HomeMy WebLinkAboutStaff Report 203-07BUDGET
’07-’09
City of Palo Alto
Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: UTILITIES
ATTENTION:FINANCE COMMITTEE
DATE:
SUBJECT:
APRIL 17, 2007 CMR: 203:07
UTILITIES ADVISORY COMMISSION RECOMMENDATION TO
APPROVE A RESOLUTION ADOPTING A WATER RATE
INCREASE FOR FISCAL YEAR 2007-08, AND STAFF
RECOMMENDATION TO APPROVE, IN CONCEPT, THE
ADOPTION OF A WATER RATE INCREASE FOR FISCAL YEAR
2008-09
RECOMMENDATION
Staff and the Utilities Advisory Commission (UAC) recormnend that the City Council adopt the
attached resolution to:
(a)Approve a 10 percent increase to water retail rat~s, for Fiscal Year (FY) 2007-08,
effective July 1, 2007, which will increase annual revenue by $2.2 million;
(b) Approve the changes to the Water Utility Rate Schedules, as attached;
(c)Approve the discontinuance of the current discounted rate for commercial, industrial and
institutional irrigation customers; and,
(d)Approve a monthly "Custolner Charge" for all customer classes, irrespective of their
monthly water consumption, in order to collect a portion of the utility’s fixed operating
costs.
In addition, for biemfial budgeting purposes, staff recommends :
(e)Approval, in concept, of a 10 percent average system water rate increase for FY 2008-
09, which will increase amaual revenue by an additional $2.5 million.
DISCUSSION
The City Council approved a 7 percent retail water revenue increase for FY 2006-07. During the
budget process, staff informed the Council that if water sales remained flat or declined, or if
there was a rise in wholesale water purchase costs from San Francisco Public Utility
CMR:203:07 Page 1 of 4
Commission (SFPUC), a rate increase could become necessary. The Water Utility sales levels
for Fiscal Year 2006-07 have remained flat, and projections for Fiscal Year 2007-08 and beyond
assume the same. In addition, operating costs and wholesale supply costs fi~om SFPUC are
increasing.
Staff is recommending a 10 percent water rate increase for FY 2007-08 and a 10 percent increase
for FY 2008-09. These increases represent annual revenue increases of $2.2 million and $2.5
million respectively. Staff will evaluate the necessity of the 10 percent increase for FY 2008-09
during the budget process.
The key driving factors for this rate increase is the decrease in sales volume, increases in the
wholesale water rates from San Francisco Public Utilities Commission (SFPUC), and the
increase in operating costs as stated in attached Utilities Advisory Commission report.
Customer Charge
Staff recommends the introduction of the monthly "Customer Charge" to collect some of the
fixed customer costs not currently being recovered from low consumption users. This charge
includes costs such as meter reading, billing and other administrative costs. A monthly "Meter
Charge" was discontinued in July 2003. However, as sales volumes decline or fluctuate with
weather patterns, the currently used "volumetric pricing" methodology results in uneven revenue
streams. It also results in artificial and unfair subsidization of low volume water users. The
monthly "Customer Charge" will achieve greater equity among customer classes and provides
stability in recovering some of the fixed costs. A state survey of other water utilities, conducted
by the California Municipal Utilities Association, indicates that most California water utilities
have a fixed monthly meter or customer charge. The expected annual revenue which would be
collected from the proposed monthly "Customer Charge" is approximately $1.6 million.
To avoid a sudden negative financial impact on the smaller water user, staff recommends that the
"Customer Charge" be initially set at a level that does not fully collect all customer-associated
fixed costs, but will increase over time to a fully allocated level. For example, a $5 monthly
charge is proposed for most residential customers, which represents 48 percent of the fully
allocated monthly customer costs based on the cost-of-service study of $10.40. For large
customers, the monthly "Customer Charge" will be based on meter size, and be fully allocated
among commercial customers effective July 1, 2007. The Customer Charge will range from $5
for the 5/8 inch meter to $383.67 for the 8 inch and 10 inch meters.
With the approval of the proposed 10 percent increase, the Water Rate Stabilization Reserve (W-
RSR) balance is projected to be $12.4 million by the end of FY 2007-08 or $200,000 above the
Maximum Guideline level approved by Council. This $12.4 million includes $8.5 million in
funds returning from closed CIP projects. This amount would be used to provide partial funding
for the City’s Emergency Water Supply project starting in FY 2008-09. The project is expected
to cost approximately $40 million in total. With the proposed Fiscal Year 2008-09 rate increase,
the W-RSR balance at the end of FY 2008-09, is expected to be $3.4 million, which is slightly
CMR:203:07 Page 2 of 4
below the Minimum Guideline level and below the Risk Assessment level of $3.6 million by
$2O0,0O0.
Proposition 218 Notice
The City must give written notice to owners whose parcels will be subject to a new or increased
water, sewer, or refuse utility rate before any such new or increased rate can be imposed. A
public hearing on the new or increased rate must be held not less than 45 days after the mailing
of notice to the affected owners. At the hearing, the Council must consider written protests
against the imposition of any such new or increased rate. If a majority of the owners do object,
the new or increased rate may not be imposed. Because property ownership is deemed to include
tenancies in property where tenants are directly liable to pay for such utility service, the notice
must be sent to tenants. A pending bill (AB 1260) would clarify that notice should be sent only
to customers (whether owners or tenants) who receive the utility services.
UTILITIES ADVISORY COMMISSION REVIEW AND RECOMMENDATIONS
On April 4, 2007, the UAC voted 4 to 0, with one absent, to recommend that the City Council:
(a) Approve a 10 percent increase to water retail rates, for Fiscal Year (FY) 2007-08,
effective July 1, 2007, which will increase annual revenue by $2.2 million;
(b) Approve the discontinuance of the current discounted rate for commercial, industrial and
institutional irrigation customers; and,
(c) Approve a monthly "Customer Charge" for all customer classes, irrespective of their
monthly water consumption, in order to collect a portion of the utility’s fixed operating
costs.
