0).
The draft excerpted minutes from the UAC’s March 1, 2017 meeting are provided as
Attachment C.
Timeline
City of Palo Alto Page 5
As no rate changes are being proposed at this time, no public noticing is required by Article
XIIID of the State Constitution (added by Proposition 218). The proposed Financial Plan will be
considered by the City Council with the FY 2018 budget.
Resource Impact
See the FY 2018 Wastewater Collection Utility Financial Plan (Attachment B) for a more
comprehensive overview of projected cost and revenue changes for the next five years.
Policy Implications
The proposed Wastewater Collection Financial Plan is consistent with Council-adopted Reserve
Management Practices.
Environmental Review
The Finance Committee’s review and recommendation to Council on the proposed FY 2018
Wastewater Collection Financial Plan does not meet the definition of a project requiring
California Environmental Quality Act (CEQA) review, under California Public Resources Code
21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental
activity which will not cause a direct or indirect physical change in the environment.
Attachments:
Attachment A: Resolution Approving the FY 2018 Wastewater Collection Financial Plan
Attachment B: Proposed FY 2018 Wastewater Collection Financial Plan
Attachment C: Excerpt of the Draft March 1, 2017 Utilities Advisory Commission
Minutes
Attachment A
* NOT YET APPROVED *
170221 jb 6053915
Resolution No. ____
Resolution of the Council of the City of Palo Alto Approving the
FY 2018 Wastewater Collection Utility Financial Plan
R E C I T A L S
A. Each year the City of Palo Alto (“City”) assesses the financial position of its utilities
with the goal of ensuring adequate revenue to fund operations. This includes making long-term
projections of market conditions, the physical condition of the system, and other factors that
could affect utility costs, and setting rates adequate to recover these costs. It does this with the
goal of providing safe, reliable, and sustainable utility services at competitive rates. The City
adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other aspects
of its operations, and regularly assesses the adequacy of these reserves and the management
practices governing their operation. The status of utility reserves and their management
practices are included in Reserves Management Practices attached to and made a part of the
Financial Plans.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby approves the FY 2018 Wastewater Collection Utility
Financial Plan.
SECTION 2. The Council finds that the adoption of this resolution does not meet the
definition of a project requiring California Environmental Quality Act (CEQA) review, under
/ /
/ /
/ /
/ /
/ /
/ /
Attachment A
* NOT YET APPROVED *
170221 jb 6053915
California Public Resources Code 21065 and CEQA Guidelines Section 15378(b)(5), because it is
an administrative governmental activity which will not cause a direct or indirect physical change
in the environment.
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
FY 2018 WASTEWATER
COLLECTION UTILITY
FINANCIAL PLAN
FY 2018 TO FY 2027
ATTACHMENT B
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2016 2 | Page
FY 2018 WASTEWATER COLLECTION
UTILITY FINANCIAL PLAN
FY 2018 TO FY 2027
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations................................................................................ 4
Section 2: Executive Summary and Recommendations ........................................................... 4
Section 2A: Overview of Financial Position .................................................................................. 4
Section 2B: Summary of Proposed Actions .................................................................................. 5
Section 3: Detail of FY 2018 Rate and Reserves Proposals ....................................................... 5
Section 3A: Rate Design ............................................................................................................... 5
Section 3B: Current and Proposed Rates ..................................................................................... 6
Section 3D: Proposed Reserve Transfers ..................................................................................... 6
Section 4: Utility Overview .................................................................................................... 7
Section 4A: Wastewater Utility History ....................................................................................... 7
Section 4B: customer base ........................................................................................................... 8
Section 4C: Collection System ...................................................................................................... 8
Section 4D: Cost Structure and Revenue Sources ........................................................................ 9
Section 4E: Reserves Structure ..................................................................................................... 9
Section 4F: Competitiveness ...................................................................................................... 10
Section 5: Utility Financial Projections ................................................................................. 11
Section 5A: FY 2012 to FY 2016 Cost and Revenue Trends ........................................................ 11
Section 5B: FY 2016 Results ....................................................................................................... 12
Section 5C: FY 2017 Projections ................................................................................................. 13
