HomeMy WebLinkAboutStaff Report 9030
City of Palo Alto (ID # 9030)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/3/2018
City of Palo Alto Page 1
Summary Title: FY 2019 Water Financial Plan and Rate Proposals
Title: Utilities Advisory Commission Recommendation that the City Council
Adopt: (1) a Resolution Approving the Fiscal Year 2019 Water Utility Financial
Plan; and (2) a Resolution Increasing Water Rates by 4% by Amending Rate
Schedules W-1 (General Residential Water Service), W-2 (Water Service from
Fire Hydrants), W-3 (Fire Service Connections),W-4 (Residential Master-
Metered and General Non-Residential Water Service), and W-7 (Non-
Residential Irrigation Water Service
From: City Manager
Lead Department: Utilities
RECOMMENDATION
Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee
recommend that the Council:
1. Adopt a resolution (Attachment A) approving the fiscal year (FY) 2019 Water Utility
Financial Plan (Attachment B); and
2. Adopt a resolution (Attachment C) increasing water rates by amending Rate Schedules
W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3
(Fire Service Connections), W-4 (Residential Master-Metered and General Non-
Residential Water Service), and W-7 (Non-Residential Irrigation Water Service).
EXECUTIVE SUMMARY
The FY 2019 Water Utility Financial Plan includes projections of the utility’s costs and revenues
for FY 2018 through FY 2028. Costs are projected to rise by about 4% per year over the next
several years, primarily due to increasing water supply and capital project costs. As a result,
staff projects the need for a 4% water rate increase on July 1, 2018 and 7% rate increases in FY
2020 and FY 2021. The 4% increase in 2018 is needed to raise revenue for rising capital and
operations expenses. Over the longer term, increases are primarily associated with increasing
water supply costs, with some of the increase related to rising capital costs.
The UAC reviewed the Water Financial Plan and Rate Proposals at its meeting on March 7,
City of Palo Alto Page 2
2018. Staff noted that the proposal had not changed from the preliminary rate review brought
to the UAC on February 7, 2018, and the UAC voted unanimously to recommend staff’s
proposal.
BACKGROUND
Every year staff presents the UAC and Finance Committee with Financial Plans for its Electric,
Gas, Water, and Wastewater Collection Utilities and recommends any rate adjustments
required to maintain their financial health. These Financial Plans include a comprehensive
overview of the utility’s operations, both retrospective and prospective, and are intended to be
a reference for UAC and Council members as they review the budget and staff’s rate
recommendations. Each Financial Plan also contains a set of Reserves Management Practices
describing the reserves for each utility and the management practices for those reserves.
DISCUSSION
Staff’s annual assessment of the financial position of the City’s water utility is completed to
ensure adequate revenue to fund operations, in compliance with the cost of service
requirements set forth in the California Constitution (Proposition 218). This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. The
current rate proposals are also based on the cost of service methodology described in the 2012
Palo Alto Water Cost of Service & Rate Study, the 2015 Study update, and the 2015 Drought
Rate memorandum completed by Raftelis Financial Consultants.
Staff proposes to adjust water rates to the levels shown in Tables 1 and 2, below, effective July
1, 2018, to recover costs related to growing capital improvement, operations and maintenance,
and general administrative costs, as discussed below. These changes are projected to increase
the system average water rate by roughly 4%. This includes a smaller increase in water
consumption charges and a larger increase in fixed charges, for an overall increase in residential
customer bills of roughly 3% to 4%.
Concurrently, staff is also evaluating whether it would be appropriate to apply a single fixed
charge to smaller meter sizes, which was an issue raised in the 2017 metering audit. If
implemented, this change would require an update to the utility’s cost of service analysis. The
evaluation will be completed for possible implementation on or before July 1, 2019.
The rate changes proposed for July 1, 2018 are included in the proposed amended rate
schedules in Attachment D, and outlined here in Tables 1 through 3.