The UAC voted to withhold recommending approval, in concept, of a 10 percent average system
water rate increase, or $2.5 million revenue increase, for Fiscal Year 2008-09, due to the fact
that future costs are too uncertain at the present time and wait for next year budget process to
evaluate the necessary rate increase.
ALTERNATIVES
Staff evaluated the impact of alternative rate proposals to the proposed 10 percent increase for
FY 2007-08. Any smaller rate increase would require reducing some combination of the
operating budget, Capital Improvement Program (CIP), or depleting the W-RSR. Reducing the
operating budget would negatively impact ongoing system maintenance, increase system water
losses and lead to higher capital costs. Reducing the CIP would hinder water main replacement
projects, where the infrastructure has exceeded its system design life. Withdrawals from the W-
RSR are not recommended, since even the proposed rate increase will result in the reserve
balance to be below both the Minimum Guideline level and the Risk Assessment target following
allocation of reserve funds to the Emergency Water Supply Project. Any combination of
alternatives would also result in a much higher rate increase recommendation for FY 2008-09.
CMR:203:07 Page 3 of 4
RESOURCE IMPACT
Approval of this 10 percent rate increase will raise the Water Fund revenues by approximately
$2.2 million for FY 2007-08. The "approve, in concept" 10 percent rate increase in FY 2008-09
will increase revenues by $2.5 million, and will slightly increase the funding of the W-RSR and
bring its balance to the Minimum Guideline level approved by the Council of $5.9 million by FY
2009-10.
POLICY IMPLICATIONS
This proposed rate increase meets the Utilities Strategic Plan objective of providing superior
financial performance to the City and investing in utilities infrastructure to deliver reliable
service. These recommendations do not represent a change in current City policies.
ENVIRONMENTAL REVIEW
The adoption of the resolution does not constitute a project under the California Enviromnental
Quality Act. Therefore, no environmental assessment is required.
ATTACHMENTS
A:
B.
C.
D.
Resolution
Water Rate Schedules W-l, W-2, W-4, and W-7
Report to the UAC from its April 4, 2007 meeting: Proposed Water Rate Increase
Minutes of the UAC meeting of April 4, 2007
PREPARED BY:
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
LUCIE HIRMINA
Utilities Rates Manager
TOM AUZENNE
Assistant Director Customer Support Services
VALERIE O. FONG
Director o~tilities _
Assistant City Manager
CMR:203:07 Page 4 of 4
NOT YET APPROVED
ATTACHMENT A
RESOLUTION NO.
RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING
UTILITY RATE SCHEDULES W-l, W-2, W-4, AND W-7 OF THE CITY OF PALO
ALTO UTILITIES RATES AND CHARGES PERTAINING TO WATER RATES
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 in accordance with sheet W-l-l, attached hereto and incorporate herein. The
foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2007.
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
in accordance with sheet W-2-1, attached hereto and incorporate herein. The foregoing
Utility Rate Schedule, as amended, shall become effective July 1, 2007.
SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code,
Utility Rate Schedule W-4 (General Non-Residential Water Service) is hereby amended
to read in accordance with sheet W-4-1, attached hereto and incorporate herein. The
foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2007.
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code,
Utility Rate Schedule W-7 (Irrigation Water Service) is hereby amended to read in
accordance with sheet W-7-1, attached hereto and incorporate herein. The foregoing
Utility Rate Schedule, as amended, shall become effective July 1, 2007.
SECTION 5. The Council finds that the revenue derived from the authorized
adoption enumerated herein shall be used only for the purpose set forth in Article VII,
Section 2, of the Charter of the City of Palo Alto.
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070405jb 0072854
NOT YET APPROVED
SECTION 6. 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:
AB S TENTIONS:
ATTEST:
City Clerk
APPROVED AS TO FORM:
Mayor
APPROVED:
City Attorney City Manager
Director of Utilities
Director of Administrative Services
070405jb 0072854
ATTACHMENT B
No
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W- 1
APPLICABILITY:
This schedule applies to all residential single family water service.
TERRITORY:
Inside and outside the incorporated limits of the City of Palo Alto and land owned or leased by the
City.
RATES:
Monthly Customer Charge:
Per Meter
Per Month
For 5/8-inch meter
For 3/4 inch meter
For 1 inch meter
For 1 1/2 inch meter
For 2-inch meter
For 3-inch meter
For 4-inch meter
For 6-inch meter
For 8-inch meter
For 10-inch meter
........................................................................................................... $5.00
...........................................................................................................5.00
...........................................................................................................12.27
................................................. ’ ..........................................................19.37
...........................................................................................................77.65
...........................................................................................................130.60
...........................................................................................................260.43
...........................................................................................................383.67
...........................................................................................................383.67
Commodity Rate: (To be added Customer Charge and applicable to all pressure zones.)
Per Meter
Per Month
Per Hundred Cubic Feet
All Pressure Zones
First 7 Ccf
Over 7 Ccf
.................................................................................................. ~ ....................$3.949
....................................................................................................................... 4.510
Temporary unmetered service to residential
subdivision developers, per connection .......................................................................$6.00
tend}
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. W-’l-’l dated 7-~1-2006 CITY OF PALO ALTO
UTILITIES
Effective 7-1-2007
Sheet No. W-l-1
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
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:
Co
Within the water service area of the City of Palo Alto.
RATES:
1. Monthly Customer Charge.
METER SIZE
5/8 inch ..........................................................................................................................50.00
3 inch ..........................................................................................................................125.00
2. Commodity Rate: (per hundred cubic feet) ............: ......................................................$4.34
D. SPECIAL NOTES:
°
Monthly charges shall include the applicable monthly customer charge in addition to usage billed at
the commodity rate.