Section 5D: FY 2018 – FY 2027 Projections ................................................................................ 13
Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 14
Section 5F: Alternate Scenarios ................................................................................................. 16
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2016 3 | Page
Section 5G: Long-Term Outlook ................................................................................................. 16
Section 6: Details and Assumptions ..................................................................................... 16
Section 6A: Wastewater Treatment Costs ................................................................................. 16
Section 6B: Operations .............................................................................................................. 17
Section 6C: Capital Improvement Program (CIP) ....................................................................... 17
Section 6D: Debt Service ............................................................................................................ 19
Section 6E: Other Revenues ....................................................................................................... 20
Section 7: Communications Plan .......................................................................................... 20
Appendices ......................................................................................................................... 22
Appendix A: Wastewater Collection Financial Forecast Detail .................................................. 23
Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail .......... 24
Appendix C: Wastewater Collection Utility Reserves Management Practices .......................... 25
Appendix D: Sample of Wastewater Collection Outreach Materials......................................... 28
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2016 4 | Page
SECTION 1: DEFINITIONS AND ABBREVIATIONS
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons. When water usage is used to assess
wastewater charges for commercial customers, it is measured in CCF.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
FOG Fats, oils, and grease. When flushed into the sewer system, these materials
accumulate in parts of the sewer system and create blockages.
O&M Operations and Maintenance
RWQCP Regional Water Quality Control Plant, the wastewater treatment plant owned and
operated by the City of Palo Alto that serves Palo Alto and several surrounding
communities.
UAC Utilities Advisory Commission
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City of Palo Alto’s Wastewater Collection Utility
for the next ten years. The Financial Plan provides revenues to cover the costs of operating the
utility safely over that time while adequately investing for the future. It also addresses the
financial risks facing the utility over the short term and long term, and includes measures to
mitigate and manage those risks.
SECTION 2A: OVERVIEW OF FINANCIAL POSITION
Overall costs in the Wastewater Collection Utility are expected to rise by about 6% per year
from fiscal year (FY) 2017 to FY 2027. Excluding FY 2018 (which, unlike a normal year, does not
include a sewer main replacement project), wastewater treatment and CIP costs are projected
to rise by five to six percent annually through the projection period, with other costs rising at
roughly three percent per year. The costs for the Wastewater Collection Utility are shown in
Table 1 below.
Table 1: Expenses for FY 2016 to FY 2027
Expenses
($000)
FY
2016
(act.)
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Treatment
Costs 8,770 9,855 9,932 10,298 11,088 11,885 12,293 13,001 14,056 14,928 15,407 15,901
Operations 5,429 6,142 6,342 6,142 6,349 6,561 6,779 7,250 7,354 7,594 7,842 8,099
Capital
Projects 4,985 971 1,338 5,218 5,033 5,207 5,336 5,495 5,658 5,827 6,000 6,178
TOTAL 19,184 16,968 17,613 21,659 22,470 23,652 24,408 25,746 27,069 28,348 29,249 30,178
The short term reduction in CIP expenses will result in higher revenues than expenses, and the
Rate Stabilization Reserve will be drawn down over a longer time frame than projected in last
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2016 5 | Page
year’s financial plan. Going forward, to ensure that revenues cover rising costs and reserves
remain healthy, the financial plan includes the rate trajectory shown in Table 2. The table also
shows rate projections from last year’s Financial Plan. Last year’s plan projected earlier, more
aggressive rate increases. However, the delay of the planned FY 2017 and FY 2018 sewer main
replacement projects resulted in an increase in reserves, which enabled the more gradual
increases projected in the current plan.
Table 2: Projected Wastewater Collection Rate Trajectory for FY 2018 to FY 2026
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Current Plan 0% 7% 7% 7% 7% 7% 5% 5% 4% 3%
FY 2017 Plan 10% 9% 7% 6% 4% 4% 4% 4% 4% N/A
The Wastewater Collection Utility has a small balance in its Rate Stabilization Reserve. This
reserve is used to phase in rate increases over several years. The FY 2017 Financial Plan
proposed a $342,000 transfer from the Rate Stabilization Reserve, but in the proposed FY 2018
Financial Plan this transfer is moved to later years. Due to the delays in main replacement
noted above, the Operations reserve is above its target level, and will rise again in FY 2018
before beginning to decline. This Financial Plan projects that the Rate Stabilization Reserve will
not be needed until FY 2020.
