HomeMy WebLinkAboutStaff Report 214-10TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER DEPARTMENT: UTILITIES
DATE: MAY 3, 2010 CMR: 214:10
REPORT TYPE: PUBLIC HEARING
SUBJECT: Finance Committee Recommendation to Adopt a Resolution
Amending Utility Rate SchedulesW-5 and S-5 of the City of Palo Alto
Utilities Rates and Charges Pertaining to Water and Wastewater
Service Connection Fees
EXECUTIVE SUMMARY
Utilities Rate Schedules W-5 and S-5 cover water and wastewater collection system service
connection and capacity fees. These one-time fees are paid before the water. or wastewater
services are upgraded for a customer and reflect the customer's pro-rated share of the cost of the
existing system. In response to a Finance Committee recommendation made in 2005, a study
was conducted to determine the appropriate level of capacity fees, assessed on approximately
150 projects per year, to be charged for the system upgrades or installations, and a phased-in
approach of the capacity fees over three years was recommended by the Finance Committee in
2008. Only the capacity fees are at issue in this report, and the recommended capacity fee
increases represent the third and last increase over the three-year phase-in period.
RECOMMENDATION
The Finance Committee recommends the City Council adopt the attached resolution to! approve a
40% increase in capacity fees in Utilities Rate Schedule W -5 and Utilities Rate Schedule S-5 to
take effect on July 2, 2010.
BACKGROUND
On July 1, 2005, the City instituted utility capacity fees for connecting to the water distribution
and wastewater collection systems in conformance with California Government Code Section
66000. The capacity fees were set up for new developments to buy into existing water
distribution and wastewater collection systems, and to recover the proportionate cost of system
improvements required to serve the new customer or increased loads of existing customers.
These are one time fees paid before the water or wastewater services are upgraded or installed.
Utility capacity fees received are placed in a special fund and used exclusively for water and
sanitary sewer capital improvement projects. The equity method, also known as the buy-in
method, of calculating capacity fees is widely accepted for cities with nearly built out utility
systems such as Palo Alto. Under the equity method the cost or value of the existing public
utility mains and plant (deducting the individual services) paid for by the current customers is
CMR: 214:10 Page 1 of4
calculated and a pro-rated portion of that system value is charged to the new (or upgrading)
customer.
On April 25, 2005, when it reviewed the capacity fees, the Finance Committee recommended
that staff periodically review the capacity fees. The Utilities Department contracted with the
consulting firm of Black and Veatch to perform a study of the City's water and wastewater
capacity fees. Black and Veatch completed its study of the City's capacity fees in 2008
(Attachment F).
Black and Veatch's study determined that the combined water and wastewater capacity fees
should be increased from $4,750 in Fiscal Year (FY) 2008 to $19,900 for a typical new single
family house, based on the current conditions in Palo Alto and reflecting customer costs of
service, contractual agreements, and local policy considerations. A phased approach was utilized
to increase the combined fees from the FY 2008 fees of $4,750 to the current rate of $14,250 in
FY 2010, and now increase the combined capacity fees to $19,900 for FY 2011. These higher
capacity fees will mainly impact developers of new residential single-family and multi-family
dwellings, and hotel construction. Commercial construction is impacted to a far lesser extent
than residential construction because the number of fixture units (based on sinks, toilets bathtubs,
showers), which is a factor in determining the amount of the fees, are fewer per square foot of
development. All property owners are given capacity fee credits for any existing water and
sewer services connected to their properties.
These fees provide incentive to use low flow fixtures. Using low flow fixtures reduces the total
number of equivalent fixture units to let the developer utilize a smaller water meter and reduce
their capacity fees.
DISCUSSION
During the FY 2009 budget process, staff recommended a phase-in of the capacity fee increases
over three years to manage the impact of the increase to developers (see table below). Staff
proposed an initial increase of the capacity fees of 100%, followed by a 50% increase in the
second year and an approximately 40% increase in the third year, to reach the Black and Veatch
capacity fee recommendations. Staff also recommended setting up a long term contract with
Black and Veatch to update the capacity fees study prior to each capacity fee increase.
Residential capacity fees for water and sewer services were planned to increase as follows:
Typical new single family home
Typical single family home remodel
FY2008
Actual
$4,750
$1,050
FY2009
Actual
$9,500
$2,100
FY2010
Current
$14,250
$3,150
FY 2011
Planned
$19,900
$4,127
As part of the FY 2009 budget process, Council approved a 100% capacity fee increase in water
schedule W-5 and wastewater schedule S-5 effective August 1, 2008. This action implemented
the first year of the three-year' plan. In addition, on May 13, 2008, the Finance Committee
agreed with the recommendation of the Utilities Advisory Commission and recommended a 50%
increase in capacity fees in water rate schedule W-5 and wastewater rate schedule S-5 to take
effect on July 1,2009 and a 40% increase in capacity fees in schedule W-5 and S-5to take effect
on July 1,2010 (CMR: 227:08). The second year of the three-year plan was implemented by
CMR: 214:10 Page 2 of4
Council action on May 4, 2009 (CMR: 222:09) when it approved a S[O% increase to the capacity
fees.
At this time, staff proposes to implement the third year of the three-year plan. To implement
these fee increases for each year, the Council needs to adopt a resolution in a public meeting.
Government Code 66016 requires that prior to increasing the fee, the City must hold at least one
public meeting to listen to any oral or written presentation on the fee. After the resolution is
adopted by the Council, the City must wait no less than 60 days before putting the new fees into
effect pursuant to Government Code 66017. Due to the public notice requirements, the rates will
actually take effect on July 2, 2010, and not July 1, 2010, as recommended by the Finance
Committee.
Capacity fees, which are paid by developers of new construction projects typically affect about
ISO projects per year. Usually, about two-thirds of these are single-family residential projects.
COMMITTEE REVIEW AND RECOMMENDATIONS
As noted earlier, on May 13, 2008, the Finance Committee voted 3 to 1 to recommend that
Council approve 100% capacity fee increases in water schedule W-S and wastewater schedule S
S effective August 1, 2008; a SO% increase in capacity fees in water schedule W-S and
wastewater schedule S-S to take effect on July 1, 2009 for FY 2010; and a 40% increase in
capacity fees in schedule W-S and S-S to take effect on July 1,2010 for FY 2011.
ALTERNATIVE
Given the current economic conditions that the water and wastewater utilities customers are
facing, an alternative for the Council to consider is to postpone the adoption of the proposed
resolution for FY 2011 and, instead, impose the proposed capacity fee increases for water and
wastewater at a later date, such as January 1,2012 or July 1,2012.
RESOURCE IMPACT
The estimated third year increase in annual capacity fee revenues is approximat((ly $100,000 in
the Water Fund and $100,000 in the Wastewater Fund. An estimated SO commercial and 100
residential construction projects will be impacted by this fee increase.
POLICY IMPLICATIONS
These recommendations do not represent a change in current City policies.
ENVIRONMENTAL REVIEW
Adoption of this resolution is statutorily exempt from the California Environmental Quality Act
(CEQA), pursuant to California Code of Regulations Title 14, Chapter 3, Section lS273(a),
because CEQA does not apply to the modification, restructuring, or approval of rates and charges
for the purpose of meeting operating expenses and obtaining funds for capital projects necessary
to maintain service.
CMR: 214:10 . Page 3 of4
ATTACHMENTS
A. Draft Resolution Amending Utility Rate Schedules W -5 and S-5
B. CMR: 227:08 -Utilities Advisory Commission Recommendation to Approve Proposed
Increases in Utility Electric, Water, Gas, and Wastewater Connection Fees and Water and
Wastewater Capacity Fees
C. Minutes from the Finance Committee meeting of May 13,2008
D. Utilities Rate Schedule W-5
E. Utilities Rate Schedule S-5
F. Development of Water, Wastewater, and Gas Capacity Fees; report prepared by Black
and Veatch
PREPARED BY:
REVIEWED BY:
DEPARTMENT APPROVAL:
CITY MANAGER APPROVAL:
CMR: 214:10
ROLAND EKSTRAND . If y-<
Utilities Sr. Project Engineer
IPEK CONNOLLY .-----Ie.-
Utilities Sr. Resource Planner
JANERATCHY
Assistant Director
TOMMMARSHA
Assistant Director
Page 4 of4
Not Yet Approved ATTAGIIM:ENT·A
Resolution No. ---Resolution of the Council of the City of Palo Alto Amending
Utility Rate Schedules W-5 and S-5 of the City of Palo Alto
Utilities Rates and Charges Pertaining to Water and Wastewater
Service Connection Fees
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,
Schedule W-5 (Water Service Connection Fees) of the Palo Alto Utilities Rates and
Charges is hereby amended to read in accordance with Sheets W-5-1, W-5-2, W-5-3, W-
5-4, and W-5-5, respectively, attached hereto and incorporated herein by reference. The
foregoing Utility Rate Schedule, as amended, shall become effective on July 2, 2010.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code,
Schedule S-5 (Sewer Service Connection Fees) of the Palo Alto Utilities Rates and
Charges is hereby amended to read in accordance with Sheets S-5-1, S-5-2, and S-5-3,
respectively, attached hereto and incorporated herein by reference. The foregoing Utility
Rate Schedule, as amended, shall become effective on July 2,2010.
SECTION 3. The Council finds that the revenue derived from the authorized
adjustments of the water and sewer service fees shall be used only for the purposes set
forth in Article VII, Section 2, of the Charter of the City of Palo Alto.
II
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100405 syn 6051162
Not Yet Approved
SECTION 4. The Council finds that the adoption of this resolution is statutorily
exempt from the California Environmental Quality Act (CEQA), pursuant to California
Code of Regulations Title 14, Chapter 3, Section lS273(a), because CEQA does not
apply to the modification, restructuring, or approval of rates and charges for the purpose
of meeting operating expenses and obtaining funds for capital projects necessary to
maintain service.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST: APPROVED:
City Clerk Mayor
APPROVED AS TO FORM:
City Manager
Deputy City Attorney
Director of Utilities
Director of Administrative Services
100405 syn 6051162
'ATTACHMENT B
TO: HONORABLE CITY COUNCIL D
ATTN: FINAl'rJCE COMMITTEE
FROM: CITY MANAGER DEPARTMENT: UTILITIES'
DATE: MAY 13,2008 CMR: 227:08
SUBJECT: UTILITIES ADVISORY COMMISSION RECOMMENDATION TO
APPROVE PROPOSED INCREASES IN UTILITY ELECTRIC, WATER,
GAS, AND WASTEWATER CONNECTION FEES AND WATER AND
WASTEWATER CAPACITY FEES
RECOMMENDATION
Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee
recommend that the City Council adopt the attached resolution to:
a) Approve utility connection fee increases in electric schedule E-15, gas schedule G-5,
water schedule W-5, and wastewater schedule S-5 effective August 1,2008;
b) Approve 100% capacity fee increases in water schedule W -5 and wastewater schedule S-
5 effective August 1, 2008 and;
c) Approve a 50% increase in capacity fees in water schedule W -5 and wastewater schedule
S-5 to take effect on July 1,2009 for FY 2009-10, and a 40% increase in capacity fees in
schedule W-5 and S-5 to take effect on July 1,2010 for FY 2010-11.
