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Home My WebLink About1996-05-23 City Council (10)BUDGET 1996-98 Ci~ of Palo Alto C ty Manager’s Report TO:THE HONORABLE CITY COUNC~ ATTENTION:FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT: UTILITIES AGENDA DATE:May 23, 1996 CMR:235:96 SUBJECT:Proposed Water Rate Increase REQUEST This report requests Council approval of a proposal to increase Water Fund revenue approximately 6 percent effective July 1, 1996. The rate increase is requested to offset increased operating and capital expenditures. RECOMMENDATION Staff recommends that Council adopt the attached resolution to increase Water Fund revenue approximately $665,000, or 6 percent, effective July 1, 1996. POLICY IMPLICATIONS Approval of this rate proposal does not represent a change to existing policies. DISCUSSION Reasons for a Rate Increase The revenue requirements of the Water Utility consist of a number of components including the cost to purchase water, operate and maintain a reliable system, finance an appropriate portion of the capital improvement programs (CIP) from current operating revenues, fund prudent reserve levels and provide a reasonable transfer to the General Fund. A change in any of these factors, as well as a change in the sales level can trigger a rate adjustment. A review of the FYs 1996-97 and 1997-98 Water Fund financial condition indicates that current rate levels are inadequate to meet the Utility’s financial CMR:235:96 Page 1 of 5 obligations. The insufficiency of current rates is due to several factors. First, a water rate increase is needed to accommodate a higher transfer to the General Fund. The FY 1996-97 transfer to the General Fund is approximately $2.04 million, or $422,000 higher than its FY 1995-96 budget level. In accordance with the Council approved Utility Enterprise Fund methodology, the upper limit of the transfer to the General Fund is based on the California Public Utilities Commission (CPUC) approved rate of return. For FY 1996- 97, the higher rate-of-return authorized by the CPUC for investor-owned utilities, in combination with a higher Palo Alto Water Fund ratebase due to capitalization of its infrastructure projects, has raised the upper limit on the transfer to the General Fund. Approximately $300,000 of the increased transfer is due to the number of the CIP projects (primarily infrastructure replacement) that will be finalized and capitalized by the end of the current fiscal year. It should be noted that the upper limit is projected to continue rising due to the infrastructure program. A second factor is an increase in the Capital Improvement Program (CIP) for FY 1996-97 which includes a $275,000 consultant study of the water wells, storage, and distribution system. A third factor is the slow rebound of water sales since the drought. Current sales estimates are approximately 5.5 million ccf(100 cubic feet) to 6.1 million ccf. Although sales have risen since the drought, sales remain below the pre-drought level of approximately 7.2 million ccf. These factors combined would require a double digit rate increase in FY 1996-97. However, to minimize the impact on our customers, staff recommends that the adjustment be split between two years. Therefore, this report recommends a $665,000, or 6 percent rate increase, effective July 1, 1996. Staff will return to Council during the interim budget process for FY 1997-98 with a 7 percent rate increase proposal. However, if water sales are stronger than projected in FY 1996-97, staff will adjust its rate proposal accordingly and may not recommend a rate increase during the FY 1997-98 interim budget process. Financial Review of the Water fund Palo Alto’s water rates were reduced 7 percent inFY 1993-94, 15 percent in FY 1994- 95, and 10 percent in FY 1995-96. However, despite three consecutive rate decreases and the current 6 percent rate increase proposal, Palo Alto’s water rates have remained above the average water rates in nearby communities. In order to gain a better understanding of why Palo Alto water rates are above rates charged in nearby cities, staff plans to perform a financial review of the Palo Alto Water CMR:235:96 Page 2 of 5 Utility and comparable reviews of water utilities in nearby cities. Included in this review will be comparisons of revenue requirements and policies related to rate structure, infrastructure replacement and financing of capital improvements as well as equity transfers. Sources of water supply, revenue, and .subsidies will be identified. The Utilities Organizational Review data and f’mdings that may be relevant to this issue will also be coordinated with the staff’s review to avoid duplication of effort. Staff plans to present its findings and possible recommendations during the interim budget process for FY 1997-98. Application of the Proposed 6 percent Revenue Increase The proposed $665,000 revenue increase was applied to residential and non-residential customers on an equal percentage basis. An objective in spreading the revenue increase to Residential Rate Schedule W-1 was to align Palo Alto’s rate structure closer to the water rate structures of nearby communities. To achieve this objective, the rate increase was spread to the first two rateblocks of Residential Water Rate Schedule W-1 with no increase applied to the third rateblock. (All usage over 14 units per month) Application of the increase to the rate structure in this manner narrows the price differential between small and large users and accounts for the range of percentage bill increases from 2.4 percent to 9.3 percent for residents. For businesses, the objective has been to gradually achieve a flat rate. For the Non- residential Rate Schedule W-4, the increase was applied to the first rateblock, thus achieving a flat rate for these customers. This transition from an inverted rate to a flat rate accounts for the range of percentage bill increases from 2.8 percent to 12.9 percent for commercial customers. Impact of Rate Increase Table 1 shows the impact of the proposed rates on customer bills based on different consumption levels. During summer months, average residential usage in Palo Alto is approximately 19 units. At this level, residents will experience approximately a 6 percent increase in their water bills. Small users will experience a bill increase of approximately 9 percent, although their water bills will remain slightly below similar water bills in surrounding areas. Larger water users, who currently pay the highest rates, will experience a rate increase below the system average of 6 percent. Under the Non-residential Water Rate Schedule W-4, the proposed rate is a flat rate. Presently, Rate