Table 3: Transfers To/(From) Reserves for FY 2017 to FY 2027 ($000)
Reserve FY 2017 FY 2018 FY 2019 to FY 2027
Rate Stabilization - - (342)
Operations - - 342
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes no rate changes or transfers for the Wastewater Collection Utility in FY 2017 and
FY 2018.
SECTION 3: DETAIL OF FY 2018 RATE AND RESERVES PROPOSALS
SECTION 3A: RATE DESIGN
The Wastewater Collection Utility’s rates are evaluated and implemented in compliance with
the cost of service requirements and procedural rules set forth in 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
Solutions (Staff Report 1399). Staff plans to review and update this cost of service study in FY
2018 or FY 2019, 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.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2016 6 | Page
SECTION 3B: CURRENT AND PROPOSED RATES
The current rates were adopted July 1, 2016, when the City increased sewer rates by 9%.
CPAU has three sewer rate schedules: one for residents (S-1), one for commercial customers
(S-2), and a special schedule for restaurants (S-6), which discharge higher than average amounts
of grease and oil and, therefore, have a greater impact on the sewer system. Residential
customers are billed a monthly service charge, while commercial customers are billed based on
their dry month water usage (previous January through March). This closely approximates non-
irrigation water consumption, which represents actual sewer use. Restaurant customers are
billed monthly based on water usage. CPAU also maintains a rate schedule for industrial
dischargers (S-7), but there are currently no customers required to be on this rate schedule.
CPAU us not proposing any rate changes for FY 2018 at this time. Table 4, below, summarizes
the current rates for all customer classes. Comparisons with neighboring communities are
discussed in Section 4F: Competitiveness.
Table 4: Current Sewer Rates
Current
(as of 7/1/2016)
Monthly Service and Minimum Charges ($/month)
S-1 (Residential) Service
charge
$34.83
S-2 (Commercial),
S-6 (Restaurant)
Minimum $34.83
Quantity Rates: based on winter water usage (average for January
- March bill period)
S-2 (Commercial) $/CCF 6.71
S-6 (Restaurant) $/CCF 10.38
S-7 (Industrial) $/CCF 3.08
SECTION 3C: PROPOSED RESERVE TRANSFERS
In the FY 2017 Financial Plan, staff recommended a $1.95 million transfer from the Rate
Stabilization Reserve in FY 2016. This left a small amount, $342,000, which was originally to be
transferred in FY 2017 and bring the Rate Stabilization Reserve balance to zero.
With main replacement projects being deferred in FY 2017 and FY 2018, the Operations reserve
will not require a transfer from the Rate Stabilization Reserve. It is now anticipated that the
remaining $342,000 will not need to be transferred until FY 2020.
These transfers are included in the financial projections in this Financial Plan, and will enable
CPAU to maintain adequate Operations Reserve levels while moderating the pace of increase in
Wastewater Collection rates. The impact of these transfers on reserves levels can be seen in
Appendix A: Wastewater Collection Financial Forecast Detail.
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2016 7 | Page
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information and to help readers better understand the forecasts in later sections.