Any applicant using a hydrant without obtaining a Hydrant Meter Permit or any permittee using a
hydrant without a Hydrant Meter Permit shall pay a fee of $50.00 for each day of such use in
addition to all other costs and fees provided in this schedule. A hydrant permit may be denied or
revoked for failure to pay such fee.
o 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.
o Any person or company using a fire hydrant as described in D. 1 above 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.
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. W-2-1 dated 7-1-2006
Effective 7-1-2007
Sheet No. W-2-1
No
Co
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
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.
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.
RATES:
Monthly Customer Charge
Per Meter
Per Month
For 5/8-inch meter
For 3/4-inch meter
For 1-inch meter
For 1 1/2 inch meter
For 2-inch meter
For 3-inch meter
For 4-inch meter
For 6-inch meter
For 8-inch meter
For 10-inch meter
............................................................................................... $5.00
...............................................................................................5.00
.......................................................................................... : ....6.50
...............................................................................................12.27
...............................................................................................19.37
......................................................................... " ......................77.65
...............................................................................................130.60
...............................................................................................260.43
.................................................... : ..........................................383.67
...............................................................................................383.67
Commodity Rates: (to be added to Customer Charge)
Per Meter
Per Month
Per Hundred Cubic Feet
All Pressure Zones
Per Ccf ....................................................................................................................... $4.341
{End}
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. W-4-1 dated 7-%2006 CITY OF PALO ALTO
UTILITIES
Effective 7-1-2007
Sheet No. W-4-1
Ao
go
Co
IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
APPLICABILITY:
This schedule applies to non-residential water service supplying dedicated irrigation meters in the
City of Palo Alto and its distribution area.
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.
RATES:
Monthly Customer Charge
Per Meter
Per Month
For 5/8-inch meter
For 3/4-inch meter
For 1-inch meter
For 1 1/2 inch meter
For 2-inch meter
For 3-inch meter
For 4-inch meter
For 6-inch meter
For 8-inch meter
For 10-inch meter
............................................................................................... $5.00
...............................................................................................5.00
...............................................................................................6.50
...............................................................................................12.27
...............................................................................................19.37
.......................................................................................... : ....77.65
...............................................................................................130.60
...............................................................................................260.43
...............................................................................................383.67
................................................... ............................................383.67
Commodi .ty Rates: ()o be added to Customer Charge)
Per Meter
Per Month
Per Hundred Cubic Feet
All Pressure Zones
Per Ccf ........................................................ : ..............................................................$4.341
{End}
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. W-7-1 dated 7-1-2006 , CITY OF PALO ALTO
UTILITIES
Effective 7-1-2007
Sheet No. W-7-1
ATTACHMENT C
MEMORANDUM 3
TO:UTILITIES ADVISORY COMMISSION
FROM:UTILITIES DEPARTMENT
DATE:APRIL 4, 2007
SUBJECT: RECOMMENDED FY 2007-08 WATER RATE INCREASE
RECOMMENDATION
This report requests that the Utilities Advisory Commission (UAC) recommend that the City
Council:
a) Approve a 10 percent retail water rate, or $2.2 million revenue, increase effective July
1, 2007;
b) A?larove, in conce~pt, anotl~er I0 p,~rcent retail water rate or $2.5 million revenue
increase, for FY 2008-09;
c) Approve the discontinuance of the current discounted rate for commercial, industrial
and institutional irrigation customers; and
d) Initiate a monthly "Customer Charge" for all customer classes designed to collect a
reasonable portion of the utility’s non-variable operating costs. This customer charge
will be fixed and will not be related to volume of water Used.
Imposing both the rate increase and customer charge will trigger Proposition 218’s notice and
protest hearing procedures.
BACKGROUND
The Water Fund’s revenue requirement consists of a number of components including:
wholesale water cost, distribution system operations, Capital Improvement Program (CIP)
projects, funding of the Water Rate Stabilization Reserve (W-RSR) and the Emergency Plant
Replacement Reserve (EPRR), and debt service. Any change in one or more of these
components, or a change in retail sales levels, can triggel~ the need for a rate adjustment. During
the budget process, staff forecasts customer revenues and utility expenses in order to quantify the
ammal revenue requirement. Changes to forecasted revenues or expenses are reflected in
adjustments during the midyear budget process.
In FY 2005-06, as part of the mid-year budget adjustments, staff reduced the water budget
revenue by $2.6 million, based on water sales-to-date, which were 12.9 percent below the
original budget projections. The lower sales level for FY 2005-06 stemmed from a reduction in
water usage, especially irrigation water, as a result of above average rainfall and ongoing water
Page 1 of 6
efficiency impacts. Since water rates have been volumetrically-based for the last few years,
changes in rainfall patterns have had significant impacts on Water Fund revenue.
After the adoption of the City of Palo Alto Budget for FY 2006-07, the San Francisco Public
Utilities Commission (SFPUC) increased its wholesale v~ater rates. A budget adjustment
increasing the wholesale supply costs by approximately $800,000 to account for the increase in
wholesale water rates was made as part of the midyear budget process. Since retail rates had
already been set and implemented, this additional expense was funded from the W-RSR.
During the FY 2006-07 budget process, a 7 percent revenue increase was proposed by the
Utilities Department and approved by the City Council. That revenue increase was not sufficient
to bring the W-RSR balance above the Minimum Guideline approved by the City Council.
However, to avoid a larger rate increase, the decision was made to slowly fund the reserve until
it reached the Minimum Guideline Level iri FY 2010-11, unless there was a need to accelerate
that schedule. The Minimum Guideline will be $4.9 million for FY 2007-08.