BACKGROUND
The Water, Gas, Wastewater and Electric Utilities have established fees to recover the costs
associated with the connection of new customers to the existing systems. There are two fees charged,
a connection fee and a capacity fee. The connection fee recovers the capital cost of building new
facilities to connect the customer to the system. These fees are collected for electric, water, gas, and
wastewater utilities. In addition to the connection fees, the water and wastewater utilities collect
capacity fees for adding new water and wastewater loads to existing water distribution and
wastewater collection systems. The capacity fees are calculated as an equity (buy-in) charge for
adding the new loads and help pay for improving the water distribution and wastewater collection
systems to meet current and future demands.
CMR: 227:08 Page 10f4
Per the April 25, 2005 Finance Committee's recommendation to periodically review the capacity
fees, the Utilities Department contracted with the consulting firm of Black and Veatch to.perform a
study ofthe City's water and wastewater capacity fees. Black and Veatch has completed its study of
the City's capacity fees and compared the City'S existing fees to other similarly sized public utilities.
DISCUSSION
Capacity Fees
On July 1, 2005, the City instituted utility capacity fees for connecting to the water distribution and
wastewater collection systems in conformance with California Government Code Section 66000.
The capacity fees were set up for new developments to buy into existing water distribution and
wastewater collection systems, and to recover the proportionate cost of system improvements
required to serve the new customer or increased loads of existing customers. These are one time fees
paid before the water or wastewater services are upgraded or installed. Utility capacity fees received
are placed in a special fund and used exclusively for water and sanitary sewer capital improvement
projects. The equity method (buy-in method) of calculating capacity fees is widely accepted for cities
with nearly built out utility systems such as Palo Alto.
Black and Veatch's study (see Attachment I) determined that current capacity fees should be
increased by $15,150 for a typical new single family house. However, staffrecommends a phase-in
of calculated capacity fee increases over several years to manage the impact of the increase to
developers (see table below). Staff proposes an initial increase of the capacity fees of 100%,
followed by a 50% increase in the second year and an approximately 40% increase in the third year
to reach the Black and Veatch capacity fee rec()mmendations. Staff also recommends setting up a
long term contract with Black and Veatch to update the capacity fees study prior to each capacity fee
mcrease.
Residential capacity fees for water and sewer are proposed to increase as follows:
Typical new single family home
Typical single family home remodel
Current
$4,750
$1,050
FY2008-09
1 st year
$9,500
$2,100
FY2009-10
2nd year
$14,250
$3,150
FY201O-11
3rd year
$19,900
$4,127
These larger capacity fees will mainly impact developers of new residential single-family and multi
family dwellings, and hotel construction. Commercial construction is impacted to a far lesser extent
than residential construction because the number of fixture units (sinks, tqilets bathtubs, showers),
which is a factor in determining the amount ofthe fee, are fewer per square foot of development. All
property owners are given capacity fee credits for any existing water and sewer services connected to
their properties.
The Black and Veatch capacity fee study looked at implementing capacity fees for new gas services.
In its review of gas distribution companies, Black and Veatch could not find other gas utilities
charging capacity fees for new gas services, therefore, staff recommends against charging gas
capacity fees at this time.
CMR: 227:08 Page 2 of4
Connection Fees
The Utilities Department provides new service connections to its distribution network to meet new
customers' needs for gas, water, wastewater and electric services. Staffperiodically performs a cost
of service study to determine if connection costs (service installation, inspection and engineering) of
these new connections are fully recovered by the connection fees. The recent staff review of these
costs indicates that current fees do not fully recover Utilities' direct and indirect costs for installing
services and an increase in fees is necessary to more fully achieve total cost recovery.
The connection fees were updated to include the increased costs associated with wages, material, and
transportation. Connection fees increased, on average, 8% over the previous fees established in
2005.
In addition to updating the connection fees to take into account inflation and wage increases, staff
recommends charging 1.5 times the standard fee for work required to be performed outside of regular
work hours.
To implement these fee increases, Council needs to adopt a resolution in a public meeting. Gov.
Code 66016 requires that prior to increasing the fee, the City must hold at least one public meeting to
listen to any oral or written presentation on the fee. After the resolution is adopted by Council, the
City must wait no less than 60 days before putting the new fees into effect. .
RESOURCE IMPACT
The estimated first year increase in annual capacity fee revenues is approximately $500,000 in the
Water Fund and $200,000 in the Wastewater Fund. The estimated increase in annual connection fee
revenues is approximately $90,000 ~n the Gas Fund, $50,000 in the Water Fund, $20,000 in the
Wastewater Fund and $12,000 in the Electric Fund.
POLICY IMPLICATIONS
These recommendations do not represent a change in current City policies.
ENVIRONMENTAL REVIEW
Approval of this contract does not require review under the California Environmental Quality Act
(CEQA) because it does not meet the definition of a "project" pursuant to California Public
Resources Code Section 21065.
CMR: 227:08 Page 3 of4
ATTACHMENTS
Attachment A: Proposed Utility Rate Schedule 0-5
Attachment B: Proposed Utility Rate Schedule W-5
Attachment C: Proposed Utility Rate Schedule S-5
Attachment D: Proposed Utility Rate Schedule E-15
Attachment E: Redlined Utility Rate Schedule 0-5 with Proposed Changes
Attachment F: Redlined Utility Rate Schedule W -5 with Proposed Changes
Attachment 0: Redlined Utility Rate Schedule S-5 with Proposed Changes
Attachment H: Redlined Utility Rate Schedule E-15 with Proposed Changes
Attachment I: Development of Water, Wastewater, and Oas Capacity Fees; report prepared by
Black and Veatch
Attachment J: Draft Resolution Amending Utility Rate Schedules E-15, 0-5, W-5, AND S-5
Attachment K: Draft Utilities Advisory Committee Meeting Minutes of April 2, 2008
PREPARED BY:
REVIEWED BY:
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
CMR: 227:08
Roland Ekstrand, Senior Project Engineer
Patrick Va lath, Senior Electric Project Engineer
Roger Cwiak, WOW Engineering Manager
TOMM MARSHALL,
Assistant Director, Utilities Eng~eering
VALERIE O ... FONG
Director of Utilities
STEVE EMSLIEIKELLY MORARIU
Deputy City Managers
Page 4 of4
/,1 'ATTACHMENT C
.~" • , ''. " • Ii'
FINANCE'COMMITTEE, . '
\,
MINUTES
~' Special Meeting
May 13, 2008
Chairperson Morton called the meetIng to order at 7:10 p.m. in the Council
Chambers, 250 Hamilton Avenue, Palo Alto, California.
".' ,';-'
" ; :
Present: Burt,JMbrton (chair), Schmid, Yeh .' '. I , ,
: • 1 " • :.'; I
Absent: None .. :'";;.
1. Oral Communications
None.
2. Utilities Electric Fund Operating Budget, Rates and Reserves!,,'
MOTION:· CounCil 'Member, YE!h, move'd, seconded by' Council 'Member
Schmid,' that th'e 'Financ;e Committee,' recommend ,to, the 'City, CouncH
tentative approval of, the· Utilities. 'Electric, Fund, 'InCluding , theO'perating
Budget[ Proposed Rates and Re~erves Balahces. ' ' " ',,;. : ';"
MOTION PASSED 4-0
,3.' Utilfties Flbet'Optlcs Fund Operating"Budget, Rates ahd'Reseives'
MOTION: Council Member S'chmid moved, seconded by Council Member
Yeh, th'at tliE(FinanceCommitteere.commend to the City Cou'ncil tentative
approval of the 'Utilities Fiber'Optics Fund Operating Budget; Prbposed'Rates
,and Reserves Balances;. ' " "",' ," . " , '.
, ,
MOTION PASSED 4-0
.... :.
05/13/08 " .FIN:1
.' 4.: Utilities Gas Fund Operating Budget, Rates and Reserves. . .. , ....
. '. :.,",.
MOTION: Council Member Schmid moved, seconded by CouncW···Member·:.: ..
Yeh, that the Finance Committee recommend to the City CouncH tentative:';::;:
approval for the Proposed 2008/09 Utilities Gas Fund Operating .. ' Buqget; .",.
Proposed Rates and Reserves Balances. .... . .
MOTION PASSED 4-0
5~ Utilities Water ·fund Operating Budget;; Rat~~ an<;l . .Res.erves
. :' : :
MOTION: Councllperson Morton moved, seconded by Council Member Yeh,
that the Finance Committee recornrn~nd to the ,City·\Councii tentative
approval of the 2008/09Utllltles Water Fund Operating Budget, Proposed
Rates and Reserves Balances. "
MOTION PASSED 4-0
6. . Utilities Wastewater Collection Fund Operating Budget, Rates and
Reserves . '. . , . '. .',
MOTI.ON: Chairperson Morton moved! seconded by Co.u.ncl.I·Member Schmid!
that the L Finance Committee re€ommend; to the', City .Councll teqtative
approval of . the utl,litiesWast"ewater CollectIon Fund Operating Budget,
Proposed Rates and Reserves Balances .. ': . .
MOTION PASSED 4-0
7. Public Works Refuse Enterp~!~:e: -FqndOperatlng< . Budget, . Rates and
Reserves.
MOTIO",::. Counei', .Member Yehmoved,sec:;:ondeClbyCOI.Jncll .. Member
$chm,id, that the ',Flnance ,Co,mrnittee recommend to,.; the.:City ~olll'Jcll
tentative approval' of the 2008/09 Public Works Refuse Enterprise Fund.
Operating Budget, Proposed Rates and Reserves Balances." .
MOTION PASSED 4-0
8. Public Works Wastewater Treatment Enterprise Fund Operating
Budget, Rates and Reserves.
05/13/08 . FIN:2
MOTION:, Council Member Schmid moved, seconded by Chairperson
Morton, that the Finance Committee recommend to the City Council
tentative approval of the 2008/09 Public Works Wast~water Treatment
Enterprise Fund Operating Budget, Proposed Rates and Reserves 8alances.
MOTION PASSED 4-0 , ,
9., Public Works Storm Drainage Fund Operating Budget, Rates and
, Reserves.
, ,
MOTION: Chairperson Morton moved, ,seconded by Council Member yeh,
that' the Finance, Committee, recommend to ,the City, Council' tentative
approval of the 2008/09' Public Works Storm Drainage Fund Operating
Budget, Proposed Rates and Reserves Balances.
MOTION PASSED 4-0
10: Utllitl'es Advi$ory Commission Recommendation, to Approve Proposed , , , , , f, '
Increases in Utility, Electric, Water, Gas and Wastewater Connection F~es
and Wat(?r and Wastewater Capacity Fees (CMR: 2~7:08) " ,';~f.'
, ,1'
IViOTXON:' Council Member Schmid moved, seconded by XXX ,to accep~ ,
target FY 08-09 capaCity' and c.onne:ction fees.