SECTION 4A: WASTEWATER UTILITY HISTORY
The Wastewater Utility commenced operation in 1899 to serve Palo Alto and Stanford. In its
first three decades the system grew to 60 miles of sewers. Raw sewage was discharged into
Mayfield Slough at the edge of the Bay. In the 1930s, at the behest of the State Department of
Health, Palo Alto built the South Bay’s first wastewater treatment plant. At that time the sewer
system served 20,500 Stanford and Palo Alto residents and a cannery. The plant was upgraded
twice in the 1940s and 1950s to increase capacity.1 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.2
In 1968 the City signed agreements with the Cities of Mountain View and Los Altos to build a
new regional treatment plant, the RWQCP, which is still in operation today. Since 1940 the City
had been providing treatment services to the East Palo Alto Sanitary District through an existing
agreement, and was also serving Stanford University by transporting wastewater across the
City’s sewer system to the treatment plant. Both of these organizations became partners in the
RWQCP as well. At the same time the Town of Los Altos Hills became the sixth partner as it
signed an agreement with the City to connect the Town’s sewer system to the City’s sewer
system to carry wastewater to the new RWQCP. The current agreements for the RWQCP
extend through 2035.3
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
studies found high rates of infiltration, estimating that as much as 40% of the water going to
the RWQCP from Palo Alto’s system was groundwater and stormwater rather than
wastewater.4 In some parts of Palo Alto the land surface had subsided due to groundwater
pumping by the water utility, and though that practice had ceased many years earlier as the
water utility switched to the Hetch Hetchy Regional Water System, parts of the city had already
subsided two to five feet. This subsidence had damaged several parts of the sewer collection
system, leading to reduced slopes for sewer mains that caused reductions in capacity. In
1 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pp 2-1
through 2-2 2 Wastewater Collection and Storm Drainage, 1965, Brown and Caldwell Consulting Engineers, pp 4, 6-7, 143 3 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pg 2-2 4 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-2
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2016 8 | Page
response to these studies the City commenced an accelerated sewer system rehabilitation
program.5 At that point the sewer system comprised over 190 miles of mains.6
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.7 At the same time the City updated its hydraulic model and
developed greater capacity to do system planning in house.
SECTION 4B: CUSTOMER BASE
The City of Palo Alto’s Wastewater Collection Utility provides sewer service to the residents and
businesses of Palo Alto. It is distinct from the Wastewater Treatment Utility, which provides
treatment services for surrounding communities in addition to Palo Alto. 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.
SECTION 4C: COLLECTION SYSTEM
The Wastewater Collection Utility delivers all the wastewater it collects to the Regional Water
Quality Control Plant (RWQCP) operated by the City of Palo Alto under a partnership agreement
with several surrounding communities. Palo Alto is responsible for 35% to 40% of the
wastewater sent to the RWQCP. 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: Wastewater Treatment Costs. 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 6C: Capital Improvement Program
(CIP). 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
5 CMR 183:90, Infrastructure Review and Update, March 1, 1990 6 Master Plan of the Wastewater Collection System, December 1988, Camp Dresser & McKee, Inc., pg 1-2 7 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-3
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2016 9 | Page
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 4D: COST STRUCTURE AND REVENUE SOURCES
In FY 2016, treatment costs represented nearly half of the Wastewater Collection Utility’s costs
(47%), followed by Capital (27%) and Operations costs (26%). These expenditures are shown in
Figure 1. The utility’s revenue in FY 2016, shown in Figure 2, came primarily from sewer charges
(94%), with the remainder coming mainly from capacity and connection fees and other sources
(6%).
Figure 1: Cost Structure (FY 2016) Figure 2: Revenue Structure (FY 2016)
SECTION 4E: RESERVES STRUCTURE
CPAU maintains six reserves for its Wastewater Collection Utility to manage various types of
contingencies. These are summarized below, but see Appendix C: Wastewater Collection Utility
Reserves Management Practices for more detailed definitions and guidelines for reserve
management:
• Reserve for Commitments: A reserve equal to the utility’s outstanding contract
liabilities for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
• Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including
the General Fund, have a Reappropriations Reserve.
• Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to
accumulate funds for future expenditure on CIP projects and is anticipated to be empty
unless a major one-time CIP expenditure is expected in future years. It also acts as a
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February 2016 10 | Page
contingency reserve for the CIP. This type of reserve is used in other utility funds
(Electric, Gas, and Water) 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 Water) as well.
• Operations Reserve: This is the primary contingency reserve for the Wastewater
Collection Utility, and is used to manage yearly variances from budget for operational
costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well.
• Unassigned Reserve: This reserve is for any funds not assigned to the other reserves
and is normally empty.