DISCUSSION
Revenues, Expenses and Reserves
The Water Utility continues to experience declining sales levels due to efficiency improvements
and certain large customers leaving the system. At the same time, there have been increased
wholesale supply, operating and CIP costs. There have also been unanticipated costs related to
retiree medical liabilities and Workers’ Compensation..These impacts have resulted in
withdrawal of funds from the W-RSR during ~¥ 2006-07, leaving the W-RSR balance below the
Minimum Guideline Level.
The SFPUC has indicated that wholesale water costs may increase in FY 2007-08, but, since the
SFPUC’s budget process runs later in the year than Palo Alto’s, the SFPUC’s final adopted rates
are not currently known and may substantially differ from early projections. Due to the
continuing trend of declining water sales, revenue forecasts for FY 2007-08 and beyond have
been adjusted down to match this pattern. CIP expenses are projected to be $1.1 million greater
in FY 2007-08 than FY 2006-07.
After the proposed 10% rate increase, the W-RSR balance is forecast to be $12.4 million at the
end of FY 2007-08. This includes an $8.5 million return from the FY 2006-07 CIP budget to the
W-RSR. The $8.5 million represents the close out of various individual CIP projects which are
elements of the City’s Emergency Water Supply and Storage Project. The Emergency Water
Supply and Storage Project is estimated to cost roughly $40 million with expenditures beginning
in FY 2007-08. Utilities staff is worldng with the Administrative Services Department to explore
utility revenue bond financing necessary to fund the Emergency Water Supply and Storage
Project.
The projected W-RSR balance at the end of FY 2007-08, will be above both the target level
established by the "Annual Risk Assessment for Reserves", and the Maximum Guideline Level
approved by Council due to the temporary infusion of $8.5 million from closed CI~ projects.
Assuming retail rates are increased 10% for FY 2008-09, the W-RSR balance at the end of FY
2008-09 is forecast to be $3.4 million or $200,000 below the Minimum Guideline Level for that
Page 2 of 6
year. Staff Will reassess the Water Utility risks, revenues and reserve levels for FY 2008-09
during the budget process for that fiscal year.
Customer Charge
Until the end of FY 2002-03, all water rate schedules included a monthly meter charge based on
lneter size. The meter charge was designed to recover a portion of the fixed costs of serving the
customers including meter reading, accounting costs and administrative costs. In June 2003, staff
recommended, and the City Council approved, the discontinuance of the monthly meter charge
and a change in the Water Utility pricing policy to collect revenues from all customer classes
through pure volumetric pricing. (CMR:267:03). The objective at that time was to encourage
customer water efficiency and avoid potential conflicts with California’s Proposition 218. In FY
2002-03, the revenue collected from the meter charge was approximately $1 million, or five
percent of the Water Utility revenue.
The "Customer Charge", recommended for FY 2007-08; collects revenue for services rendered
to the customer regardless of usage, and mitigates the revenue uncertainty associated with
predicting water usage. Staff recommends the fixed charge be termed a "Customer Charge" to
more accurately describe the nature of the charge. The proposal calls for the customer charge to
vary based upon the meter size as applied to all water rate schedules.
Staff reviewed a survey by the California Municipal Utilities Association and found that the
majority of California’s water utilities have both a fixed customer charge and a volumetric
charge. The recommended residential customer charge of five dollars for a 5/8 inch meter
appears to be in line with that of other water utilities. Table 1 below shows the fixed monthly
charges for surrounding cities:
TABLE 1: Water Rate Comparisons
Meter Size.
5/8 "
3/4 "
1 "
1 1/2"
2 "
3 "
4 ,t
6 "
8 "
10"
Palo Alto
(Proposed)
$ 5.00
5.00
6.50
12.27
19.37
77.65
130.60
260.43
383.67
383.67
MOun+aih
View.
$ 4.10
4.10
8.20
13.30
24.80
43.05
67.70
135.55
215.85
315.00
$10.47
15.71
22.07
35.31
55.16
95.99
132.40
215.14
344.23
441.32
$12.95
19.43
25.!7
37.18
56.30
121.09
212.44
366.46
1,036.00
1,489.25
14.25
21.38
35.63
71.25
114.00
213.75
356.25
7i2.50
7!2.50
712.50
A recently cornpleted water cost-of-service study determined the pro-rata share of fixed costs for
each customer class. To avoid a sudden large negative impact on the smaller water users (with
meters up to two inches in size), staff recommends that the customer charge initially be set at a
level that does not fully collect all fixed costs, but rather a portion of those costs. The portion of
fixed costs left uncollected by the customer charge would continue to be collected
volumetrically. For example a five dollar monthly charge is proposed for most of the residential
customers (5/8 inch meter), which represents 48% of the fully allocated cost-of-service result of
Page 3 of 6
$10.40. Incremental changes will be made over time in order to match revenue from the
customer charge with the fully allocated cost of service. For larger customers, with meter sizes of
three inches or more, the proposed monthly charge, varying with meter size, will immediately
collect the fully allocated customer costs.
The expected revenue from implementing a fixed charge is approximately $1.6 million. The
impact of all revenue requirement changes and the new monthly customer charge, will result in
an average residential customer’s water bill increasing by $6.04/month (or 10.4%, from $58.17
to $64.21). Small users will have a monthly bill increase of $4.74 (for 4 monthly usage of CCF,
the monthly bill will increase from $16.16 to $20.80, a 28.7% increase).
Proposition 218 Water Rate Increase Procedure:
Proposition 218 amended the California Constitution and set forth procedural requirements
public agencies must follow in order to enact or increase a property-related fee. Since
Proposition 218 applies to the water service rate increases and customer charges described here,
the City must provide written notice by mail to water customers subject to the proposed fees,
followed by a public hearing held not less than 45 days after notice is mailed. The notice must
include the amount of the fee, the basis upon which the fee was calculated, the reason for }he fee,
and the date, time and location of the public hearing. If written protests against the proposed
fees are not presented by a majority of customers, the City may impose the fee.