, ,
MOTION FAILED due to lack of second
"'! .:'
MOTION: Chairperson Morton moved, seconded by CourlcilMember Yeh,
that .the, Finance ,Committee recommend that the; City.Council adopt the
resolution to: a) approve utility' connection fee Increase, In electric schedule
E-15, gas schedule G-5, water schedule W-5, and wastewater schedule 5-5
'effectiye August 12008; b) approve 100% Cap~city fee i,ncreasesin water
schedule W-5 and wastewater sched,ule 5-5 effective August 1, 2008; and c)
approve a 5,0 0(0 iQcreasesin capacity fees In w~ter ,.sc~edu,e W-5 a,nd
wastewater schedule 5-5 to take effect on July 1, 2009 for FY 2009-10, and
a 40 0/0 increase In' capacity fees In schedule W-5 a'nd ScS to take ef~ect on
July 1, 2010 for FY 2010-11. '
MOTION PASSED 3~1, Schmid n,o
11'. Recommendation to Create a Fiber Optics EmergencyPlant,R:epla¢ement
Reserve and Establish Guidelines for the Fiber Optics Rate Stabilizatfon and
Emergency Plant Replacement Reserves.
05/13/08 FIN: 3
MOTION:'Chairpersoll Morton moved, seconded by Council Member Schmid,
that the Finance CommIttee recommends that the Council, take, the following
action: 1) adopt a resolution approving a policy establishing a Fiber Optics
Emergency Plant Replacement Reserve; 2) Approve a minimum 'funding level
guideline for the Fiber Optics Emergency Plant. Replacement Reserve which
will be equal to the lesser of A) an amount equal to the amount of the City's
liability insurance coverage deductible; or B) an amou'nt equal to. the
replacement cost of the most essential fiber optics Infrastructure which, if
damaged or de'stroyed, would cause a significant Interruption In the normal
operation of the City's fIber optics infrastructure; and 3) approve the
mInimum and maximum funding level gl,lideline for the Fiber Optics Rate
Stabilization Reserve which will be equal to 20010' and 50% of the annual
sales revenue of the Fiber Optics Fund operations, resp'ectivelY. . . .' . . ,. ,. .;'
MOTION PASSED. 4-0
12. Approval of a Resolution Amending UtIlIty Rate Schedule 0-1 (Storm and
Surface, Water Drainage) Reflecting a 3.8% Rate Increase to $10.95 per
Month p~r Equivalent Residential Unitfor'PisC,a'l'Year 2008/09." ' ., .:,," . .
MOTION: Council Member Schmid moved,' seconded by Chairperson Morton,
that the, Finance Committee recommends that' Council approve the
Resolutlo'n (Attachment A) amending Utility Rate Schedule 0-1 (Storm and
suiface Water Dralnage)1 to Implement a 3.8% rate Increase to $10.9'5 per
month per Equivalent Residential Unit beginning in Fi?cal Year 2006/09.
.... . '. ,"
MOTION PASSED 4-0
" , . ,'. ,
1~; Approval' of the Palo Alto, Sanitation Company Compensation' in the
amount 'of $10,960,234 fof Fiscal Year 200'8/09. , . . . .
Alfredo Romo, District Manager for Palo Alto Sanitation Company (PASCO)
stated there had been a letter Circulated to the Committee Members to
review In, regards to wh,at PASCO feels was ~ fair compensation and a fair
rate of return for the services rendered. He,' stated the contract was clear
. and had been for the life' of the contract.
Julia Butler PASCO representative summarized the contract required the City
to compensate PASCO for its operating services and mandates It received a
fair profit. She noted PASCO was requesting a 2008/09 budget make up for
a ioss lri, the, '2006/07 fisCal year. ' ' . . ',' '
-,1; .\. ,,' .'
05/13/08 FIN:4
, .
I
MOTION: Council Member Schmid moved, seconded by Council Member
Burt, that the Finance Committee recommends to the CouncIl tentative
approval of the compensation for budget year 2008-09 to the Palo Alto
Sanitation Company (PASCO) in the amount of $10,960,234, acknowledging
PASCO disputes that amount.
MOTION PASSED 4-0
14. Response to Finance Committee QuesUonRelated to the Refuse Fund
Budget Fiscal Year 2008-09 -Informational only
No action required.
15. Third Quarter Fiscal Year 2007-08 General Fund Financial Results -
Informational only
No -action required.
16. Discussion for Future Meeting Schedules and Agendas
May 15, 2008 regarding 1) Municipal Fee Schedule, 2) Contracts Greater
than $85,000, and 3) Budget Wrap-up
May 20, 2008 Meeting Canceled
ADJOURI\JrvIENT: The meeting adjourned at 10:17 p.m .
.. ' .
05/13/08 FIN:5
iATTACHMENT D L . . ..
WATER SERVICE CONNECTION FEES
UTILITY RATE SCHEDULE W -5
A. TERRITORY:
. Jnside the incorporated limits of the City of Palo Alto and on land owned or leased by the City of Palo
Alto.
B. FEES:
All fees must be paid prior to the scheduling of any construction. Depending on material availability and
scheduling constraints, utility service will be installed between 30 and 40 days following receipt of full
payment. Any work required to be done outside of regular work hours due to traffic, existing conditions
or applicant) requirements shall be charged at 1.5 times the stated fee. The following fees are regularly
updated, therefore all billings are only valid for 90 days from date of billing.
1. DISTRIBUTION SYSTEM EXTENSION CHARGE
For City Standard 6" Main, charge per foot
2. SERVICE CONNECTION CHARGES:
Category 1 -Domestic Water Service
I-inch connection
1-112 inch connection
2-inch connection
4-inch connection
6-inch connection
Category 2 -Fire Service
4-inch connection
6-inch connection
8-inch connection
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. W-5-1 dated 8Z-8§.--2()()fJ2009 CITY OF PALO ALTO
UTI LlTI ES
$111.00
Amount
$3,797.00
4,535.00
5,681.00
8,381.00
9,,379.00
Amount
$7,176.00
7,941.00
8,564.00
s
WATER SERVICE CONNECTION FEES
UTILITY RATE SCHEDULE W-5
Category 3 -Additional Domestic or Irrigation Services
For service installations connecting to a pre-existing, larger service.
I-inch connection
1-112 inch connection
2-inch connection
4-inch connection
..... 5.* ..................................................................................... 9 ••••••••
$1,747.00
2,095.00
2,383.00
5,043.00
Category 4 -Combination Domestic Water Service and Fire Service
For requests of combiriation domestic and fire water services, two service connection charges will
apply: the charge for connection of a fire service and the charge for domestic service installation
connection to a larger service.
Category 5 -Master Water Service
Approval by the Director of Utilities is required for a connection that serves domestic water service
and fire protection through a detector meter. The charge for master water service will be based on
the Engineering Manager's, Water-Gas-Wastewater, estimate of the total costs, including: ef-aH
materials, labor, metering not listed in Section B(2) or B(4), .J:.abef..and other costs incidental to the
installation.
For service connections of 4-inch through 8-inch sizes and meter sizes of 3-inch through 8-inch, the
new owner must provide and install a concrete vault with meter reading lid covers to house meters
and other required control equipment in accordance with the Water Utility's specifications.
An approved backflow prevention device with bypass assemblies must be provided by owner on all
fire services.
3. METER CHARGES:
5/8 Inch x 3/4 Inch ................. : ............................................................................................ $222.00
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. W-5-2 dated .gZ-8§.-20082009
Effecti ve 7 -€i2-2{}0.920 10
CITY OF PALO AL TO
UTILITIES s
WATER SERVICE CONNECTION FEES
UTILITY RATE SCHEDULE W -5
1 Inch ....... ; ......................................................................................................................... 276.00
1 Y2 Inch ................................................................................................................................. 492.00
2 Inch disk .......................................................................................................................... 601.00
2 Inch turbine (irrigation only) ........................................................................................... 724.00
3 Inch compound ............................................................................................................ 1,882.00
3 Inch turbine (irrigation only) ........................................................................................ 1,163.00
4 Inch ............................................................................ : ................................................. 2,429.00
4 Inch turbine (irrigation only) ........................................................................................ 1,487.00
6 Inch .............................................................................................................................. 4,138.00
AMR Encoder Receiver Transmitter ......................................................................................... 108.00
4. ADDmONAL METERS ON CONNECTION:
With new connection ....................................................................................................... $321.00
On existing connection ......................................................................................................... 783.00
5. RELOCATION OF FACILITIES:
Approved relocation of service, hydrants, or other facilities will be done at the cost of the person
requesting the re-Iocation. Deposit of estimated cost is required before relocation work begins. After
the City completes the work, a final billing based on actual costs will be sent to the person requesting
the relocation of facilities.
6. CAPACITY FEES:
Domestic:
5/8 Inch x 3/4 Inch .................................................................................................. $~h@5,OOO.00
1 Inch ..................................................................................................................... ~9,400.00
1 Y2 Inch ................................................................................................................. ·1·::3,,·59918,850.00
2 Inch ...................... ~ .............................................................. 27,OOO.00.n.y,estimate at $125/FU
3 Inch ................................................................................ ; ................. By estimate at $90125/FU
4 Inch .................................................................................................. By estimate at $90125/FU
6 Inch .................................................................................................. By estimate at $90J25/FU
Note: FU is fixture unit (1 FU=15gpd)
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. W-5-3 dated 8Z-8f140082009
Effective 7-62-~2010
CITY OF PALO ALTO
UTILITIES s
WATER SERVICE CONNECTION FEES
UTILITY RATE SCHEDULE W -5
Fire Service Capacity Fees:
2 Inch ...................................................................................... , ......................................... $750.00
4 Inch ............................................................................................................................ $9,000.00
6 Inch .......................................................................................................................... $22,530.00
8 Inch .......................................................................................................................... $43,080.00
10 Inch .......................................................................................................................... $69,510.00
If a customer is upgrading the capacity of an existing service, then the capacity charge will be the
difference between the new service size and the existing service size.
C. OTHER CONDITIONS
1. SERVICE CHARGES:
(A) Additional Service connections are available with payment of additional service connection
charge as shown in Section B.
(B) Replacement of service connection made necessary because of ordinary wear and deterioration
will be made without charge. Replacement due to inadequacy because of additional demand or
load will be charged as a new service connection.
2. INSTALLATION UNDER UNUSUAL CONDITIONS:
(A) Any condition which, in the opinion of the Engineering Manager, Water-Gas-Wastewater will
result in a cost higher than the charges set forth in Section B will be classified as unusuaL The
charge for an unusual installation will be based on Engineering Manager, Water-Gas
Wastewater's estimate of the total costs of all materials, labor, and other costs incidental to the
installation.
(B) In the event water service to a premises is requested and insufficient capacity exists to provide
such service, the applicant shall bear the total cost for enlarging the distribution system to
accommodate serving the applicant. The Engineering Manager, Water-Gas-Wastewater may
require the applicant to make arrangements for the design and construction of said expansion in
accordance with City standards and specifications. Alternatively, the Engineering Manager,
Water-Gas-Wastewater may elect for City forces or contractors to design and install
respectively such facilities at the applicants' expense.