Table 1: Water Consumption Charges in $/CCF (Current and Proposed)
Current
(7/1/16)
Proposed
(7/1/17)
Change
$/CCF %
City of Palo Alto Page 3
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 6.66 6.66 - -
Tier 2 Rates 9.18 9.48 0.30 3%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 7.68 7.80 0.12 2%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 7.68 7.80 0.12 2%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 9.08 9.37 0.29 3%
Table 2: Current and Proposed Monthly Service Charges for W-1, W-4, and W-7
Mete
r
Size
Monthly Service Charge
($/month based on meter size)
Change
Current (7/1/17)
Residential (W-
1)
Commercial (W-
4)
Irrigation (W-7)
Proposed
(7/1/18)
Residential (W-1)
Commercial (W-
4)
Irrigation (W-7)
$ %
5/8” $16.77 $18.71 $1.94 11.6%
3/4” $22.60 $25.21 $2.61 11.6%
1” $34.26 $38.22 $3.96 11.6%
1 ½” $63.40 $70.73 $7.33 11.6%
2” $98.37 $109.75 $11.38 11.6%
3” $209.11 $233.29 $24.18 11.6%
4” $372.31 $415.36 $43.05 11.6%
6” $762.81 $851.02 $88.21 11.6%
8” $1,403.94 $1,566.29 $162.35 11.6%
10” $2,219.92 $2,476.63 $256.71 11.6%
12” $2,919.34 $3,256.93 $337.59 11.6%
Table 3: Current and Proposed Monthly Service Charges for Fire Services (W-3)
Mete
r
Size
Monthly Service Charge
($/month based on meter size)
Change
Current (7/1/17) Proposed
(7/1/18)
$ %
City of Palo Alto Page 4
2” $3.79 $4.23 $0.44 11.6%
4” $23.42 $26.13 $2.71 11.6%
6” $68.03 $75.90 $7.87 11.6%
8” $144.97 $161.73 $16.76 11.6%
10” $260.70 $290.85 $30.15 11.6%
12” $421.11 $469.81 $48.70 11.6%
Bill Impact of Proposed Rate Changes
Table 5 shows the impact of the proposed July 1, 2018 rate changes on residential bills. The
average increase in revenue is projected to be about four percent, but some customers may see
slightly higher or lower increases in their bill due to slight changes in the composition of the
utility’s costs. The change represents about a 12% increase to the distribution portion of the
water rates to recover projected increases in capital projects, such as reservoir and tank
rehabilitations, main replacement projects and meter upgrades, as well as inflationary increases
to operations costs. This is offset by lower water supply costs than were projected by staff
during last year’s forecasting process. Because water consumption increased as the Bay Area
exited the drought last year, the current estimate of the FY 2019 SFPUC W-25 rate (Wholesale
Use with Long-Term Contract) is $4.10/ccf, compared to last year’s projection, which was
$4.37/ccf. The SFPUC will not determine its final wholesale rate until May or June. However, in
order to have the City’s water rates in place for July 1, staff must provide notice to CPAU
customers by the end of April. Should the SFPUC increase rates beyond $4.10/ccf after the
City’s July 1 water rates are adopted, current Operations Reserves should provide sufficient
funds until an adjustment to Palo Alto’s rates can be made next year.
Table 5 shows the impact of the proposed changes.
Table 5: Impact of Proposed Rate Changes on Residential Bills
Usage
(CCF/month)
Bill under
Existing Rates
(7/1/17)
Bill under
Proposed Rates
(7/1/18)
Change
$/mo. %
4 $43.41 $45.35 $1.94 4.5%
(Winter median) 7 $65.91 $68.15 $2.24 3.4%
(Annual median) 9 $84.27 $87.11 $2.84 3.4%
(Summer median) 14 $130.17 $134.51 $4.34 3.3%
25 $231.15 $238.79 $7.64 3.3%
Table 6 shows the impact of the proposed July 1, 2018 rate changes on various representative
commercial customer bills.
City of Palo Alto Page 5
Table 6: Impact of Proposed Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current Rates
(7/1/17)
Bill under
Proposed Rates
(7/1/18)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 $108.93 $112.31 $3.38 3.1%
(Annual average) 64 $508.29 $517.91 $9.62 1.9%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 $ 145.12 $ 155.06 $ 9.94 6.9%
(Summer median) 37 $ 399.36 $ 417.42
$
18.06 4.5%
(Winter average) 56 $ 571.88 $ 595.45
$
23.57 4.1%
(Summer average) 199 $
1,870.32 $ 1,935.36
$
65.04 3.5%
FY 2019 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 7 shows the projected rate adjustments over the next five years and their impact on the
annual median residential water bill.
Table 7: Projected Rate Adjustments, FY 2019 to FY 2023
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Water Utility 4% 7% 7% 6% 4%
Estimated Bill Impact ($/mo)* $2.84 $6.10 $6.52 $5.98 $4.23
* estimated impact on median residential water bill, which is currently $84.27.