Allocation of the Rate Increase
A cost-of-service study conducted during FY 2005-06 for the Water Utility determined the
allocation of costs between customer classes. The results indicated inequities among customer
classes that needed con-ection. This imbalance is exacerbated by the chanzinz customer mix in
the City.
Table 2 below shows the impact of the proposed rates increase on custorner bills based on
different consumption levels for the residential and non-residential classes.
TABLE 2: Impact of Rate Increase on Customer Bills
Customer
Small Residential
Average Residential
Residential
Large Residential
Medium Coml-nercial
5/8" Meter
5/8" Meter
5/8" Meter
5/8" Meter
3" Meter
Large Commercial or Industrial
Large Commercial or Industrial
(irrigation only) (W-7)
6" Meter
6" Meter
(CCF)
7
14
2O
35
3O0
1200
3000
Proposed :.
Monthly
Bill
$32.64
64.21
91.27
158.92
1,379.95
5,469.63
13,283.43
Amount
of
Proposed
Increase
$4.36
6.04
7.48
11.08
104.95
369.63
1,163.43
Pei:cent :
15.4%
10.4%
8.9%
7.5%
8.2%
7.2%
9.6%
In addition to implementation of the customer charge, staff recommends discontinuing the
discount for all the commercial, industrial and institutional irrigation rate schedule (W-7) which
has been in effect since July 2003. Water Rate Schedule W-7 currently gives a discount to large
Page 4 of 6
customers who install a separate landscape irrigation meter. The City still supports the
installation of separate irrigation meters, but feels that the customer savings on wastewater bills
provide sufficient incentive to do so. This change will provide a new price signal to improve
landscape efficiency.
Comparison of Palo Alto Water Rates and Surrounding Cities:
For several years, Palo Alto’s retail water rates have generally been higher than surrounding
areas, due to wholesale water rate increases from SFPUC, the funding of an aggressive Capital
Improvement Program (CIP) to rehabilitate or replace aging water distribution infrastructure, and
increases in allocated costs from other City departments for services provided to the Water Fund.
A 2007 bill comparison of municipal water rates in Redwood City, Mountain View, Los Altos
and Menlo Park indicates that the average Palo Alto residential customer pays approximately 32
percent more than comparable customers in surrounding cities: There are indications that nearby
cities that purchase their water supplies from the SFPUC may be raising rates this year. At this
time, the certainty or magnitude of their rate increases is not known.
Risk Assessment
An a~mualized risk assessment has been performed by staff which compares projected reserve
levels to applicable risk factors. This assessment has determined that reserve balances are
adequate for FY 2007-08. An updated risk assessment will be performed as part of the budget
process for FY 2008-09.
A rate increase of 10 percent, or a revenue increase of $2.5 miiiion, in FY 2008-09 is also
recommended by staff. The projected ending W-RSR balance of $3.4 million for FY 2008-09
would be below the Minimum Guideline Level of $5.4 million, but only slightly below the
projected risk assessed reserve level of $3.6 million. Staff will evaluate the revenues, expenses
and risks during the FY 2008-09 budget process to ensure that the Water Utility remains
financially sound.
Table 3 below summarizes the end of year balances for the W-RSR, the risk assessment level
and the Reserve Guidelines. Note that the risk assessment level is determined by assessing the
short-term risks to the water fund. The Reserve Guidelines were e~tablished to manage risks
over the longer term.
TABLE 3: Water Reserve Balance, Guideline Levels and Risk Assessment Level
Reserve Balance and Guideline Levels FY 2007-08 FY 2008-09
End of Year Balance $10.2 million - $1.3 million
(Forecast with No Rate Adjustments)
End of Year Balance $12.4 million ~ .$3.4 ~illi0n.
(Forecast with Proposed Rate Adjustments). ~
Risk Assessrnent Level $3.3 million . $3.6 million
Reserve Minimum Level $4.9 million $5.4 million
Reserve Maximum Level $12.4 million $13.6 million
ALTERNATIVES
Staff evaluated the impact of alternative rate proposals to the proposed $2.2 million revenue
increase. Any smaller rate increase would require reducing some combination of the operating
Page 5 of 6
budget, Capital Improvement Program, or the W-RSR. Reducing the CIP would hinder water
main replacement projects, where the infrastructure has exceeded its system design life.
Reducing the water operating budget will hinder the reliability and safety of the water system.
Withdrawing more funds from the W-RSR would drive the reserve balance further below the
Minimmn Guideline, and could necessitate an emergency rate increase request to accommodate
infrastructure failure, or an increase in water supply costs.
RESOURCE IMPACT
Approval of this rate proposal will increase the Water Fund metered retail sales revenues by
approximately $2.2 million for FY 2007-08. Due to the return of $8.5 million from encumbered
CIP projects, the W-RSR balance is projected to be temporarily above the Maximum Reserve
Guideline Level at the end of FY 2007-08. However, the returned monies will be eannarked to
partially fund the City’s Emergency Water Supply Storage project starting in FY 2007-08.
Staff also recommends that Council approve in concept an additional 10 percent rate increase, or
$2.5 million, in FY 2008-09 to bring the W-RSR closer to the Minimum Guideline Level.
POLICY IMPLICATIONS
This rate proposal meets the following Utilities Strategic Plan objectives: to invest in utility
infrastructure to deliver reliable service and to provide superior financial service to the City and
competitive rates to customers. Approval of the proposed water rate increase does not represent
a change to existing policies.