3. EXCEPTIONS:
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. W-5-4 dated 8Z -lJ§.-2ffOO200fl
Effective 7-6~-20092010
CITY OF PALO Al TO
UTI LlTI ES s
, .
WATER SERVICE CONNECTION FEES
UTILITY RATE SCHEDULE W-5
(A) Water Service Areas 3 & 4, connections served directly from supply main: The distribution
system charges (Section B) will be based on a maximum frontage of 660 feet. This exception
applies to single applications for service and does not apply to subdivisions or tracts.
(B) The subdivision developer will furnish and install the water system at his or her expense and in
accordance with City's specifications.
D. OTHER SERVICES:
1. MANIFOLD:
(A) 2 Inch ............................................................................................................................ $612.00
2. ABANDONMENT:
(A) Small service less than 2 Inch ..................................... .' ................ : ............................... $952.00
(B) Large service more than 2 Inch ................................................................................... 1,383.00
3. METER INSTALLATION:
Charges for meter installations by third parties, i.e. contractors, homeowners, etc'.
5/8 Inch to 2 Inch .................................................................................................................... $76.00
3 Inch to 6 Inch ....................................................................................................................... 228.00
4. FIRE HYDRANT:
(A) Install New Hydrant without Lateral.. ....................................................................... $2,830.00
(B) Install New Hydrant with Lateral ................................................................................ 9,785.00
(C) Relocation behind curb (up to 5 feet) .......................................................................... 4,261.00
Relocations more than 5 feet will require a New Lateral and the existing Lateral will be disconnected
and abandoned at the main.
5. OTHER FEES: Per Hour
The following fees will apply to utility work performed by outside contractors:
(A) Engineering Fee ............................................................................................. ~ .............. $132.00
CITY OF PALO ALTO UTILITIES
~\I/~ .........: ~
Issued by the City Council
a\\~
I CITY OF PALO Al TO Supersedes Sheet No. W-5-5 dated .[JZ..fj§.~2009 UTI LIT I E S
Effecti ve 7 -66-~20 10
s
WATER SERVICE CONNECTION FEES
UTILITY RATE SCHED1JLE W -5
(B) Utility Inspection Fee ..................................................................................................... 102.00
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. W-5-6 dated IiZ-8§.-2OOI32009
{End}
Effective 7-62.-~201O
CITY OF PALO ALTO
UTILITIES s
ATTACHMENT E
WASTEWATER SERVICE CONNECTION FEES
UTILITY RATE SCHEDULE S-5
A. TERRITORY:
Inside the incorporated limits of the City of Palo Alto and on land owned or leased by the City of Palo
Alto. .
B. FEES:
All fees must be paid prior to the scheduling of any construction. Depending on material availability and
scheduling constraints, utility service will be installed between 30 and 40 days following receipt of full
payment. Any work required to be done outside of regular work hours due to traffic, existing conditions
or applicant) requirements shall be charged at 1.5 times the stated fee. The following fees are regularly
updated, therefore all billings are only valid for 90 days from date of billing.
1. COLLECTION SYSTEM EXTENSION CHARGE:
. For City Standard 8" Main Charges Per Foot
Wastewater Service Areas 1 & 2 ....................................................................................... $119.00
Wastewater Service Areas 3 & 4 ......................................................................................... 140.00
2. CONNECTION CHARGES:
4-inch connection : .......................................................................................................... $5,876.00
6-inch connection .............................................................................................................. 6,388.00
4-Inch lateral depth more than 6 feet but less than 10 feeL ............................................. 6,476.00
6-inch lateral depth more than 6 feet but less than 10 feet.. ............................................. 7,332.00
Sewer laterals over 25 feet in length will be charged for the additional footage at a rate of$106ILn.
Ft. for 4 inch connections and $110ILn. Ft for 6 inch connections.
Special arrangements must be made to provide for the cost of a connection larger than six-inch.
The City will estimate the cost which will serve as the basis for a customer deposit. Upon receipt
of this deposit the· City will install the connection and the customer shall pay the actual cost netof
the deposit. '
3. RELOCATION OF FACILITIES:
Approved relocation of service, and other facilities will be done at the cost of the person requesting
the re-Iocation. Deposit of estimated cO,st is required before relocation work begins. After the City
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. 5-5-1 dated 8Z ..()[J06-2fJ()8.-20 CITY OF PALO AL TO
UTI LlTI ES
Effecti ve 7 -6~-2Q(}9~0 1 0
Sheet No. S·5·1
WASTEWATER SERVICE CONNECTION FEES
UTILITY RATE SCHEDULE S-5
completes the work, a final billing based on actual costs will be sent to the person reque~ting the
relocation of facilities.
4. CAPACITY CHARGES:
4-inch connection ............................... $~10,500.00 for first 50 FU, $+5(}...21O IFU additional
6-inch connection ............................................................................... By estimate at $-l-5-O21 OIFU
8-inch connection ............................................................................... By estimate at $B-Q.210IFU
. Note: FU is fixture unit (1 FU 15 gpd).
If a customer is upgrading the capacity of an existing service, then the capacity charge will be the
difference between the new service size and the existing service size.
C. OTHER CONDITIONS
1. SERVICE CHARGES:
(A) Additional service connections are available with payment of additional service connection
charge as shown in Section B2.
(B) Replacement of service connections made necessary because of ordinary wear and
deterioration will be made without charge. Replacement due to inadequacy because of
increased demand or load will be charged asa new connection.
2. INSTALLATION UNDER UNUSUAL CONDITIONS:
(A) Any condition which, in the opinion of the Engineering Manager, Water-Gas-Wastewater
will result in a cost higher than the charges set forth in B above will be classified as unusual.
The charge for an unusual installation will be based on the Engineering Manager's estimate
of the total costs of all materials, labor, and other costs incidental to the installation.
(B) In the event wastewater service to a premise is requested and insufficient capacity exists to.
provide such service, the applicant shall bear the total cost for flow monitoring the existing
main to determine remaining capacity, design of new sewer main and construction cost for
enlarging the collection system to accommodate serving the applicant. The Engineering
Manager, Water-Gas-Wastewater may require the applicant to make arrangements for the
design and construction of said expansion in accordance with City· standards and
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. S-5-2 dated IJZ-().806-2f)f)g-20, CITY OF PALO ALTO
UTILITIES
Effective 7 -6~-;w(W20 10
Sheet No. S-5-2
WASTEWATER SERVICE CONNECTION FEES
UTILITY RATE SCHEDULE S-5
specifications. Alternatively, the Engineering Manager, Water-Gas-Wastewater may elect
for City forces or contractors to design and install respectively such facilities at the applicants
expense.
3. PUMPING PLANTS:
Where pumping facilities are needed to drain wastewater into the wastewater collection system, the
capital cost of construction of the pumping plant and the on-going plant operation and maintenance
costs will be at the expense of the developer.
D. OTHER SERVICE CHARGES:
1. INSTALL MANHOLE:
(A) Depth less than 6 feet ............................................................................................ $6,011.00
(B) Depth more than 6 feet ............................................................................................ 7,889.00
2. ABANDONMENT:
(A) Sewer Lateral ......................................................................................................... $1,270.00
3. OTHER SERVICE FEES:
The following fees will apply to utility work performed by outside contractors:
(A) Engineering Service Fee (per Hour) ........................................................................ $132.00
(B) Inspection Service Fee (Per Hour) ............................................................................. 102.00
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. S-5-3 dated $1-0006-2:008-20 1
CITY OF PALO ALTO
UTILITIES
{End}
Effective 7-{}~-;;wQ92010
Sheet No. S-5-3
Development of
Water, Wastewater, and Gas Capacity Fees
For
City of Palo Alto Utilities
"~Qlt\eK& V.EAT9H
..• . ........ ~. Building Clworld.oh:llff~relic( September 2007
Table of Contents
INTRODUCTION ............................... , ....................................................................................................................... 1
BACKGROUND ........................................................................................................................................................... 1
PURPOSE .................................................................................................................................................................... 1
DISCLAIMER .............................................................................................................................................................. 2
CAPACITY FEES ....................................................................................................................................................... 3
BASIC METHODOLOGIES ............................................................................................................................................ 3
ASSET VALUATION METHODS ............... ; ................................................................................................................... 4
Original Cost ........................................................................................................................................................ 4
Reproduction Cost ............................ : ................................................................................................................... 4
Depreciation ........................................................................................................................................................ 5
CAPACITY FEE DETERMINATION METHODS .................................................................................. : ........................... 5
System Buy-In Method ........................................................................ ~ ................................................................ 5
Incremental Cost~Pricing Method ........................................................................................................................ 5
Value~of-Service Method. ..................................................................................................................................... 6
LEGAL CONSIDERATIONS : ......................................................................................................................................... 6
Proper Authorization under Existing Law ........................................................................................................... 7
Uniformity of Application ......................................................... : ........................................ ; ................................. 7
Equitability ........................................................................................................................................................... 8
Administrative Issues ........................................................................................................................................... 8
PROPOSED WATER AND W ASTEW A TER METHODOLOGY ......................................................................................... 1 0
WATER AND WASTEWATER CAPACITY FEE COMPARISONS ..................................................................................... 12
PROPOSED GAS CAPACITY FEE METHODOLOGY ..................................................................................................... 13
Growth of the City's Gas Utility ........................................................................................................................ 14
Capita/Improvement Program ................. : ........................................................................................................ 15
Determination of Reproduction Cost Less Depreciation ................................................................................... 15
Calculation of Base Equity Component ............................................................................................................. 17
Calculation of Incremental Cost ........................................................................................................................ 18
GAS CAPACITY FEE COMPARISONS ......................................................................................................................... 20
Cll'I OF PAl.O Al.TO
UTILITIES
Introduction
Background
INTRODUCTION
The City of Palo Alto Utilities (City) is a municipally owned utility providing water, wastewater,
fiber optic, natural gas, and electric services to almost 60,000 residents. Deeply ingrained in the founding
of the City's utilities is the principal that a City-owned utility should be able to provide services at fees
significantly lower than those charged by private companies. To this day, the City continues to operate
under this philosophy and contributes to the City's community services. Consequently, it is a natural
outcome for the City to embrace a "growth-pays-for-growth" approach to development.
A prudent balance of revenue sources, capacity fees, and user charges, is necessary for the City's
long-term financial stability. The Silicon Valley is beginning to see reinvestment in technology, and the
City's economy is benefiting from this recovery. In order for the City to attract developers, the capacity
fees must also be reasonable, defensible, and competitive compared to neighboring communities. They
must also be sufficient to help support the City's growth needs. Finally, all developed capacity fees must
comply with the Mitigation Fee Act and demonstrate a clear relationship between use and cost.