SECTION 4F: COMPETITIVENESS
Table 6 shows the monthly sewer bills for residential customers compared to what they would
be in surrounding communities. The annual sewer bill for a Palo Alto customer is $418 under
current rates, 31% lower than the average neighboring community. Palo Alto has the fourth
lowest bill of the group.
Table 5: Residential Monthly Sewer Bill Comparison
Palo Alto
Neighboring Communities Neighboring
Community
Average
Menlo
Park
Redwood
City
Mountain
View Los Altos
Santa
Clara Hayward
34.83 85.91 75.11 34.30 33.93 41.65 29.80 50.12
Based on rates as of February 2017
Table 7 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. Palo Alto is less competitive with surrounding cities
with regards to commercial sewer rates, but is not the most expensive jurisdiction in all cases.
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February 2016 11 | Page
Table 6: 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 $ 94.00 $ 33.14 $ 75.11 $ 62.86 $ 50.76 $ 65.94 $ 62.02 $ 74.97
Restaurant 581.10 664.72 781.08 490.56 137.70 590.24 463.12 521.24
Based on rates as of February 2017
SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: FY 2012 TO FY 2016 COST AND REVENUE TRENDS
Figure 3 shows the Wastewater Collection Utility’s actual expenses and revenues for the past
five years and projections through FY 2027. Operations costs were low in FY 2012, but in
general expenses have grown with inflation at around 2% per year. Capital Investment grew on
average by around 3%, with FY 2014 and FY 2015 seeing a reduction in investment mainly due
to delayed main replacement projects. Treatment costs stayed relatively flat during this time
frame.
Since the revenue for this utility is very stable, revenue changes closely follow rate changes. The
other large revenue item of note is the continued connection and capacity fees from new
construction. These fees have grown dramatically since FY 2010, and it is uncertain when this
trend may dampen.
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February 2016 12 | Page
Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes
Actual Costs through FY 2016 and Projections through FY 2027
SECTION 5B: FY 2016 RESULTS
Forecasted revenues for FY 2016 were lower than projected ($16.6 million actual vs. $18 million
projected), but expenses related to Administration and Customer Service activities came in well
below expected budget as well. Total FY 2016 expenses were $18.5 million compared to
projections of $19.9 million in the FY 2017 Financial Plan. Table 8 summarizes the variances
from forecast.
Table 7: FY 2016, Actual Results vs. Financial Plan Forecast
Net Cost/
(Benefit)
Type of
change
Admin and customer service costs lower than projected (806,000) Cost savings
Sales revenues lower than forecast 657,000 Revenue decrease
Connection, capacity fees and other revenues were
lower than forecasted
119,000 Revenue decrease
Operations, capital and other cost increases 131,000 Cost increase
Net Cost / (Benefit) of Variances ($101,000)
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SECTION 5C: FY 2017 PROJECTIONS
The most notable change from the FY 2017 budget identified at this time is the deferral of
Wastewater Collection System Rehabilitation Project 28. Originally budgeted at $3.5 million,
this project is now anticipated to start in FY 2019. Also deferred to FY 2019 will be the design
phase of Project 29, budgeted at $328,000. Capital Improvement issues are further discussed in
Section 6c below.
SECTION 5D: FY 2018 – FY 2027 PROJECTIONS
Staff has prepared a forecast of costs and revenues through FY 2027. As shown in Figure 3
above (and, in more detail, in Appendix A: Wastewater Collection Financial Forecast Detail), the
Wastewater Collection Utility’s total costs are projected to increase by roughly 6% per year on
average for FY 2017 through FY 2027. The majority of this increase is due to projected
treatment cost increases. The treatment plant itself is facing the need for major upgrades in
coming years, both due to age of equipment and constantly changing environmental
regulations. While the costs of the plant are shared among member agencies, Palo Alto is still
expected to see average cost increases of 5% per year over the forecast horizon.