ATTACHMENTS:
A.Water Rate Schedules W-l, W-2, W-4, and W-7
PREPARED BY:
REVIEWED BY:
Assistant Director, Customer Support Services
DEPARTMENT HEAD:
Director of Utilities
Page 6 of 6
ATTACHMENT D
DRAFT
UTILITIES ADVISORY COMMISSION
MINUTES OF APRIL 4, 2007
CALL TO ORDER
Melton called to order at 7:00 pm the regular scheduled meeting of the Utilities Advisory
Commission.
Present: Melton, Dawes, Bechtel, Rosenbaum
ORAL COMMUNICATIONS
Mrs. ~,~ead made con~.~Lo ~,o,~ L,,~ Rates discussion (see below).
APPROVAL OF THE MINUTES
Approval.of the minutes of March 7 was made with the following change and comments:
Bechtel asked for clarification on page 3, paragraph 1 of the March 7 draft minutes. He asked
whether it was 11.4 percent cost per kWh or if it should be 11.4 cents cost per kWh. Tom
Auzenne, Assistant Director, said that it should be cents. Bechtel also requested therebe more
specifics and details to the sense minutes rather than just saying there was "comments and
concerns" brought up in the meeting.
Dawes said he would like more explanation on the $40 million dollar cost of the Reservoir Project.
There was a similar project 4 years ago which cost around $15 or $16 million. He also wondered
Utilities Advisory Commission Minutes from: Approved on:Page 1 of 11
why "including land" wasn’t explained further in the minutes. Melton said he did not think there had
been discussion of the term "including land" at the meeting and that is why there was nothing in the
minutes.
Chairman Melton: Moved approval, Dexter Dawes Seconded. Motion passed with four ayes and
one absent.
AGENDA REVIEW
Valerie Fong, Utilities Director, pointed out that Item 2 on the agenda (Ten-Year Energy Efficiency
Portfolio Plan) was an Action item, not an Informational item.
REPORT FROM COMMISSION MEETINGS/EVENTS
NONE
UTILITIES DIRECTOR REPORT
Fong presented the following report:
1) The Emergency Water Supply Project Notice of Determination was filed on March 9. The
CEQA process will be complete, if there are no protests, by April 11.
2) A CMR will go to Council next week to notify them that more time is needed for the FEIR
cost allocation schemes and will be brought forward in May. The 2nd reading of the Park
Ordinances will also take place in May.
3) Water system flushing notices will go in the Palo Alto Weekly and Palo Alto Daily. The
flushing will take place the week of Apr 22.
4) There will be a Federal Policy Conference in Washington D.C at the end of April. Val will
attend with Council member Bern Beecham and Resource Planner Debbie Lloyd.
5) The next UAC meeting will be a day meeting on May 2.
6) There is a conflict regarding the July 11 UAC meeting date as a Hetch Hetchy tour is
scheduled for the same date. Fong asked if July 19 might work as the Chambers are not
Utilities Advisory Commission Minutes from: Approved on:Page 2 of 11
available on July 18. Staff was asked to see if a conference room, other than the Chambers,
might be available on July 18. Fong said we would look into that option.
7) The Mayor is sponsoring a session on Stanford University’s Green Transportation Program.
This will take place Apr 5, 4:00 - 5:30 pm in the Council Chambers.
8) There will be a Special Meeting of Council (study session) on April 11 at 2:00 pm in the
Council Chambers. Lt. Governor John Garamendi will speak on the issue of Climate Change.
UNFINISHED BUSINESS
Rosenbaum asked about the overhead for the Green Project and how it was calculated. Assistant
Director, Customer Services Tom Auzenne explained that based on the 11.5 cent cost for Palo Alto
Green, our overhead was 4%. Rosenbaum then asked what percentage of the $500,000 premium
represented. Auzenne said 33%. Auzenne also said that based on an Oct., 2006 publication from
the National Renewable Energy Laboratoryl the average marketing and administration expenses
for the top ten renewable programs in the country was 29%. Palo Alto Green is the number one
program in the country and the marketing and administrative costs are in line with the average
noted iiq t, ,~ study, so ~u~u~, ~ ~,~,~ ,,.,u~ ,,,~ our marketing works.
NEW BUSINESS
ITEM 1: INFORMATION ITEM:
2006 Statewide and Palo Alto Residential Customer Satisfaction Survey Results
Senior Resource Planner Karl Knapp presented a summary of the main findings of a residential
customer survey conducted by RKS Consulting. The survey is conducted every other year for
CMUA and CPAU, and is used to compare CPAU customer attitudes and utility performance in a
number of areas, and enables CPAU to benchmark performance against California municipal and
investor-owned utilities.
The survey was conducted in October and November of 2006. CPAU’s overall Value Rating
remains high, which is a composite score of several different areas. CPAU continues to perform
well in the areas of overall customer satisfaction, price/value performance, power delivery, and
there is growth in users of the website and participation in the green energy option. There was a
slight decline in scores on trust, overall feelings, and to some extent, communication effectiveness.
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The consultant report indicates that these declines are not statistically significant, but may be
consistent with changes that take place after rate increases.
Palo Alto residents differ significantly from other California utility customers in three main areas:
high awareness of the seriousness of the California energy situation, global warming, and a strong
preference for using the internet to obtain information and pay bills. CPAU customers are more
aware and concerned about global warming, but are not sure about CPAU’s involvement, and
express a willingness to pay more to fund solutions.
Main areas for improvement noted by the consultant report were to enhance the website and web-
based services, and to embrace the global warming issue. Knapp pointed out that the entire City
web page is undergoing a major conversion to an entire new database structure and that no big
changes are being made until that effort is completed.
Melton asked whethP.r the report indicated dissatisfaction with the website and whether RKS asked
about specific improvements that customers would like to see. Knapp/Auzenne replied that
customers did indicate d~ssatisfaction w~tiq the website and that a table listing responses [or how [o
make the website better is contained on page 14 of the consultant report.