The largest projected increases in water rates occur between now and FY 2024, with lower
increases afterward. Figures 1 and 2 below illustrate the projected increases in the Water
Utility’s costs between FY 2018 and FY 2024:
City of Palo Alto Page 6
Figure 1: FY 2018 and FY 2024 costs
Figure 2: Percentage of Total Cost Increase From FY 2018 to FY 2024
Attributed to Supply, Capital, and Operations Costs
A major driver for the increase in the water utility’s costs (and therefore rates) over the next
several years is the cost of water. Wholesale water costs are adopted by the SFPUC, and
generally change on an annual basis, but are projected to increase by 3.8% from FY 2018 to FY
2024. The SFPUC is currently engaged in a $4.8 billion Water System Improvement Project
(WSIP), funding of which is 60% complete but is not forecast for final completion until late
2021. Current major projects underway are replacement of Calaveras dam, restoration work to
the Alameda Creek Watershed, and work on regional groundwater storage and recovery. The
SFPUC is forecasting the need for additional Transmission, Supply & Storage and Treatment
system upgrade projects, starting after the WSIP is complete. All future and in-progress
construction work will require bond funding, and the SFPUC’s financial plans show debt service
cost growing by 77% between FY 2018 and FY 2024, and nearly doubling by FY 2028. Initial
City of Palo Alto Page 7
wholesale rate increase projections range from 5% to 7% per year through FY 2024 to cover
increases in debt service cost. In later years (FY 2024 through FY 2028), water supply costs are
projected to rise by about 1.0% percent per year on average, though the later year forecast is
highly uncertain.
Changes in usage due to drought, or recovery from drought, can also make the magnitude of
future increases difficult to predict. The SFPUC’s costs to operate the Regional Water System
are primarily fixed costs, so the water rate charged to wholesale customers like the City of Palo
Alto is highly dependent on usage by all users of the Regional Water System. The City’s FY 2019
Water Utility Financial Plan assumes that, while the drought has ended and usage has started to
increase, based on CPAU’s experience, consumption is not anticipated to return to pre-drought
levels. The SFPUC is currently working on its budget for FY 2019, and the long-range changes to
wholesales costs are subject to change. Staff will reflect those increases in future financial
forecasts, as they become available.
There remains some uncertainty in the forecasts of capital costs for the water utility in coming
years. Water main replacement costs have risen substantially in recent years. The regional and
even national focus on infrastructure improvement has created labor shortages, leading to
higher bids than were seen in the past. Capital cost projections increased by 5.4% from FY 2018
through FY 2024. In part this is because the FY 2018 capital budget, like previous years, was
lower due to main replacement project delays, so the increase in capital costs is more
pronounced. However, the increased costs also are due to the higher construction costs CPAU
has seen in recent capital project bids, as well as large one-time capital costs in FY 2019, FY
2020, and FY 2021 related to reservoir rehabilitation and additional costs required to invest in
an advanced metering infrastructure (AMI). AMI is a foundational technology that will improve
customer experience and enable more effective detection of water leaks. Over the entire
forecast period (through FY 2028), capital costs are projected to rise on average by 4.4%.
Operations costs are projected to increase by 2.1% over the forecast period due to materials
and services cost inflation as well as benefit costs that are increasing faster than inflation.
Higher bid costs and delays in project schedules resulted in a deferment of main replacement
projects in FY 2017, temporarily lowering costs, and greater than anticipated sales post-drought
resulted in higher revenues. These have resulted in the Operations Reserve increasing to the
maximum guideline level, and with surplus reserves available to phase in rate increases
gradually over the forecast period by drawing down reserves.
Water Bill Comparison with Surrounding Cities
Table 8 compares water bills for residential customers to those in surrounding communities as
of February 1, 2018 (under current the City’s current water rates). Palo Alto customers have the
highest monthly bills of the group, although bills for smaller water users are lower than in some
surrounding communities. It is unclear at this time what water rate changes may be
implemented in these communities for FY 2019.
City of Palo Alto Page 8
Table 8: Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of February 2018
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
4 43.41 50.51 37.10 33.20 50.10 22.76
(Winter median) 7 65.91 73.36 57.50 54.62 70.56 39.83
(Annual median) 9 84.27 88.60 71.10 68.90 84.20 51.21
(Summer median) 14 130.17 126.70 105.10 106.51 128.86 79.66
25 231.15 210.50 220.70 199.02 247.97 142.25
*Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable
water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87%
for Mountain View, 10% for Santa Clara and 100% for Hayward.
Cost Drivers and Cost Containment
Because the City’s water rates are higher than in most of the comparison cities in Table 8
above, it is worth noting the drivers for these costs, as well as the City’s efforts to contain costs.