In the past few years, the City underwent an examination of existing capacity fees and determined
that the City's fees were substantially lower than neighboring utilities. As a result, the City decided to hire
a qualified and experienced consultant to conduct a capacity fee studies on its water, wastewater and gas
utilities. Through the study, the City anticipates developing fees that allow the City to recover a
proportionate cost of service and remain fair and equitable to its customers.
Purpose
The purpose of this report is to document the results of a water, wastewater and gas capacity fee
/
study to fund system upgrades and expansion. The specific goals of the study were to:
• Review and evaluate existing policies and procedures affecting water, wastewater, and
gas capacity fees;
• Establish a methodology for deriving capacity fees that assists the City in recuperating
the cost of expanding the water, wastewater and gas systems;
• Evaluate the City's Capital Improvement Program (CIP), in particular those projects
identified as Growth and Capacity Enhancements;
• Review the City's projected number of residential water, wastewater, and gas customers,
in particular those who contribute to the need for those projects identified as Growth and
Capacity Enhancements
• Benchmark recommended water, wastewater, and gas capacity fees to neighboring
utilities.
CAPACITY FEE STUDY 1 SEPTEMBER 2007
INTRODUCTION
CllY Of PALO ALTO
UTILITIES
The proposed water, wastewater, and gas capacity fees recognize customer costs of service, contractual
agreements, and local policy considerations.
Disclaimer
In conducting our studies, we reviewed the books, records, agreements, capital improvement
programs, and customer sales and financial projections of the City's utilities, as we deemed necessary to
express our opinion of the City's water, wastewater, and natural gas' operating results and projections.
While we consider such books, records, documents, and projections to be reliable, Black & Veatch has
not verified the accuracy of these documents.
The projections set forth in this report below are intended as "forward-looking statements". In
formulating these projections, Black ,& Veatch has made certain assumptions with respect to conditions,
events, and circumstances that may occur in the future. The methodology utilized in performing the
analyses follows generally accepted practices for such projections. Such assumptions and methodologies
are reasonable and appropriate for the purpose for which they are used. While we believe, the
assumptions are reasonable and the projection methodology valid, actual results may differ materially
from those projected, as influenced by the conditions, events, and circumstances that actually occur. Such
factors may include the City's ability to execute the capital improvement program as scheduled and
within budget, regional climate and weather conditions affecting the demand for water and gas, a
downturn in the housing market, and adverse legislative, regulatory or legal decisions (including
environmental laws and regulations) affecting the City's ability to manage the water, wastewater, and
natural gas systems and meet regulatory requirements.
CAPACITY FEE STUDY 2 SEPTEMBER 2007
CAPACITY FEES
UTILITIES
Capacity Fees
Many utilities assess capacity fees to help offset costs for increased system capacity. Generally
levied at the time building permits are required, the capacity fees are assessed for increased demand or
loadings which result from either (1) changes in use of a structure served by an existing connection to the
system, or (2) a new connection to the system.
Capacity fees are based on the premise that new customers or developers should pay for required
system capacity, to the extent that user charges do not support the investment for the required capacity.
Similar charges are termed by other utilities as capital recovery fees, system development charges, system
capacity charges, impact fees, system equity charges, connection fees, or other names. These charges
represent the current demand requirement of each property and are not transferable to any other property
located within the service area.
The cost of providing such capacity in system facilities for new customers can contribute
significantly to the need for capital financing and service rates and/or taxes to support the financing.
Collection of connection fees to partially or wholly finance new customer capacity requirements can, over
time, significantly reduce the amount of financing and the magnitude of rate increases that otherwise
might be needed. Ideally, capacity fees should generate sufficient revenues to meet future expansion
requirements so that existing users are not burdened by the costs of expansion caused by growth in system
use by new users.
Basic Methodologies
Capacity fees are traditionally assessed to new development to recover the value of system
capacity constructed for new customer service. There is no single established method for the
determination of capacity fees that is both appropriate for all situations and perfectly equitable to all new
customers. There are, however, various approaches which are currently recognized and utilized, some to a
greater extent than others, by utilities. These methods can be categorized as follows:
1. System Buy-In. Capacity fees are designed to derive from the new customer an amount
per connection equal to the "equity" in the system attributable to similar existing cus
tomers. (Note: The word "equity" refers to that portion of system value for which there
is no offsetting debt. It does not imply ownership of, or title to, utility facilities.)
2. Incremental Cost-Pricing. Capacity fees are designed to derive from the new customer
the marginal, or incremental cost of system expansion associated with new customer
growth. This method is based on the premise that new connections to the systems should
be responsible for those costs which they cause to be incurred for the most recent or next
increment of required system capacity, except as such costs are recovered from user fees
or other utility charges.
3. Value of Service. Capacity fees are based on non-direct cost based considerations such
as the fees that other area utilities charge, estimated opportunity or substitute costs, et al.
Unlike the system buy-in or incremental cost-pricing methods, this method does not
require extensive analyses in valuation and cost determination.
CAPACITY FEE STUDY 3 SEPTEMBER 2007
"--CAPACITY FEES
uTiuTIE~s~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Revenues derived from capacity fees are commonly used to offset part or all capital costs to
accomplish any of the following objectives:
1. To pay the capital costs of future capacity provided for growth.
2. To provide rate relief to existing system users by recovering that.portion of the annual
existing and future capacity capital costs associated with growth, including debt service
requirements and direct asset purchases from current revenues.
3. To accumulate reserves to finance system improvements and expansions required to
meet growth needs.
Since the system buy-in method for developing capacity fees requires the selection of a basis for
determining plant value, a discussion of asset valuation methods follows.
Asset Valuation Methods
Various methods are employed to estimate the value of utility facilities required to furnish service
to new users. The two principal methods commonly used to value a utility's properties are original cost
and reproduction cost.
Original Cost
The principal advantages of the original cost method lie in its relative simplicity and stability,
since the recorded costs of tangible property are held constant.
The major criticism levied against original cost valuation pertains to the disregard of changes in
the value of money over, which are attributable to inflation and other factors. As evidenced by history,
prices have tended to increase rather than to remain constant. Because the value of money varies inversely
with changes in price, monetary values in most recent years have exhibited a definite decline; a fact not
recognized by the original cost approach. This situation causes further problems when it is realized that
most utility systems are developed over time on a piecemeal basis as demanded by service area growth.
Consequently, each property addition was paid for with dollars of different purchasing power. When these
outlays are added together to obtain a plant value the result can be seriously misleading.
Reproduction Cost
Changes in the value of the dollar over time, at least as considered by the impact of inflation, can
be recognized by reproduction cost property valuation. The reproduction cost represents the cost of
duplicating the existing utility facilities (or duplicating its function) at current prices. Unlike the original
cost approach, the replacement cost method recognizes price level changes that may have occurred since
plant construction.
The most accurate reproduction cost valuation would involve a physical inventory and appraisal
of plant components in terms of their reproduction costs at the time of valuation. However, with original
cost records available, a reasonable approximation· of reproduction cost plant value can most easily be
ascertained by trending historical original costs. This approach employs the use of cost indices to express
actual capital costs experienced by the utility in terms of current dollars. An obvious advantage of the
reproduction cost approach is that it gives consideration to changes in the value of money over time.
CAPACITY FEE STUDY 4 SEPTEMBER 2007
CAPACITY FEES
UTILITIES
Depreciation
Considerati6ns of the current value of utility facilities may also be materially affected by the
effects of age and depreciation. Depreciation takes into account the anticipated losses in plant value
caused by wear and tear, decay, inadequacy, and obsolescence. To provide appropriate recognition of the
effects of depreciation on existing utility facilities, both the original cost and reproduction cost valuation
measures can also be expressed on an original cost less depreciation (OCLD) and a reproduction cost less
depreciation (RCLD) basis. These measures are identical to the aforementioned valuation methods, with
the exception that accumulated depreciation is computed for each asset account based upon its age or
condition, and deducted from the respective total original cost or reproduction cost to determine the
OCLD or RCLD measures of plant value.
Recognition of depreciation in establishing value for purposes of capacity fee under the system
buy-in approach is appropriate in consideration of the fact that, once the new connector has "bought into"
the system, he assumes the same status as similar existing customers. This includes assumption of the
same responsibilities for future replacement of worn out or obsolete facilities.
Capacity Fee Determination Methods
Three methods of developing connection fees which are currently employed by utilities were
introduced in a preceding section of this report. These include the system buy-in, incremental cost
pricing, and value-of-service methods, which are further described in t?e following paragraphs.
System Buy-In Method
Under this method, capacity fees are based upon the "buy-in" concept that new customers, at the
time of connection, should pay an amount per connection equal to the equity in the system attributable to
existing customers. To recover this equity, capacity fees should be designed to recover the cost or current
value of applicable service facility capacity associated with each new customer connection. An
appropriate basis for calculating a capacity fee would include consideration of the total capital investment
value less depreciation, less any outstanding utility debt in excess of available debt service reserves and
unused construction funds, less any applicable grants or funding from non-utility sources, divided by the
facility service capacity.
As previously discussed, there are two principal methods of determining the value of utility
system investment: OCLD and RCLD. Unless the City desires to recover only the historical costs of
investment, the RCLD value approach is considered to be the most appropriate valuation method because
it recognizes the current value of plant investment. It is noted that under the RCLD method, it is necessary
to revise capacity fees periodically to account for construction cost escalation and depreciation. The
system buy-in method typically tends to be best suited for application when there is adequate capacity
available in existing facilities to serve new customers.
Incremental Cost-Pricing Method
This method is based on the premise that new system users should be responsible for the value of
the latest or next increment of capacity which they cause to be incurred. Accordingly, capacity fees would
CAPACITY FEE STUDY 5 SEPTEMBER 2007
CAPACITY FEES
be designed to derive the marginal or incremental cost of system expansion as may be determined by
recent construction cost experience or planned future improvements.
In order to determine the true incremental cost of system expansion, it is necessary to conduct a
detailed engineering analysis to establish the facilities required to increase the design capacity to a
specific level to accommodate additional new customers. Depertding upon circumstances, the capacities
of existing facilities which are available for new customers and their associated current value (RCLD)
may also need to be recognized. The incremental cost of these specific facilities is then divided by the
associated capacity provided to determine the incremental unit cost of additional capacity. In deriving
capacity fees using the incremental cost-pricing method, appropriate reductions in rates should be made to
credit any obligation or debt which will eventually be recovered from future users through the payment of
ongoing user fees or other utility charges.
Use of this method is generally considered to be most appropr~ate when a significant portion of
the capacity required to serve new customers must be provided by the construction of new facilities.
Value-of-Service Method
The value-of-service method is sometimes employed to develop capacity fees for utilities.
Though often simpler to employ than the system buy-in or incremental cost-pricing methods, it does not
typically recognize the direct cost or value of utility facilities required to provide service for the particular
utility facilities involved. Rather, under this method, capacity fees are based on considerations such as the
rates charged by other communities, the cost of service from available alternative facilities, or other
similar measures. Because value of service measures are not typically based on the direct costs or value of
facilities of the utility actually providing service, this method is not as readily supportable in adversary
proceedings.