Revenues are shown by the red line in Figure 3, and what is notable here is that costs have
been generally higher than revenue. Some relief was experienced during times of lower CIP
expenditures, and this is projected to be seen in FY 2017 and 2018. The trend of under-
collection picks up in the future, however, resulting in a fairly rapid reduction of reserves. A
path of 7% annual rate increases in the near term, decreasing to more inflationary increases in
outer years, is required to keep reserves from dropping too low. Figure 4 below shows the
relative drop in reserves, only showing slowing replenishment after the projected increase in FY
2021.
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February 2016 14 | Page
Figure 4: Wastewater Collection Reserves Projections
SECTION 5E: RISK ASSESSMENT AND RESERVES ADEQUACY
The Wastewater Collection Utility currently has one contingency reserve, the Operations
Reserve, and this Financial Plan maintains reserves within the approved guideline levels
throughout the forecast period, as shown in Figure 5 below. Reserve levels also exceed the
short term risk assessment for the utility.
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Figure 5: 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
through FY 2022. The Operations Reserve is projected to be adequate to manage these levels
of risk over the entire forecast period.
Table 8: Wastewater Collection Risk Assessment
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Total Revenue ($000) 17,146 18,296 19,577 20,947 22,413
Max. Historical Budget-to-Actual variance 3% 3% 3% 3% 3%
Budget-to-Actual Risk ($000) 514 549 587 628 672
System Rehabilitation CIP Budget ($000) 933 4,800 4,602 4,763 4,880
CIP Contingency @10% ($000) 93 480 460 476 488
Treatment Budget ($000) 9,932 10,298 11,088 11,885 12,293
Treatment Cost Contingency @10% ($000) 993 1,030 1,109 1,188 1,229
Total risk assessment value ($000) 1,600 2,059 2,156 2,292 2,389
Projected Operations Reserve Level ($000) 6,688 5,410 5,069 4,529 4,732
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SECTION 5F: ALTERNATE SCENARIOS
At its February 2017 meeting, staff presented an earlier scenario with a 2% rate increase in FY
2018 followed by 6% rate increases in outer years. However, with the Operations reserve
projected to be above the target level and well within the guideline levels adopted by Council,
staff no longer sees the need for an increase at this time.
SECTION 5G: LONG-TERM OUTLOOK
In the longer term (5 to 35 years) the primary factor that could lead to increased costs for the
Wastewater Collection Utility are major upgrades at the RWQCP, a share of which will be
allocated to the utility as part of treatment costs. These upgrades 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.
SECTION 6: DETAILS AND ASSUMPTIONS
SECTION 6A: WASTEWATER TREATMENT COSTS
Treatment expenses represent the Wastewater Collection Utility’s share of the costs of
operating the RWQCP. Per the partnership agreements between Palo Alto and its partner
agencies, these charges are assessed based on a formula that takes into account the total
amount of wastewater delivered, the amount of organic material in it, its ammonia content,
and the total suspended solids it is carrying. The Wastewater Collection Utility’s assessed share
of the RWQCP’s revenue requirement 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.
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. Wastewater Treatment
Fund costs are increasing due to rising salary and benefit costs as well as the attendant
allocated charges for centralized city services needed by the Fund. Additional expenses include
increased water and air permitting fees from the Regional Water Quality Control Board and the
Bay Area Air Quality Management District. Commodity and utility rates to operate the facility
are also increasing with the largest increases in FY2018 for electrical, water, refuse, and storm
rates. Chemical commodity expenses, needed to adjust water quality and meet permit
requirements, are also increasing modestly per latest chemical market conditions and
procurement contract conditions.
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Capital projects, parts, and materials are increasing about 3% to keep up with ongoing
replacement of aging equipment. Larger increase to capital expenses are expected to begin in
FY2020 in the form of new debt service for major projects to implement the Plant’s capital
program. The Plant’s major project in FY2018 will be making progress constructing the Sludge
Dewatering and Truck Loadout Facility, which will allow (in about 2019) the retirement of the
Plant’s two sewage sludge incinerators that have been in operation since 1972.
SECTION 6B: OPERATIONS
Operations costs include the Customer Service, Distribution Operations, Engineering, and
Allocated Charges categories in Appendix A: Wastewater Collection Financial Forecast Detail.