The primary driver for rising costs in recent years has been the increasing cost of Hetch Hetchy
water due to rehabilitation and seismic strengthening of the one hundred year old system. A
secondary but significant driver has been the rising cost of construction for Palo Alto
infrastructure replacement, as well as the cost the City’s emergency supply system. Other
agencies in the area that buy Hetch Hetchy water have been similarly affected by these trends,
but Palo Alto’s rates remain higher. Some of the key reasons include:
As one of the earliest cities to develop on the Peninsula, Palo Alto has older infrastructure
that requires more spending on replacement. In addition, other cities have allowed more
redevelopment, which means that developers pay fees to upgrade and replace the system
when they create capacity impacts.
Palo Alto’s system is more spread out, with reservoirs and transmission lines running into
the Foothills rather than being more centrally located. This results in higher operational and
capital replacement costs.
Palo Alto’s consumption patterns are different. With larger lot sizes and more irrigation,
Palo Alto residents use more water and are allocated a larger share of costs than residents
in cities with denser development. Some cities also have industrial users that use significant
amounts of water, helping to offset the cost of water to residents.
Even though costs have risen in recent years, they have not risen as much as they would have if
City staff did not make an effort to contain costs. Some examples include:
The City partners with other small utilities to push the SFPUC to control its costs through
the Bay Area Water Supply and Conservation Agency (BAWSCA). These efforts result in real
savings. For example, efforts by BAWSCA recently resulted in $12 million in refunds for
wholesale customers, including Palo Alto. BAWSCA is also beginning an audit of the SFPUC’s
City of Palo Alto Page 9
capital spending, and has strongly advocated to enforce contractual provisions to avoid
improper allocation of costs to wholesale customers.
City staff looks for opportunities to save money operationally, small opportunities that add
up. For example, the City recently creatively rebid its contract for construction material
supply and spoils hauling to go from using a single vendor to multiple vendors that each
specialized in specific materials, realizing nearly $250,000 in savings over three years.
City staff also looks for strategic opportunities to save money. For example, rather than
replacing aging reservoirs “as is,” staff is examining whether there are strategic
opportunities to consolidate or relocate reservoirs to reduce operational and capital costs.
The current climate of high construction costs results in less capital replacement for dollars
invested. Staff will continue to prioritize near-term projects to address immediate needs,
and potentially defer projects where system reliability will not be impacted to ensure full
value is extracted from existing infrastructure.
As reflected in the Utilities Strategic Plan, staff is raising the ongoing attention to effective
use of available resources particularly across Divisions.
Utility consumers also see some long-term cost savings from City-wide efforts to manage
personnel costs.
Changes from Last Year’s Financial Forecast
Table 9 compares current rate projections to those projected in the last two year’s Financial
Plans. As shown, the FY 2019 rate projections are somewhat lower than projected last year.
The cumulative projected increase in rates through FY 2028 is similar to last year’s projections.
Table 9: Projected Water Rate Trajectory for FY 2018 to FY 2027
Projection FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
Current
(FY 2019 Financial Plan) 4% 7% 7% 6% 4% 4% 1% 3% 1% 2%
Last year
(FY 2018 Financial Plan) 6% 6% 6% 6% 6% 2% 2% 2% 1% N/A
Two years ago
(FY 2017 Financial Plan) 9% 6% 2% 2% 2% 3% 5% 3% N/A N/A
COMMISSION REVIEW AND RECOMMENDATION
The UAC reviewed this proposal at its March 7, 2018 meeting. After brief discussion the UAC
voted unanimously to recommend the Financial Plan and rate increase as proposed. The
excepted draft minutes from the UAC’s March 7, 2018 meeting can be found here.
TIMELINE
If the Finance Committee supports staff’s recommendation, notification of the rate increases
will be sent to customers as required by Article XIIID of the State Constitution (added by
Proposition 218). The Financial Plans and rate schedules will then go to the City Council with
the FY 2019 budget for adoption, at which time the public hearing required by Article XIIID of
City of Palo Alto Page 10
the State Constitution will be held. If the rate changes are approved, they will become effective
July 1, 2018.
RESOURCE IMPACT
Normal year sales revenues for the Water Utility are projected to increase by roughly 4% ($2.7
million) as a result of these rate increases. See the attached FY 2019 Water Financial Plan for a
more comprehensive overview of projected cost and revenue changes for the next ten years.