Legal Considerations
The use of system development charges to finance new customer service facilities has generally
been concentrated in those areas experiencing moderate to rapid rates of growth and with respect to water
utilities, or in areas of scarce water supply such as Florida, Colorado, California, Texas and Arizona.
Accordingly, many ofthe legislative and judicial requirements and precedents currently recognized in the
water industry have their origins in these areas.
A common standard for assessing the reasonableness of capital recovery charges is the "rational
nexus" or reasonable relationship test. This test requires that:
1. There is a reasonable connection between the need for additional facilities and the growth
resulting from new development, i.e., new users have created the need for new capital
facilities.
2. The capital recovery charges must not exceed a proportionate share of the cost incurred
or to be incurred to accommodate the new users paying the fee, Le., the fee must not
exceed a new user's proportionate share of costs ..
CAPACITY FEE STUDY 6 SEPTEMBER 2007
CAPACITY FEES
3. There is a reasonable connection between the expenditure of the fees collected and the
benefits received by the new users paying the fees, i.e., all fees collected from new users
actually, but not exclusively, benefit the new users.
Before applying the rational nexus test, courts have typically reviewed the municipality's
statutory authority to levy a capital recovery charge. Some suggest that this review should be considered
as the first criteria of a four-part rational nexus test. However, the establishment of legal authority to
lmplement capital recovery charges is generally considered to be a separate issue and not part of the
rational nexus test.
While there are no universally accepted industry standards governing the proper derivation and
application of utility capital recovery charges, following is a brief discussion of certain common criteria
that need to be recognized.
Proper Authorization under Existing Law
A first step in implementing a system development charge is to ascertain whether the utility has
the proper legal authority for its enactment and enforcement. Challenges to established or proposed fees
typically tend to center on three questions: First, do existing statutes, charters, grants of authority, etc.
provide for, or at least allow, the utility to administer such a fee? Second, does the fee constitute an
unlawful tax, in which case it may not be properly implemented without enabling legislation or approval
by the electorate? Third, was the enacting ordinance properly drawn and adopted in accordance with
applicable procedural requirements?
Numerous system development charges have been challenged as an unlawful tax, in some in
stances successfully. Although laws and their interpretation may differ significantly among various states,
it may be significant to note that court decisions have, in varying degrees, ruled that capital recovery
charges are not taxes so long as they do not exceed the reasonable cost of providing the service for which
the fee is charged.
Uniformity of Application
Much of the criticism raised by developers and others across the nation regarding utility
requirements for front end contributions and capital recovery charge payments for required service
facilities, concerns allegations that utilities have adopted no uniform policy concerning the bases for such
payments. The absence of such policies, some critics contend, can result in inconsistent treatment and in
perceived, if not actual, financial discrimination among contributors. To provide assurance that all con
tributors are treated fairly and consistently and to reduce the potential threat of litigation or adverse
legislation, some utilities have devoted considerable effort to the establishment of formal policies, rules
and regulations, ordinances, etc. which set forth a system of uniform procedures and criteria to be
recognized in establishing each new contributor's share of financial responsibility for utility development.
Such policies can provide valuable ground rules to contributors and help assure them that all contribution
amounts will be equitably determined and applied to their benefit.
CAPACITY FEE STUDY 7 SEPTEMBER 2007
CAPACITY FEES
UTILITIES
Equitability
There appears to be considerable agreement in the utility industry and among legislators and the
courts that system development charges must be based on clearly defined needs and costs, and derived in
a manner which fairly apportions costs in accordance with benefits provided. This is reflected both in
court decisions and in manuals of practice published by the American Water Works Association
(A WWA) and the Water Environment Federation (WEF).
Generally, A WW A and WEF refrain from citing specific procedures to be used in fonnulating
capital recovery charges, thereby allowing utilities some latitude in meeting these two requirements. The
manual Financing and Charges for Wastewater Systems briefly addresses two "most prominent" methods,
including the "system buy-in" and "marginal/incremental cost" approaches. The Principles of Water
Rates, Fees and Charges devotes an entire chapter to System Development Charges, including discussion
of the equity (buy-in) method and the incremental cost method.
Irrespective of the specific methodology employed, it is important that such fees recognize only
those costs associated with the provision of facility capacity required for growth and development,
exclusive of both operation and maintenance expense and the costs of new or replacement facilities
designed to meet the needs of existing utility customers. Further, in order to avoid overcharges, it is
essential in deriving and applying capital recovery charges to recognize the effect of other possibly
overlapping contributions, and facilities financed through general service charges, so that the contributor's
total payment responsibility does not ~xceed his share of the total cost or value of facilities required for
service.
Administrative Issues
Procedures to administer the capital recovery charge program must be established, including a
process for hearing appeals. Because capital recovery charges are assessed to recover the costs associated
with new customers, it is important that receipts and expenditures be properly documented. Receipts
should be accounted for in a manner similar to contributed facilities, rather than included as part of
general operating revenues. Capital recovery charge funds should only be used for capital related
purposes, Le., construction of facilities or retirement of debt associated with facilities related to system
growth.
Legal Requirements in California
Many states have established specific laws regarding the establishment, calculation,and
implementation of capacity fees. For most states, the primary objective of these laws is to assure that the
charges are established in such a manner that they are fair, equitable, and cost-based.
Mitigation Fee Act
The laws governing the establishment, accounting, and reporting of capacity fees in the State of
California are found in the "Mitigation Fee Act". A summary of the relevant statutes required in the
calculation of a capacity fee is as follows:
CAPACITY FEE STUDY 8 SEPTEMBER 2007
--~. -CAPACITY FEES
~~~u~iEs·~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
"66013 (a) Notwithstanding any other provision of law, when a local agency imposes
fees for water connections or sewer connections, or imposes City charges, those fees or
charges shall not exceed the reasonable cost of providing the service for which the fee or
charge/is imposed, unless a question regarding the amount of the fee or charge imposed
in excess of the estimated reasonable cost of providing the services or materials is
submitted to, and approved by, a popular vote of two-thirds of those electors voting on
the issue. "
"66013 (B)(3) "City charge" shall mean a charge for facilities in existence at the time a
charge is imposed or charges for new facilities to be constructed in the future that are of
benefit to the person or property being charged"
In addition ·to the specific elements for the determination of proportionate cost sharing under
California law, the Mitigation Fee Act also requires the following:
• Funds are maintained in a separate account;
• Annual accounting requirements on fee collections and expenditures;
• A public hearing to adopt or modify the fee; and
• A protest mechanism for the fees.
Proposition 218
In 1996, California voters passed Proposition 218 ("Prop 218"), which required the imposition of
certain fees and assessments by municipal governments to require a vote of the public to change or
increase the fee or assessment. The applicability of Prop 218 to connection fees is established the Third
City Court of Appeals decision in Richmond v. Shasta Community Services District, which states that
water impact fees are development fees and as such, are not subject to the procedural or substantive
requirements of Prop 218. Furthermore, the decision states that local agencies can enact the fee by either·
ordinance or resolution.
Assembly Bill 1600
The City has broad authority to charge users for capital facilities. The main limitation of that
authority is that fees on new developments must have a rationale nexus to the needs created by, and the
benefits accruing to that development. In 1988, the California Legislature added sections to the
Government Code that codified constitutional and decisional law related to fees imposed on new
developments. Assembly Bill ("AB") 1600 enacted Government Code §66000-66003 related to developer
fees. In general, AB 1600 contains three requirements:
• Local agencies must follow a process set forth in the statutes and establish a nexus between a
development project and the public improvement being fmanced with the fee.
• Local agencies must segregate the fee revenues from the General Fund to avoid commingling
of funds.
CAPACITY FEE STUDY 9 SEPTEMBER 2007
CAPACITY FEES
• If a local agency has unspent or uncommitted developer fees for five years or more, then it
must make annual findings describing the continuing need for that money, or it must refund
the fees.
Since its original passage in 1988, the California Legislature has added and modified various
code sections to further clarify and expand the requirements related to developer fees. In particular,
Government Code §660 13 contains requirements specific to water and wastewater capacity charges.
Specifically, §66013 states that "Notwithstanding any other provision of law, when a local agency
imposes fees for water connections or sewer connections, or imposes capacity charges, those fees or
charges shall not exceed the estimated reasonable cost of providing the service for which the fee or charge
is imposed ... ". The fundamental issue ofthis statutory requirement is that a maximum is set for capacity
charges the estimated reasonable cost of providing the service.
With respect to the City's gas utility, Chapter 5, of the California Government Code pertains to
fees charged for development projects. Specifically, Government Code §66002 (c) (5) includes "facilities
for the generation of electricity and the distribution of gas and electricity" as part of its definitions of
facilities. As such, there are requirements in the development of and implementation of gas capacity fees.
The statutory requirements pertaining to capacity charges in California continue to evolve. In
1998, the California Legislature passed Senate Bill ("SB") 1760. SB 1760 amends and expands
Government Code §66013 to subject capacity charges collected after January 1, 1999 to certain
accounting, expenditure, and reporting requirements.
Proposed Water and Wastewater Methodology
Since the City strongly believes that capacity fees should cover the proportionate cost of system
improvements required to serve the new customer, Black & Veatch utilized the buy-in methodology to
derived water and wastewater capacity fees; As a City that is almost fully built-out, using the buy-in
method (or equity method) is appropriate. The collected capacity fees will be separated from rate revenue
and used exclusively for water, sanitary sewer and gas-related capital improvement projects. In addition,
to maintain some level of consistency and enhance public acceptance, Black & Veatch paralleled to the
extent possible, the approach currently used which basis the capacity fee on the number of fixture units. A
fixture unit is equal to one cubic foot of water per minute. A fixture unit is not a flow rate unit per se but a
design unit.
In applying the buy-in methodology, Black & Veatch used the RCLD to arrive at the appropriate
facilities cost. Based on the City's fixed asset listing and starting with the original service date and
original cost, the estimated replacement cost for each in-service asset was calculated. Cost escalation
factors used were obtained from Engineering News Record (ENR) Index for the San Francisco Bay Area
and the Handy-Whitman Index for the Pacific Region. To arrive at RCLD, the replacement cost was
multiplied by the estimated remaining service life percentage. The net replacement cost is then, the RCLD
plus any additional asset costs placed into service in FY 06/07. We note that by using an ENR and
Handy-Whitman indices, the capacity fee calculation may be updated yearly if desired to more accurately
reflect current construction cost conditions.
cCAPACITY FEE STUDY 10 SEPTEMBER 2007
--~~ CAPACITY FEES
nTrLf¥IES~o~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Once the RCLD is determined for the water and wastewater utilities, the outstanding utility debt
in excess of available debt service reserves and unused construction funds was subtracted to arrive at the
total system value for the given utility. For the water utility, there remained outstanding debt due to the
1999 arid 2001 Utility Revenue Bonds. For the wastewater utility, there remained outstanding debt due to
the 1999 Utility Revenue Bond. Using the consumption records provided by the City for FY 00/01 to FY
05/06, Black & Veatch was able to forecast the average water consumption and wastewater production, in
gallons per day, for FY 06/07. By dividing the total system value by the average consumption or
production, the charge per fixture unit was determined. A summary of these calculations are summarized
below.