Schedule W-4 is an inverted rate structure whereby the price is higher as usage rises. To complete the transition to the flat rate means that businesses using relatively small amounts of water will experience a bill increase higher than the system average, while businesses requiring relatively large amounts of water will experience a CMR:235:96 Page 3 of 5 bill increase below the system average. Table 1 Impact of Rate Increase on Customer Bills Usage Monthly Amount of Percent Customer (CCF)Bill Increase Increase Residential 7 $14.29 $1.19 9.1 Residential 14 28.08 2.38 9.3 Residential 19 38.28 2.38 6.6 Residential 35 70.92 2.38 3.5 Residential 50 101.72 2.38 2.4 Small Commercial 18 40.72 4.32 11.9 Medium Commercial 100 215.30 24.00 12.5 Medium Commercial 600 1235.30 48.00 4.0 Large Commercial 500 1050.00 120.00 12.9 Large Commercial 3000 6150.00 168.00 2.8 Water Rate Comparison with Surrounding Cities The attached bar charts (figures 2 and 3), compare Palo Alto’s proposed rates with the current water rates of Menlo Park, Redwood City, Mountain View and Los Altos (the latter is being served by the California Water Service company). A range of usage levels for residential and non-residential customers is shown. In Palo Alto, the current average residential water usage is 14 units per month on an annual basis. At this level, Palo Alto residential water bills under the proposed rates are approximately 14 percent above the corresponding bills of surrounding areas. For businesses, Palo Alto’s commercial water bills are approximately 10 percent to 20 percent higher than the composite average bills in nearby cities. FISCAL IMPACT The fiscal impact of the proposed 6 percent rate increase will be an increase in sales revenue of approximately $665,000 in FY 1996-97 and the RSR balance in the Water Fund is projected above the minimum but below the target level guidelines. CMR:235:96 Page 4 of 5 ENVIRONMENTAL ASSESSMENT The adoption of the resolution does not constitute a project under the California Environmental Quality Act, therefore, no environmental assessment is required. ATTACHMENTS Figure 1 & 2 Water Bill comparisons Resolution Rate Schedules W-1 and W-4 PREPARED BY:Lucie Hirmina, Manager of Utilities Rates Randy Baldschun, Assistant Director of Utilities DEPARTMENT HEAD REVIEW: CITY MANAGER APPROVAL: ED’v)//ARD J. I~I~EK Director of FLEMING Manager CC: Utilities Advisory Commission CMR:235:96 Page 5 of 5 WATER BILL COMPARISON Effective March 1996 $ Monthly Bills Residential 140 120 100 8O 60 40 0 Figure (1) 7 14 20 35 50 Units(CCFs) "P.A. ~--~IM. P. I-~a. C. F’~M.V. F~L. A. //////1/////1///,/ / $ Monthly Bills Typical Commercial 1 1200 1000 80O 600 400 200 0 Figure (2) 100 300 600 Units(CCFs) "P. A. ~]M. P. i-~a. C. F-~M. V. []L. A. RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING UTILITYRATE SCHEDULES W-I AND W-4 OF THE CITY OF PALO ALTO UTILITIES RATES AND CHARGES PERTAINING TO GENERAL WATER SERVICE The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION I. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Schedules W-I (General Residential Water Service) and W-4 (General Non-Residential Water Service) of the Palo Alto Utilities Rates and Charges are hereby amended to read in accordance with Sheets W-I-I and W-4-1, respectively, attached hereto and incorporated herein by reference. The foregoing Utility Rate Schedules, as amended, shall become effective on July i, 1996. SECTION 2. The Council finds that the revenue derived from the authorized adjustments of the several general water service 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 3. 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:APPROVED: City Clerk APPROVED AS TO FORM: Senior Asst. City Attorney Deputy City Manager, Administrative Services Mayor City Manager Director of Utilities 960416 s.~m 0070952 GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 A.APPLICABILITY: This schedule applies to all residential single family water service. B.TERRITORY: C= Inside and outside the incorporated limits of the City of Palo Alto and land owned or leased by the City. RATES: Per Meter Service Charge:Per Month For For For For For For For For For For 5/8-inch meter .....................................$ 4.00 3/4 inch meter .......................................4.00 1 inch meter .......................................4.50 1 1/2 inch meter .....................................5.20 2-inch meter .......................................6.80 3-inch 4-inch 6-inch 8-inch 10-inch meter ......................................11.30 meter ......................................16.20 meter ......................................30.00 meter ......................................46.75 meter ......................................58.00 Commodity Rate: (To be added Service Charge and applicable to all pressure zones.) Per Meter Per Hundred Cubic Feet Per Meter All Pressure Zones First Next Over 7 Ccf .........................................$1.47 7 Ccf ..........................................1.97 14 Ccf .........................................2.04 Temporary unmetered service to residential subdivision developers, per connection .......................$4.00 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. W-1-1 dated 7-1-95 Effective 7-1-96 Sheet No. W-1-1 GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-4 A. APPLICABILITY: This schedule applies to non-residential water service in the City of Palo Alto and its distribution area. This schedule is also applicable to multi-family residential customers served through a master meter. B. TERRITORY: Inside the incorporated limits of the City of Palo Alto, on land owned or leased by the City, and any other land serviced by the Palo Alto Water Utility. C. RATES: Service Charge Per Meter Per Month For For For For 1 1/2 inch meter ......................................5.20 For For For For For For 5/8-inch meter .....................................$ 4.00 3/4-inch meter .......................................4.00 1-inch meter .......................................4.50 2 inch meter .......................................6.80 3-inch meter ......................................11.30 4-inch meter ......................................16.20 6-inch meter ......................................30.00 8-inch meter ......................................46.75 10-inch meter ......................................58.00 Commodity Rates: (to be added to Service Charge) Per Meter Per Month Per Hundred Cubic Feet All Pressure Zones Per Ccf ............................................$2.04 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. W-4-1 and W-4-2 dated 7-1-95 Effective 7-1-96 Sheet No. W-4-1