POLICY IMPLICATIONS
The proposed water rate adjustments are consistent with Council-adopted Reserve
Management Practices that are part of the Financial Plans, and were developed using a cost of
service study and methodology consistent with the cost of service requirements of Proposition
218.
ENVIRONMENTAL REVIEW
The Finance Committee’s review and recommendation to Council on the FY 2019 Water
Financial Plans and rate adjustments does not meet the definition of a project requiring
California Environmental Quality Act (CEQA) review under Public Resources Code Section 21065
thus no environmental review is required.
Attachments:
Attachment A: Resolution Adopting FY 2019 Water Financial Plan
Attachment B: FY 2019 Water Financial Plan
Attachment C: Draft Resolution Adopting Water Rates Effective July 1, 2018
Attachment D: Utility Rate Schedules W-1 W-2 W-3 W-4 and W-7
Attachment A
NOT YET APPROVED
180315 jb 6054073
Resolution No. _____
Resolution of the Council of the City of Palo Alto Approving the
Fiscal Year 2019 Water Utility Financial Plan
R E C I T A L S
A. Each year the City of Palo Alto (“City”) regularly assesses the financial position of
its utilities with the goal of ensuring adequate revenue to fund operations. This includes
making long-term projections of market conditions, the physical condition of the system, and
other factors that could affect utility costs, and setting rates adequate to recover these costs. It
does this with the goal of providing safe, reliable, and sustainable utility services at competitive
rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and made
part of the Financial Plans.
The Council of the City of Palo Alto hereby RESOLVES as follows:
SECTION 1. The Council hereby adopts the FY 2019 Water Utility Financial Plan.
SECTION 2. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act’s (CEQA) definition of a project under Public Resources
Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative
governmental activity which will not cause a direct or indirect physical change in the
environment,, and therefore, no environmental review is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
Attachment A
NOT YET APPROVED
180315 jb 6054073
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Assistant City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
FY 2019 WATER
UTILITY
FINANCIAL PLAN
FY 2019 TO FY 2028
ATTACHMENT B
WATER UTILITY FINANCIAL PLAN
February 2018 2 | Page
FY 2019 WATER UTILITY
FINANCIAL PLAN
FY 2019 TO FY 2028
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations................................................................................ 4
Section 2: Executive Summary and Recommendations ........................................................... 4
Section 2A: Overview of Financial Position .................................................................................. 4
Section 2B: Summary of Proposed Actions .................................................................................. 5
Section 3: Detail of FY 2019 Rate and Reserves Proposals ....................................................... 6
Section 3A: Rate Design ............................................................................................................... 6
Section 3B: Current and Proposed Rates ..................................................................................... 6
Section 3C: Bill Impact of Proposed Rate Changes ...................................................................... 8
Section 3D: Proposed Reserve Transfers ..................................................................................... 9
Section 4: Utility Overview .................................................................................................... 9
Section 4A: Water Utility History ............................................................................................... 10
Section 4B: Customer Base ........................................................................................................ 10
Section 4C: Distribution System ................................................................................................. 11
Section 4D: Cost Structure and Revenue Sources ...................................................................... 11
Section 4E: Reserves Structure ................................................................................................... 12
Section 4F: Competitiveness ...................................................................................................... 12
Section 5: Utility Financial Projections ................................................................................. 13
Section 5A: Load Forecast .......................................................................................................... 13
Section 5B: FY 2012 to FY 2016 Cost and Revenue Trends ........................................................ 14
Section 5C: FY 2017 Results ....................................................................................................... 15
Section 5D: FY 2018 Projections ................................................................................................ 16
Section 5E: FY 2019 – FY 2028 Projections ................................................................................ 16
Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 18
Section 5G: Alternate Scenarios................................................................................................. 19
WATER UTILITY FINANCIAL PLAN
February 2018 3 | Page
Section 5H: Long-Term Outlook ................................................................................................. 19
Section 6: Details and Assumptions ..................................................................................... 19
Section 6A: Water Purchase Costs ............................................................................................. 20
Section 6B: Operations .............................................................................................................. 21
Section 6C: Capital Improvement Program (CIP) ....................................................................... 22
Section 6D: Debt Service ............................................................................................................ 25
Section 6E: Other Revenues ....................................................................................................... 26
Section 6F: Sales Revenues ........................................................................................................ 26
Section 7: Communications Plan .......................................................................................... 27
Appendices ......................................................................................................................... 28
Appendix A: Water Utility Financial Forecast Detail ................................................................. 29
Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 31
Appendix C: Water Utility Reserves Management Practices ..................................................... 32
Appendix D: Description of Water Utility Operational Activities ............................................... 35
Appendix E: Sample of Water Utility Outreach Communications ............................................. 36
WATER UTILITY FINANCIAL PLAN
February 2018 4 | Page
SECTION 1: DEFINITIONS AND ABBREVIATIONS
BAWSCA Bay Area Water Supply and Conservation Agency
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
O&M Operations and Maintenance
RFC Raftelis Financial Consultants, Inc.