Dawes asked whether customers were asked about bank drafting.
Knapp/Auzenne explained that while bank drafting was not specifically included in the survey, a
high percentage of customers use CPAU’s bank drafting program.
Rosenbaum asked why credit card payment options are not shown on web. Auzenne explained
that CPAU does do credit card payment in-house, is developing ability to pay using a credit card by
phone, and is also working on getting the technology and infrastructure in place to handle web-
based credit card payments. Additionally, Auzenne noted that information about all payment
options in marketing materials and as the web will be updated.
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Melton noted that it appears that more people apparently believe that they are green power
customers than actually are. Bechtel suggested a more direct question be included in the next.
survey regarding incurred PAGreen costs. Staff agreed it would make such a suggestion.
ITEM 2: INFORMATION ITEM:
Ten-Year Enerqy Efficiency Portfolio Plan
Knapp presented a brief summary of the proposed ten-year energy efficiency plan. Adoption of a
10-year plan is required by AB2021 passed last year. The Plan includes all of the elements
required by the new statutory requirement. Energy efficiency is the highest priority resource for
CPAU, with renewable energy second and conventional supply last. The Plan sets energy
efficiency targets that are based on the technical and economic potential study conducted by the
Rocky Mountain Institute in 2005, seeking to aChieve at least half of the estimated economic
potential, AB2021 also requires that utilities "treat energy efficiency as a supply investment". The
Plan proposes to fund the efforts needed to achieve the targets by including approximately $2.6
million ever two ;,ears in the e!ectric and ~as supply budgets, which when added to the existing
Public Benefits efficiency budgets would bring the two-year efficiency programs total to $7 million.
The Plan wiii be staffed with existing positions. The estimated financial impacts a~e a potential rate
increase of 0.5-1.0% with an average bill decrease of 2.5-3%. Six of the main near-term efforts
were described, including revamping existing programs and establishing new programs that
address underserved segments such as new construction and remodeling.
Dawes asked whether the Plan costs are identified as a line item in financial reports and included
in the long-term financial forecasts and rate projections. Staff responded affirmatively and
explained that a new Fund Center has been created and all of the Plan costs are included in the
proposed budget.
Melton asked whether the Plan takes a stepped approach, going after the "low-hanging fruit" that is
on the cheaper end of the scale first. Staff replied that it will be emphasizing the "low-hanging fruit",
but that much of the proposed plan will be approaching things more holistically and not simply
more of the same prescription-style rebates. Staff noted that the law and our own policies require
that CPAU pursue all cost-effective energy efficiency opportunities, and not just the cheapest ones.
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Dawes noted that the rate of return of 1.6% described in the report is low and asked if there is a
mandated minimum spending threshold requirement. Staff explained that the very low IRR cited
reflects the added cost of the many required reporting and verification elements of the energy
efficiency program, so that while the incentives alone might have an estimated 10.6% return, the
other reporting requirements eat up nearly all of that benefit, dropping the payback to only 1.6%.
The cost effectiveness tests described in the plan state that energy efficiency that costs less than
energy from the market is a preferred investment, consistent with the higher priority of efficiency
over supply dictated by the resource loading order.
Dawes asked whether small customers will fail to benefit if they do not participate. Knapp explained
that one of the main tenets of the Plan is to ensure that there are programs available for all
customers to be able to participate. Staff feels that the rigorous and industry-standard cost-
effectiveness testing and criteria described in detail in the Plan along with follow-up using
independent verification of program resL!!ts (as required by law) provides the necessary financial
controls to ensure that energy efficiency investments are selected judiciously.
Melton noted that the Plan does appear to offer opportunities for residential customers.
Bechtel asked for an explanation of the carbon adder methodology. Knapp explained the proxy
value of approximately $10/ton of carbon dioxide used by California’s investor-owned utilities when
making energy procurement decisions. A GHG adder is used in evaluation criteria for purchasing
decisions to encourage choosing the lowest cost resource, including the adder.
Dawes asked what staff will do next year that is not being done now. Staff explained that in the
near term, the main activities will be adding programs to target areas not currently addressed such
as new construction and remodeling, coordinating with the Green Building efforts in the Planning
Department, supporting both end-user efficiency and supply-side efficiency, third-party programs
like "Right Lights", and joint action with other agencies.
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Rosenbaum moved approval of staff recommendation that UAC recommends that Council approve
the ten-year energy efficiency portfolio plan. Bechtel seconded. Motion passed with three ayes,
one abstained, and one absent.
PUBLIC COMMENT:
Prior to the discussion of utility rate increases, Mary Carlstead (resident) spoke regarding how
increases, especially those from bond measures, affect the senior/fixed/low income populations
adversely. Parcel taxes are increasing, and are not deductible. Her feelings were that Palo Alto
was creating a "perfect storm".
ITEM 3: ACTION ITEM:
Recommended FY 2007-08 Water Rate Increase
Auzenne stated that the Fiscal Year 2007-08 (FY07-08) water system average rate was $4.59 per
one hundred cubic feet (ccf), and presented a slide titled "Components of System Average rate FY
2007-08", which shows the breakdown of costs For FY07-08, a 10 percent or $2.2 million increase
was proposed (Item A), as well as another 10 percent increase in Fiscal Year 2008-09 (FY08-09)
(Item B/. Also included was the discontinuance of a price discount for irrigation cus[o~,~,e~s on W-7
(Item C) and the introduction of the fixed charge "customer Charge" (Item D). Customer charges
will provide revenue stability, and reduce the need for rapid increases in the future due tofact that
sales volume depends on weather and economic factors. Charges for small customers are being
phased in, as to limit the overall impact to customers.