Debt service, rent, and transfers are also included in this category. Customer Service costs are
primarily related to the call center and collections on delinquent accounts. The Distribution
Operations category includes preventative and corrective maintenance on sewer mains and
laterals, investigation of sewer overflows, regular cleaning of heavily impacted sections of the
sewer system, and services shared with other utilities (such as street restoration and
equipment maintenance). Allocated Charges include the costs of accounting, purchasing, legal,
and other 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.
SECTION 6C: 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
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February 2016 18 | Page
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.
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 maintain the current pace of replacement.
This increase in cost is a partial reason for the two year delay in projects. The most recent
project, when put out for bid, resulted in very few contractors competing, and project bids
larger than budgeted. Staff will redesign this and future projects into smaller segments to keep
budgets lower, while not compromising on overall system integrity. The other reason for delay
is the University Avenue Business District project, and getting coordination amongst all
departments is taking more time than expected. Finally, there has been an ongoing issue with
keeping and maintaining qualified staff to design and work on projects.
Customer Connections costs are projected to increase steadily by around 3% 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 increases, so
does fee revenue.
Projected CIP spending is displayed in Table 10 for the 5-year financial forecast period.
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Table 9: Projected CIP Spending
Aside from Customer Connections, the CIP plan for FY 2018 to FY 2022 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 6D: DEBT SERVICE
The Wastewater Collection Utility currently pays its share of one bond issuance, the 1999 Utility
Revenue Bonds, Series A, which is due to be retired in 2024. This $17.7 million issuance
refinanced various earlier Storm Drain, Wastewater Treatment, and Wastewater Collection
Utility bond issuances. The Wastewater Collection Utility’s share of the issuance was roughly
$1.9 million. This amount represented the second refinancing of the remaining principal of a
1990 bond issuance which itself was a refinancing of a 1985 issuance that financed a variety of
improvements to the sewer system. The cost of debt service for the Wastewater Collection
Utility’s share of this bond issuance for the financial forecast period is roughly $128,000 per
year as shown in Table 11 below.
Table 10: Wastewater Collection Utility Debt Service ($000)
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
1999 Utility Revenue Bonds, Series A 128 128 128 129 129 129
The 1999 Utility Revenue Bonds include two covenants stating that 1) the Wastewater
Collection Utility will maintain a debt coverage ratio of 125% of debt service, and 2) that the
City will maintain “Available Reserves”8 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 12, 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.
8 Available Reserves as defined in the 1999 Utility Revenue Bonds included reserves for the Water, Wastewater
Treatment, Wastewater Collection, Refuse, Storm Drain, Electric, and Gas Utilities
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February 2016 20 | Page
Table 11: Debt Service Coverage Ratio ($000)
FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Revenues 19,042 19,170 20,381 21,787 23,112 24,611
Expenses (Excl. CIP
and Debt Service) -15,869 -16,146 -16,713 -17,709 -18,717 -19,343
Net Revenues 3,173 3,024 3,668 4,078 4,395 5,268
Debt Service 128 128 128 128 129 129
Coverage Ratio 2479% 2363% 2866% 3186% 3407% 4084%
The Wastewater Collection Utility’s reserves (but not its net revenues) are also considered
security for the Storm Drain and Wastewater Treatment Utilities’ shares of the debt service on
the 1999 bonds. Throughout the term of the bonds there remains a small risk that the
Wastewater Collection Utility’s reserves could be called upon to make a debt service payment
on behalf of one of those utilities if it cannot meet its debt service obligations. Staff does not
foresee this occurring based on the current financial condition of those utilities. If the
Wastewater Collection Utility’s reserves were used this way, any amounts advanced would
have to be repaid by the borrowing utility.
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.
SECTION 6E: OTHER REVENUES
The utility has seen substantial increases in connection and capacity fee revenues in recent
years, offsetting the need for increased sales revenue in the past, and these are assumed to
continue, albeit slightly reduced from current levels. Income from interest and transfers in are
projected to remain steady through the forecast horizon.