SFPUC San Francisco Public Utilities Commission
SFWD San Francisco Water Department
UAC Utilities Advisory Commission
WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the
transmission lines of the Hetch Hetchy regional water system.
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City’s Water Utility for the next ten years. This
Financial Plan provides revenues to cover the costs of operating the utility safely over that time
while adequately investing for the future. It also addresses the financial risks facing the utility
over the short term and long term, and includes measures to mitigate and manage those risks.
SECTION 2A: OVERVIEW OF FINANCIAL POSITION
Staff expect overall costs in the Water Utility to rise by about 2.8% per year from fiscal year (FY)
2018 to 2028. Excluding FY 2017 (which, unlike normal years, did not include a water main
replacement project), most costs are projected to rise by 2-4% annually through the projection
period. Water supply costs, the largest component of the utility’s costs, are projected to rise
nearly 3.7% per year through FY 2024, and at a lower rate in subsequent years, due to a series
of major capital projects on the Hetch Hetchy water system. See Section 6A: Water Purchase
Costs for more information. Capital projects, with several reservoir and tank rehabilitation
projects scheduled for FY 2019 through FY 2021, as well as increases to main replacement
project costs to reflect rising construction costs. More detail on CIP costs is discussed in Section
6C: Capital Improvement Program (CIP) below. Table 1 below shows the costs for the Water
Utility from FY 2017 through FY 2028.
Table 1: Expenses for FY 2017 to FY 2028 (Thousand $’s)
Expenses
($000)
FY
2017
(act.)
FY
2018
(est.)
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
Water
Purchases
20,075 22,062 22,611 23,356 24,190 25,318 26,207 27,534 27,680 28,458 28,558 28,659
Operations 15,965 18,627 19,142 19,615 20,088 20,529 20,973 21,364 21,743 22,154 22,430 22,826
Capital
Projects
4,110 8,267 13,695 13,210 16,765 10,709 11,023 11,344 11,675 12,024 12,373 12,737
TOTAL 40,151 48,956 55,449 56,181 61,042 56,556 58,203 60,242 61,098 62,636 63,361 64,222
WATER UTILITY FINANCIAL PLAN
February 2018 5 | Page
This proposed financial plan projects that the Water Utility needs the rate increases shown in
Table 2 to ensure that revenues cover rising costs and reserves remain healthy. While costs are
increasing roughly 3.5% per year through FY 2024, staff projects a need for sales revenue
increases averaging roughly 4.7% per year over that period. This is due to the fact that revenue
is currently slightly below costs and also because little or no increase is expected in non-sales
revenue (e.g. interest, connection fees).
The table also shows rate projections from last year’s Financial Plan. Last year’s plan projected
earlier, generally higher rate increases. However, the delay of FY 2017 water main replacement
projects as well as post-drought sales revenues resulted in an increase in reserves, which
enabled the more gradual increases projected in the current plan. This also means that the Rate
Stabilization Reserve will be drawn down over a longer time frame than projected in last year’s
financial plan.
Table 2: Proposed and Projected Water Rate Changes for FY 2019 to FY 2028
Projection FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
Current 4% 7% 7% 6% 4% 4% 1% 3% 1% 2%
Last year 6% 6% 6% 6% 6% 2% 2% 2% 1% N/A
2 years 9% 6% 2% 2% 2% 3% 5% 3% N/A N/A
The Water Utility has a Rate Stabilization Reserve that can be used to smooth rate increases
over several years. This Financial Plan projects that these reserves will be exhausted by the end
of FY 2021. The Water Utility also has a Capital Improvement Program (CIP) Reserve that can be
used to offset one-time unanticipated capital costs. This Financial Plan assumes that the CIP
Reserve will be used for unanticipated capital expenses or returned to the Operations Reserve
by the end of FY 2020. The Water Utility Operations Reserve was above the maximum guideline
level at the end of FY 2017, mainly due to larger than anticipated drought surcharge revenue.
However, these funds will be needed to fund the Water Utility in FY 2018 and FY 2019, bringing
the Operations Reserve within guidelines by FY 2020. Table 3 shows the projected reserve
transfers over the forecast period.