Water Capacity Fee
Trended
Original Depreciation Net Reproduction DepreCiation Not Less Than
Descri!1tion Cost Reserve Plant Cost New Reserve RCLD
$ $ $ $ $ $
Water
Building General Plant 191,138 101,299 89,839 305,543 135.942 169,601
Building -Pumping Plant 187,462 58,648 128,814 703,953 430,909 273,044
Building -Transmission & Distribution 214,674 28,208 186,466 320,089 80,970 239.119
Building -Reservoirs & Tanks 2,506,148 817,016 1;689,132 19,944,327 10,766,173 9,178,154
Building -Source of Supply 110,102 61,216 48.886 630,621 464,791 165,831
Equipment Source of Supply -Wells 579,437 433,908 145,529 225.839 45,418 180,421
Equipment -Pumping Plant 696,605 478,105 218.500 1,106.205 687,082 419,123
Equipment -Water Treatment 237,705 127,841 109,864 513,254 308,292 204,962
Equipment -Mains 35,574,792 10,843,100 24,731,691 147,148,376 77,318,813 69,829,563
Equipment -Non-Customer Valves 2,335,727 991.700 1,344,027 3,517,587 1,704,613 1,812,974
'Equipment -Pressure Regulating 200,470 123,656 76,814 171,126 67,551 103,575
Equipment -Instrumentation 125,945 98,135 27,810 161,047 100,349 60,698
Equipment -Meters 3,103,345 925,821 2,177,524 4,499,425 1,511,554 2,987,871
Equipment -Hydrants 2,639,898 612,271 2,027,627 4,593,822 1,861,501 2,732,321
Equipment -Miscellaneous -Gen Plant 349,289 302,099 47,190 114,748 66,093 48,656
Equipment Miscellaneous 1,202,566 653,471 549,095 1,482,504 735,179 747,325
Total 50,255,301 16,656,494 33,598.807 185,438,467 96,285,230 89,153,237
Plus: Construction Work In Progress 12,335,181
Less: Outstanding Principal on Debt (4,445,888)
Total Value $ 97,042,530
Total Water Demand (gpd) 11,929,733
Charge per gpd $ 8.13
Charge per Fixture Unit (1 FU = 15 gpd) $ 122.00
CAPACITY FEE STUDY 11 SEPTEMBER 2007
Wastewater Capacity Fee
Wastewater Treatment
Building -Building & Structures
Equipment -Treatment & Disposal
Wastewater Collection
. Building -Collection Plant
Equipment -Miscellaneous
Equipment· Gravity Mains
Equipment· Manholes
Equipment -Electric Pumping Equip
Total
Plus: Construction Work I·n Progress
Less: Outstanding Principal on Debt
Total Value
Original
Cost
$
27,501,174
34,696,530
183,017
731,041
39,978,695
5,626,384
103,016
108,819,857
Depreciation
Reserve
$
15,974,138
22,682,104
45,974
437,572
15,696,724
2,018,061
54,741
56,909,315
Total Residential Sewer Discharge (gpd) at 90% of Water Consumed
Total Measured Water Discharge (gpd)
Charge per gpd
Charge per Fixture Unit (1 FU = 15 gpd)
Net
Plant
$
11,527,036
12,014,427
137,043
293,469
24,281,971
3,608,322
48,275
51,910,542
Reproduction
Cost New
$
73,292,975
29,731,354
248;474
579,204
91,151,425
8,469,027
101,200
203,573,660
CAPACITY FEES
Trended
Depreciation
Reserve
$
42,544,678
15,055,667
62,529
245,311
53,638,074
3,655,500
30,228
115,231,987
Not Less Than
RCLD
$
30,748,297
14,675,687
185,945
333,893
37,513,352
4,813,528
70,971
88,341,672
22,770,261
(11,302,280)
$ 99,809,654
$
$
5,261,642
1,695,833
14.35
215.00
Table 1 represent the capacity charge for a single family residential household with
approximately 50 fixture units. While the City is transitioning away from the typical 5/S" meter to a 1"
meter, the calculation is still based on the 5/S" meter in order to compare to neighboring utilities.
Table 1
Proposed Capacity Fee
Water Capacity Fee $
Wastewater Capacity Fee $
6,100
10,750
Water and Wastewater Capacity Fee Comparisons
The timely adoption of the proposed capacity fees in Table 1 will provide for full recovery of the
. water and wastewater utility's estimated costs of service. Based on the proposed capacity fees per fixture
unit, the typical water residential with a standard 1" meter will pay a total of $9,150 plus any fees
associated with the connection fee. The connection fee is charge imposed on the developer for physically
connecting to the system. This fee does not account for additional capacity in the system. Similarly the
typical wastewater residential with a standard 4" connection will pay a total of $10,750 plus any
connection fees. Added together, a typical residential developer will pay roughly $19,900 per household.
Presented in Table 2 are the proposed capacity fees compared to fees of neighboring cities, for a
residential customer with a S/S" meter. Similar to the rates, the capacity fees could employ an annual
indexed adjustment to account for inflation. Unlike the rates, the capacity fees have a greater fluctuation
due to large capital improvement projects and build-out. Based on the table below, the proposed capacity
fee is at the highest tier of fees .. As neighboring utilities make adjustments to their fees in the coming
CAPACITY FEE STUDY SEPTEMBER 2007
CAPACITY FEES
UTILITIES
months and years, we anticipate that the proposed rates for the City will shift towards the lower end of the
spectrum. All surveyed utility fees are current as of July 2007.
Table 2
Proposed Capacity Fee Comparison
Water Capacity Fee
Residential Meter Size
City, District, Or Agency 5/8" 1" 1·1/2" 2" 3" 4" 6"
Mountain Vif!!oN $3,900
City of Napa $3,800 $6,300 $12,500 $20,000 $400,000 $62,500 $124,900
Redwood City $1,787 $4,468 $8,935 $14,296 $26,805 $44,675 $89,350
Menlo Park $2,570 $4,111 $8,486 $13,627 $24,929 $38,556 $85,598
Alameda County Water District $5,546 $11,829 $17,335 $21,177 $35,054 $58,220 $85,627
Santa Cruz $6,530 $16,325 $32,650 $52,240 $104,180 $163,250 $326,500
Dublin San Ramon Services Dis!. $6,541 $16,353 $32,706 $52,330 $114,475 $327,063 $654,125
City of Benicia $7,635 $8,047 $18,084 $32,144 $72,336 $128,577
EBMUD (Zone 1) $6,380 $9,570 $15,980 $31,960
Contra Costa Water Dis!. $15,962 $39,905 $79,810 $127,696 $255,392 $399,050 $798,100
Average Fee $6,065 $12,990 $25,165 $40,608 $129,146 $152,736 $309,171
Palo Alto (Proposed) $6,100 $9,150
Wastewater Capacity Fee
City, District, Or Agency Unit 4"
Mountain View Lot Frontage $3,350
Central Contra Costa Sanitary Dist.· 1 EDU $4,524
West Bay Sanitary Dist 1 EDU $6,022
Los Altos 1 EDU $5,274
Redwood City 1 EDU $1,676
Dublin San Ramon Services Dlst. 1 EDU $11,367
East Bay Municipal Utility District 1 EDU $1,125
City of Benicia 1 EDU $7,500
Santa Cruz 1 EDU $1,200
SF PUC 1 EDU $2,907
Union Sanitary District 1 EDU $3,459
Average Fee 1 EDU $4,400
Palo Alto (Proposed) 1 EDU $10,750
Proposed Gas Capacity Fee Methodology
After discussions with the City and review of available methodologies a combination of the
equity method (or system buy-in approach) and the marginal or incremental approach was found to be the
best fit regarding the need for the City's system expansion. The use of this methodology is appropriate
when a portion of the capacity required to serve new customers is available in the current system, but new
facilities will need to be constructed (or existing facilities enhanced) to fully meet capacity requirements.
This is similar to the City's circumstances with respect to its gas distribution system. The incremental cost
method recognizes the costs associated with constructing specific individual increments of new capacity
required to meet growth needs. It can often be more difficult to accurately ascertain that portion of
capacity and associated value available to serve new customers from existing facility components.
CAPACITY FEE STUDY 13 SEPTEMBER 2007
CAPACITY FEES
By properly combining elements of each method, the value of system capacity that should be
recovered can be established by recognizing the current value of applicable existing service facilities,
together with the estimated or actual cost ·of any required new service facilities. By combining these
values and dividing by the associated total applicable service capacity, a reasonable measure of the value
of system capacity applicable to new customer requirements can be derived. Black & Veatch utilized the
combination of the system buy-in and incremental cost approach to determine the system development
charge for the City's gas distribution system.
Growth of the City's Gas Utility
The City of Palo Alto is a largely "built-out" community fn the Silicon Valley and the greater San
Francisco and San Jose areas. There has been no meani~gful growth in the number of natural gas
customers over the past six years, as shown in Table 3. The number of natural gas customers served by
City has remained at about 23,000 since 2001.
Table 3
City of Palo Alto -Gas Division
Historical Number of Customers
Public Commercial City of
Residential MultiFamily Commercial Industrial Facilities Multi Family Palo Alto Total
2001 14,490 5,806 1,399 179 30 744 38 22,686
2002. 14,515 5,733 1,331 168 30 733 38 22,547
2Q03 14,604 5,790 1,356 173 30 745 36 22,734
2004 14,767 5,774 1,365 174 32 775 37 22,922
2005 14,735 5,775 1,373 171 34 775 35 22,896
2006 14,824 5,920 1,351 169 35 784 37 23,119
The City has, however, recently seen a trend where residential customers are renovating and
upgrading existing single-family homes or building larger homes that are substantially increasing the
demand on the City's gas system. These renovated or new homes are substantially larger and are being
built with heated swimming pools and tankless water heaters. This added load requires the City to
increase its system's capacity by reinforcing and replacing its mains and services. Over the next five
years, the City projects adding about 100 natural gas customers per year connecting to the system with
new, larger housing construction (or 500 new customers) and about 240 natural gas customers per year
upgrading and enlarging their homes. This is projection consistent with the results of our review of the
City's recent meter additions and retirements .
. The City's records and recent experience indicate that a typical City residential gas customer uses
about 700 therms per year. A typical customer requires a 175-400 cubic feet per hour (cfh) meter.