SECTION 7: COMMUNICATIONS PLAN
The FY 2017 Wastewater Collection Utility communications strategy covers three primary areas:
rates, maintenance and operations, 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 newspapers and local publications, utility bill inserts, social media and email
newsletters.
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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 prior to clearing sewer lines in the event of a sewer back-up.
Promotional activity about wastewater utility maintenance and safety operations includes use
of bill inserts, ads in local print publications, website pages, email newsletters and social
media. While print materials and website pages feature prominently, CPAU is increasing the
outreach emphasis on more direct communication with customers, including through use of
social media, email newsletters, digital ads, 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: Sample of Wastewater Collection Outreach Materials
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APPENDIX A: WASTEWATER COLLECTION FINANCIAL FORECAST DETAIL
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February 2016 24 | Page
APPENDIX B: WASTEWATER COLLECTION UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
WASTEWATER COLLECTION UTILITY FINANCIAL PLAN
February 2016 25 | Page
APPENDIX C: WASTEWATER COLLECTION UTILITY RESERVES
MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Wastewater
Collection Utility Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY
2015 to FY 2019 would be the Financial Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Wastewater Collection Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Wastewater Collection
Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 8 (Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all contracts in force for the Wastewater
Collection Utility at that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
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Section 5. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels
are calculated for each fiscal year of the Financial Planning Period 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.
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.
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Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Wastewater Collection Utility’s Fund Balance not
included in the reserves described in Section 3-Section 6 above will be included in the
Operations Reserve unless this reserve has reached its maximum level as set forth in Section
7(d) below. Staff will manage the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for
that year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 105 days of O&M and commodity expense
Maximum Level 150 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Wastewater Collection Utility
shall be designed to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Wastewater Collection
Utility’s Fund Balance shall be automatically included in the Unassigned Reserve
described in Section 8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the
Wastewater Collection Utility’s Fund Balance will be held in the Unassigned Reserve. If
there are any funds in the Unassigned Reserve at the end of any fiscal year, the next
Financial Plan presented to the City Council must include a plan to assign them to a specific
purpose or return them to the Wastewater Collection Utility ratepayers by the end of the
first fiscal year of the next Financial Planning Period. For example, if there were funds in the
Unassigned Reserves at the end of FY 2015, and the next Financial Planning Period is
FY 2016 through FY 2020, the Financial Plan shall include a plan to return or assign any
funds in the Unassigned Reserve by the end of FY 2016. Staff may present an alternative
plan that retains these funds or returns them over a longer period of time.
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APPENDIX D: SAMPLE OF WASTEWATER COLLECTION OUTREACH
MATERIALS
Attachment C
EXCERPTED DRAFT MINUTES OF THE MARCH 1, 2017
UTILITIES ADVISORY COMMISSION
ITEM 4. ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2018 Wastewater
Collection Financial Plan
Acting Senior Resource Planner Eric Keniston presented on the Wastewater Collection Financial
Plan. He said no rate increase was proposed for the Wastewater Collection Utility. Wastewater
collection capital investment was projected to increase in the future, and wastewater
treatment capital investment and operating costs were projected to increase in the future.
Commissioner Trumbull noted citizens were voting for a parcel tax to extend the storm drain.
He asked whether that was reflected in the summary of all rate increases shown in the staff
presentation, and what the impact to residential rates would be if the parcel tax were not
approved.
Keniston said that the numbers were provided for context, but staff did not have information
on hand to address the storm drain rate changes.
Assistant Director of Resource Management Jonathan Abendschein said the ballot for the
parcel tax would be the best source of information.
Commissioner Schwartz asked about basement dewatering. The water went to the storm drain.
She asked whether the storm drain parcel tax was linked to the issue of basement dewatering.
Utilities Director Ed Shikada said the two issues were not linked.
Commissioner Danaher said the issue had been discussed at a prior meeting.
ACTION: Commissioner Schwartz moved, seconded by Commissioner Ballantine to recommend
that the City Council adopt the staff recommendation. The motion carried unanimously (6-0,
with Vice Chair Danaher and Commissioners Trumbull, Forssell, Danaher, Schwartz, Ballantine,
and Johnston voting yes and Commissioner Cook absent).