Table 3: Transfers To/(From) Reserves for FY 2018 to FY 2028 ($000)
Reserve FY 2018 FY 2019 FY 2020 to FY 2028
Capital Improvement - - (2,726)
Rate Stabilization - - (4,069)
Operations - - 6,785
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Water Utility in FY 2019:
1. Increase rates to raise an additional 4% in revenue to fund increases to capital
expenditures and increased operations costs. Section 3B: Current and Proposed Rates
describes this increase in more detail.
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February 2018 6 | Page
SECTION 3: DETAIL OF FY 2019 RATE AND RESERVES PROPOSALS
SECTION 3A: RATE DESIGN
The Water Utility’s rates are evaluated and implemented in compliance with the cost of service
requirements and procedural rules set forth in the California Constitution under Article 13 (per
Proposition 218). The City structured current rates based on staff’s assessment of the financial
position of the Water Utility, and updated current rates using the methodology from the March
2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc. (RFC)
(Staff Report 2676), as well as RFC’s 2015 Memorandum: Proposed Water Rates updating the
2012 Study and analyzing drought rates (Staff Report 5951). Staff plans to review and update
this cost of service study in 1 to 2 years, unless any major changes occur to the utility’s
operations or customer base that would necessitate an earlier study. Before conducting any
new cost of service study, staff will review current rates and the scope of the study with the
Utilities Advisory Commission (UAC) and Council to determine the City’s policy priorities.
In 2015 Council adopted a drought surcharge to assist the water utility in recovering its costs
due to decreased revenue resulting from lower water consumption as customers conserved.
With the State declaring the drought over in FY 2017, the drought surcharge was discontinued
as of July 1, 2017.
SECTION 3B: CURRENT AND PROPOSED RATES
The current rates and surcharges were effective on July 1, 2017. Current rates reflect
adjustments in accordance with the results of an updated cost of service study performed by
RFC in 2015. The 2015 study developed the drought surcharges and evaluated the City’s water
rate methodology and structure in light of court decisions interpreting provisions of the State
Constitution applicable to water rates. RFC validated the City’s rate structure, recommending
only minor adjustments to ensure that peaking costs were equitably allocated to each customer
class and residential rate tier.
CPAU has five rate schedules: separately metered residential customers (W-1), commercial and
master-metered multi-family residential customers (W-4), irrigation-only services (W-7),
services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire
hydrant rental meters used for construction (W-2). All customers pay a monthly service charge
based on the size of their inlet meter. This charge represents meter reading, billing, and other
customer service costs, but also the cost of maintaining the capability to deliver a peak flow for
that customer corresponding to their meter size. All customers are also charged for each CCF
(one hundred cubic feet) of water used. Separately metered residential customers are charged
on a tiered basis, with the first 0.2 CCF per day (6 CCF for a 30 day billing period) charged at the
first tier price per CCF, and all additional units charged a higher tier price per CCF. Commercial
customers pay a uniform price for each CCF used, and a higher price for separately metered
irrigation service.
For July 1, 2018 staff is proposing an increase in rates of approximately four percent. Water
rates are composed of two general types of costs: commodity and distribution. Commodity
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February 2018 7 | Page
costs are mainly volumetric in nature and charged by the San Francisco Public Utilities
Commission (SFPUC). In late December 2017, the SFPUC provided a preliminary estimate that
their FY 2019 W-25 wholesale rate for agencies with long-term contracts would remain at
$4.10/CCF in FY 2019. The SFPUC will not determine its final rate until May or June. However,
in order to have the City’s water rates in place for July 1, staff must notify customers by the end
of April. Staff is using the SFPUC’s December 2017 estimate in this forecast.
For FY 2018, early indications were that the SFPUC would raise their rates to $4.37/CCF, and
this was what was used in CPAU staff’s rate setting analysis. Since the SFPUC’s actual rate
increase was lower, and FY 2019 indications forecast no change, staff will reduce the
commodity portion of CPAU’s rates accordingly.
Distribution rates cover all the costs to deliver water within the City, such as operations,
maintenance, metering and billing, and capital improvement. Capital improvement costs have
been increasing by about 3.5% annually, are projected to continue rising in the future, and staff
is reflecting these changes in distribution costs. Operations costs are discussed in Section 6B:
Operations, below. The decrease in commodity rates partially offsets the distribution increases,
thus the percentage change differs between volumetric rates and monthly service charges.
Table 4 shows the current and proposed consumption charges.