Bechtel commented on how he appreciated the charts, and would like to be emailed copies. The
concept of customer charges appeared rational, so he had no questions regarding these. He did
question whether supply/distribution breakdowns were displayed on the customer bills. Auzenne
stated that they were not, but it would be an option to be reviewed in the future.
Dawes stated that there does need to be an explanation of where costs come from, and the charts
showed this welt, especially in light of customer questions (such as Ms. Carlstead). There was
some question as to how current costs would compare to costs five years ago, but it was not a
request to produce data. He stated he was ready to approve the issue.
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Rosenbaum stated that Item B related to FY08-09 rate approval had not been done by the UAC in
the past, and questioned whether it made sense. As costs are too variable, he Considered striking
Item B from all proposals. Auzenne commented that as this represent a two-year budget process,
something regarding FY08-09 should be added. However, rate changes would be re-evaluated
during FY 08-09 budget process.
Rosenbaum countered that it is a question of emphasis. While the future increases are in the
budget, they are conceptual. He did not think that the UAC should add their imprimatur to items
beyond the immediate budget year in their recommendations to Finance/Council.
Dawes had a question as to the total bill, and wished to see how the proposed rates compare with
the current rates for water commodity. Auzenne explained the current vs. proposed bill effects.
Melton asked for staff’s anticipation of the length of the phase-in period for the customer charge to
go from roughly 50% to 100%. Auzenne indicated a 3 to 4 year time frame.
Dawes pointed out that rents, general fund transfers, and other transfers are a large portion of the
water budget, and that these are the items that the public needs to know about when rate
increases are proposed.
Melton mentioned that conceptual approval of the second year increases had been brought up
before in memoranda, although not as formally currently proposed by staff as an explicit item for
approval. Rosenbaum generally agreed that the "approve in concept" request was more explicit
than in the past.
Bechtel moved to recommend the water proposal as worded. Melton seconded.
Rosenbaum asked if a friendly amendment eliminating Item B (approving year two rate increase in
concept) would be entertained. Bechtel declined to accept the friendly amendment and instead
indicated a strong preference and obligation to advise the Council of potential increases in the
Utilities Advisory Commission Minutes from: Approved on:Page 8 of 11
2008-09 budget year. However, Dawes indicated his concurrence with Rosenbaum on the removal
of Item B.
Rosenbaum proposed an amendment to strike Item B. Dawes seconded. Melton noted the
substitute motion. Three Commissioners voted in favor of the amendment (Melton, Dawes,
Rosenbaum), one voted against (Bechtel), with one absent (Keller). Motion passed.
Rosenbaum commented on how he understood the concerns raised by Carlstead, however, he
also noted the UAC’s obligation to look out for the utilities businesses on behalf of the City. He
acknowledged that it will be difficult for Palo Alto to go forward with bonds, but was unsure of what
else could be done.
A motion was made to approve the Water proposal with the removal of Item B. It passed
unanimously (Rosenbaum, Dawes, Bechtel, Melton), with one absent (Keller).
Dawes mentioned that while he understood that there was a two year budget process, the second
year was too much of an estimate. The UAC would reserve its judgment on such issues.
ITEM 4: ACTION ITEM:
Recommended FY 2007-08 Electric Rate Increase
Auzenne stated that with this proposal, every customer class receives the same 5 percent increase
in FY07-08, and no customer charges were proposed. He presented a slide titled "Components of
System Average Rate FY 2007-08". Melton questioned whether a "Customer Charge" would be
considered in the future. Auzenne said not at this time, as usage/weather variability was not as
much of an issue with electricity as with water and natural gas.
Dawes had concerns regarding future hydro projections, and asked for any update on the water
situation. Auzenne stated that the last data he had heard was 43 percent of normal snow-pack
levels. Dawes commented that this was very serious, and as such, Item B regarding FY08-09 rate
increases should also be removed in this case.
Utilities Advisory Commission Minutes from: Approved on:Page 9 of 11
Rosenbaum stated his agreement with the 5 percent increase at this time because of the hydro
situation, even though the reserves are large.
Bechtel moved approval for staff’s recommendation to increase Electric rates in FY 2007-08 with
the removal of Item B (approval in concept of an electric rate increase in FY 2008-09).
Rosenbaum seconded. Passage was unanimous (Rosenbaum, Dawes, Bechtel, Melton), with one
absent (Keller).
ITEM 5: ACTION ITEM:
Recommended FY 2007-08 Gas Rate Increase
Melton commented that the structure of the increase was similar to water. Auzenne concurred,
commenting how gas usage was quite variable based on weather effects. He presented a similar
slide titled "Components of Average System Rate FY 2007-08".
Fong mentioned that, because of the laddering of gas purchases, future costs were better known.
However, staff was still amenable to removal of Item B (approval in concept of gas rate increases
for FY 2008-09).
Melton question how long it would be before customer charges, were up to cost of service
recommendations. Auzenne and Fong commented it was a function of reserve depletion.
Auzenne clarified that although 9.5 percent increase was an overall figure, the allocations to
individual customer classes would be different.
Dawes questioned whether, with increased efficiency measures; measures were made using
heating degree data. Auzenneconfirmed that such comparisons were made. Dawes felt we
should publish our efficiency metrics.
Bechtel questioned whether the wording regarding the increase should include a mention that it is
a 9.5 percent system average increase. Fong agreed.
Utilities Advisory Commission Minutes from: Approved on:Page 10 of 11
Melton commented that the UAC is in essence recommending the rate schedules. Auzenne stated
that this would be clarified in the transmittals to the Finance committee.
Rosenbaum moved to recommend the Gas increase with Item B removed. Dawes seconded.
Passage was unanimous (Rosenbaum, Dawes, Bechtel, Melton), with one absent (Keller).
Meeting adjourned at 9:35 p.m.
Respectfully submitted,
Melody Vega
City of Palo Alto Utilities
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