However, residential customers who are upgrading their homes or constructing new homes have increased
gas demand that require a meter almost 2 to 3 times as larger(650-800 cfh). These larger residential
customers will use about 2,500 therms annually_
CAPACITY FEE STUDY 14 SEPTEMBER 2007
CAPACITY FEES
Capita/Improvement Program
Because of the increased demand that these customers are placing on the City system, the City
must increase its system's capacity by reinforcing and replacing its mains and services. Table 4 presents
the City's gas utility's capital improvement program (CIP) for the five-year period ending 2011. These
projections were supplied by City staff. The City projects its spending for system improvements to be
approximately $32.2 million over the five-year period for system improvements. The City estimates thata
portion of these costs are attributable to growth and capacity enhancements. The City desires these costs
be financed through gas capacity fees, or system development charges, so those customers who are
responsible for the needed incremental capacity pay for that capacity. The remainder will be financed
through rate revenues. The gas capacity charges that we develop herein are designed to recover the
portion ofthe CIP cost used for growth and capacity enhancements.
Table 4
City of Palo Alto -Gas Division
Five Year Capital Improvement Program
Distribution System -Customer Design and Connection Services
OS-80017 Gas System Extensions
Others
Net Total Distribution System -Customer Design and Coon, Services
/
Distribution System -System Improvements
OS-lIoo0 OMR-Project21
OS-03007 Directional Boring Equipment
OS-020 13 Directional Boring Machine
OS-80019 G .. Meters and Regulators
08·0600] OMR· Project 16
08-07002 OMR -Project 17
OS-080 II GMR -Project 18
08-09002 GMR -Project 19
OS-lOool OMR-Project20
OS-03008 Polyethylene Fusion Equipment
OS-03OO9 System Extensions -Unreimbursed
Net Total Distribution System -System Improvements
Total System Improvements
Costs AHributable to Reinforcement and Replacement Activities (R&R)
Costs AHributable to Growth and Capacity EnhancemenlS
x
x
x
x
x
x
x
~ 2010-11 Total
$ $ $
563 580 597 615 633 2,988
~ ~ ~ --.Jill) ~ ~
457
83 56 60
165 35 40 185
262 270 278 286 297
5,110
408 5,259
420 5,408
432 5,556
444 5,700
V m D
~ ---1.?i ~ ----...ill. __ 19_1
6,224 6,158 6,384 6,511 6,922
6,224 6,158 6,384 6,511 6,922
457
199
425
1,393
5,110
5,667
5,828
5,988
6,144
89
~
32,199
32,199
x 5,949 6,123
3,062
6,298
3,149
6,471
3,236
6,645
3,323
31,486
15,743 50% 2,975
Determination of Reproduction Cost Less Depreciation
The first step in the capacity fee process is to adjust the original cost ,of assets to their
reproduction cost levels and then reduce by the accumulated depreciation (RCLD) of the asset. For the
purpose of this report, we apply the existing reserve ratio to the trended original cost to adjust for
depreciation reserve to determine RCLD using the Handy-Whitman Index for the Pacific Region.
In the process of determining an RCLD value for the gas distribution system, we begin by
classifYing the original cost of existing plant (as of December 31, 2006) into the asset classifications
shown in Table 5. For the purpose of a system development charge, only "backbone" facilities are
CAPACITY FEE STUDY 15 SEPTEMBER 2007
/
CAPACITY FEES
PALOAl.TO
included in the system equity calculation. As such, certain asset categories were excluded from the
valuation including structures and improvements, general plant, and miscellaneous equipment. These
categories are relatively unaffected by the size of customers served.
Table 5
City of Palo Alto -Gas Division
Asset Descriptions
Asset Description
Structures and Improvements
Meters
Services
Regulators
Mains
Measuring and Regulating Station Equipment
Miscellaneous Equipment
General Plant
The total RCLD of the assets applicable to the SDC are shown in Table 6.
Meters
Services
Regulators
Mains
Description
Meas.& Reg. Sin. Equip.
Total
Less: Outstanding Principal on Debt
Total Equity
Table 6
City of Palo Alto -Gas Division
Reproduction Cost Less Depreciation
Equity in Existing System
Original Depreciation Net Reproduction
Cost Reserve Plant Cost New
$ $ $ $
4,965,862 1,615,590 3,350,272 5,600,375
22,867,425 4,313,641 18,553,783 30,191,907
971,223 432,724 538,500 1,450,251
32,659,227 9,191,586 23,467,641 93,395,728
609,853 269,488 340,365 1,858,102
62,073,590 15,823,029 46,250,560 132,496,363
(12,096,006)
$ 34,154,555
Trended
Depreciation
Reserve
$
1,822,022
5;695,309
646,152
26,285,218
821,076
35,269,778
$
RCLD
$
3,778,353
24,496,598
804,099 •
67,JlO,510
1,037,026
97,226,585
(12,096,006)
85,130,579
To determine equity in the existing system, we reduce the value by the amount of outstanding
principal on the City's bonds and other long-term debt associated with the gas distribution system. This
amounts to a reduction of $12.1 million. With this adjustment, the total value of the gas distribution
system applicable to the capacity fee is $85.1 million, based on an RCLD value base. The equity using an
OCLD value base amounts to $34.2 million. For the purpose of the balance of this report, we use the
RCLD value base.
To determine the dollar amount applic~ble to each new customer, we calculated the number of
residential meter equivalents in the system. As shown in Table 7, the City's 23,119 customers amount to
CAPACITY FEE STUDY 16 SEPTEMBER 2007
CAPACITY FEES
38,080 residential meter equivalent units. The weighting factors we use to develop these equivalent units
are based on our experience with other gas distribution systems and review' of use per customer for each
of the City's classes.
Table 7
City of Palo Alto -Gas Division
Residential Meter (Customer) Equivalents
Residential
Multi Family
Commercial
Industrial
Public Facilities
Commercial Multi Family
City of Palo Alto
Total
Number of
Customers
14,824
5,920
1,351
169
35
784
23,119
Calculation of Base Equity Component
Weighting
Factor
5
30
30
5
15
Weighted
Number of
Customers
14,824
5,920
6,754
5,065
1,040
3,919
559
38,080
We show in Table 8 our development of the base equity component of the capacity fee. This
equity component amounts to $2,235 per equivalent residential customer. Using the theoretical basis of
the equity method, this can be translated to every retail customer currently using the system (on a
residential meter equivalent basis) has invested $2,235 in replacement value for their share of capacity in
the system. Therefore, by having future customers pay a fee to connect to the system, equal to this
amount, future customers match the value base contributed by the current customers.
Total Equity
Table 8
City of Palo Alto -Gas Division
Determination of Base Equity
Equivalent Number of Residential Customers @ 2006
Base Equity -$ per customer
$ 85,130,579
38,080
$ 2,235.57
This base equity will be used as a credit (to reduce the required SDC) for those residential
customers who have already "bought in" to the existing system facilities.
CAPACITY FEE STUDY 17 SEPTEMBER 2007
CAPACITY FEES
Calculation of Incremental Cost
As discussed earlier, the marginal or incremental approach is based on the principle that new
system users should be responsible for the cost of the latest or next increments of capacity that they cause
to be constructed. This fee recovers growth's share of planned additions to the system. Table 9 shows the
development of the base unit charge for the incremental capacity. We develop this base unit charge by
dividing the capital improvement costs attributable to system expansion ($15.7 million over 5 years) by
the projected number of customers who are responsible for the needed capacity expansion ..
The City projects approximately 100 natural gas customers per year connecting to the system
from new construction (500 new customers over the 5 years) and about 240 natural gas customers who
upgrade and enlarge their homes. In addition, City staff has seen the trend of these customers using
natural gas to heat swimming pools and installing tankless water heaters. We estimate the average usage
of these customers to be about 2,500 therms per year, or about 3.5 times larger than the average
residential customer.
We estimate the total volumes over a five-year period, which are attributable to customers who
require this increased capacity to be 4,250,000 therms. The base unit charge to be applied to these
customers for the increased capacity is determined by dividing the $15.7 million in CIP associated with
Growth and Capacity Enhancements by these volumes. The resultant unit charge is $0.741 per thermo
However, those City customers who are upgrading their service from a 175-400 cfh meter to at least a
650-800 cfh meter will be credited for their existing equity in the system. The total estimated base equity
from these customers is approximately $537,000, which is 240 customers times $2,236 (Table 6). The'
volumetric credit to be applied to existing customers is then determined to be $0.036 per therm, or the
adjusted volumetric charge is determined to be $0.705 per thermo It is intended that this system
development charge for upgraded existing customers be applied for a 60 month period.
In order to properly .collect the full $15.7 million and make up for this shortfall of $537,000, the
base volumetric charge should also be adjusted for new system customers. The base charge for new
customers should be adjusted $0.086 per therm, or the adjusted volumetric charge for new customers is
determined to be $0.827 per thermo It is intended that this system development charge for new customers
be applied for a 60 month period.
CAPACITY FEE STUDY 18 SEPTEMBER 2007
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Table 9
City of Palo Alto -Gas Division
Calculation of Capacity Fee -Combined with Incremental Approach
Anticipated Number of Residential Customers Related to Growth and Capacity Enhancements
Projected Number of New Residential Customers Through 2011 From New Construction
Projected Number of New Residential Customers Through 2011 From Upgrades
Total Number of Residential Customers Related to Growth and Capacity Enhancements
Estimated Average Annual Usage (therms) per customer
lOOper year X 5 years
____ ....;2;;..4-'-0 per year X 5 years
340
2,500 therms
500
1,200
1,700
Total Volumes Over Five-Year Period Attributable to Increased Capacity
Volumes from Residential New Construction ~ II Volumes from Residential Upgrades
6,250,000
15,000,000
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Total 'Thenns to Recover Increased Capacity
Additional CIP (2007-201 I) Attributable to Capacity Related Projects
Base Unit Charge
System Development Charge to Upgraded Customers
Credit for Base Equity
Unit Credit ($Ithenn)
Net Charge Applied to Upgrade Customers ($Ithenn)
System Development Charge to New Customers
Credit fur Base Equity to Recover from New Customers
Additional Charge to New Construction Customers ($/thenn)
Total Charge Applied to New Customers ($/thenn)
Recovery from new customers
Recovery from upgraded customers
Total Recovered
$
$
$
$
$
$
$
$
21,250,000 Thenns
15,743,000
0.741 Itherm
(536,536) Base Equity of$ 2236 X 240 customers
(0.036) Credit for Base Equity I ( 5 years X 2500 therms X 240 customers)
0.705 Ithenn
536,536
0.086 Credit fur Base Equity I ( 5 years X 2500 therms X 100 customers)
0.827 Ithenn
5,166,830
10,576,170
15,743,000 ~
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CAPACITY FEES
Gas Capacity Fee Comparisons
At the request of the City, Black & Veatch conducted a survey of comparable utilities to establish
a range of gas capacity fees charged. We can find no instance where a gas utility (municipal or investor
owned) has a system development charge. In many instances, gas utilities have a line extension policy,
similar to the City's existing policy. These policies typically require customers to pay an adQitional fee
for increasing its service line capacity from 2-inch to a larger size, or increasing the size of its meter or for
extending the distribution sys~em in excess of a nominal length. In any event, these line extension policies
are intended to offset increased cost directly incurred. In addition, most line extension policies provide for
the partial reimbursement of the developer or builder if within a set period extended facilities are used to
connect other customers.
CAPACITY FEE STUDY 20 SEPTEMBER 2007