Table 4: Current and Proposed Water Consumption Charges
Current
(7/1/17)
Proposed
(7/1/18)
Change
$/CCF %
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 6.66 6.66 - -
Tier 2 Rates 9.18 9.48 0.30 3%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 7.68 7.80 0.12 2%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 7.68 7.80 0.12 2%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 9.08 9.37 0.29 3%
Table 5 shows the current and proposed monthly service charges for rate schedules W-1, W-4,
and W-7.
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Table 5: Current and Proposed Monthly Service Charges for W-1, W-4, and W-7
Meter
Size
Monthly Service Charge
($/month based on meter size)
Change
Current (7/1/17)
Residential (W-1)
Commercial (W-4)
Irrigation (W-7)
Proposed (7/1/18)
Residential (W-1)
Commercial (W-4)
Irrigation (W-7)
$ %
5/8” $16.77 $18.71 $1.94 11.6%
3/4” $22.60 $25.21 $2.61 11.6%
1” $34.26 $38.22 $3.96 11.6%
1 ½” $63.40 $70.73 $7.33 11.6%
2” $98.37 $109.75 $11.38 11.6%
3” $209.11 $233.29 $24.18 11.6%
4” $372.31 $415.36 $43.05 11.6%
6” $762.81 $851.02 $88.21 11.6%
8” $1,403.94 $1,566.29 $162.35 11.6%
10” $2,219.92 $2,476.63 $256.71 11.6%
12” $2,919.34 $3,256.93 $337.59 11.6%
Table 6 shows the current and proposed monthly service charges for rate schedule W-3
Table 6: Current and Proposed Monthly Service Charges for Fire Services (W-3)
Meter
Size
Monthly Service Charge
($/month based on meter size)
Change
Current (7/1/17) Proposed (7/1/18) $ %
2” $3.79 $4.23 $0.44 11.6%
4” $23.42 $26.13 $2.71 11.6%
6” $68.03 $75.90 $7.87 11.6%
8” $144.97 $161.73 $16.76 11.6%
10” $260.70 $290.85 $30.15 11.6%
12” $421.11 $469.81 $48.70 11.6%
SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES
Table 7 shows the impact of the proposed July 1, 2018 rate changes on the median residential
bill. The average increase is projected to be about four percent, but some customers may see
slightly higher or lower increases due to slight changes in the composition of the utility’s costs.
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Table 7: Impact of Proposed Water Rate Changes on Residential Bills
Usage
(CCF/month)
Bill under
Current Rates
(7/1/17)
Bill under
Proposed
Rates (7/1/18)
Change
$/mo. %
4 $43.41 $45.35 $1.94 4.5%
(Winter median) 7 $65.91 $68.15 $2.24 3.4%
(Annual median) 9 $84.27 $87.11 $2.84 3.4%
(Summer median) 14 $130.17 $134.51 $4.34 3.3%
25 $231.15 $238.79 $7.64 3.3%
Table 8 shows the impact of the proposed July 1, 2018 rate changes on various representative
commercial customer bills.
Table 8: Impact of Proposed Water Rate Changes on Commercial Bills
Usage
(CCF/month)
Bill under
Current Rates
(7/1/17)
Bill under
Proposed
Rates
(7/1/18)
Change
$/mo. %
Commercial (W-4) (5/8” meters)
(Annual median) 12 $108.93 $112.31 $3.38 3.1%
(Annual average) 64 $508.29 $517.91 $9.62 1.9%
Irrigation (W-7) (1 ½” meters)
(Winter median) 9 $ 145.12 $ 155.06 $ 9.94 6.9%
(Summer median) 37 $ 399.36 $ 417.42 $ 18.06 4.5%
(Winter average) 56 $ 571.88 $ 595.45 $ 23.57 4.1%
(Summer average) 199 $ 1,870.32 $ 1,935.36 $ 65.04 3.5%
SECTION 3D: PROPOSED RESERVE TRANSFERS
In the FY 2018 Financial Plan, staff proposed transferring $1.87 million from the Rate
Stabilization Reserve to the Operations Reserve in FY 2018. This transfer was not necessary as
increased sales during FY 2017 resulted in larger than expected revenues, largely from the
drought surcharge. The drought surcharge was discontinued at the start of FY 2018. Customer
sales recovery after the drought continues to be more robust than staff’s initial projections.
Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail shows
details of reserves levels.
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It provides general
background information and helps readers better understand the forecasts in Section 5: Utility
Financial Projections and Section 6: Details and Assumptions.
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SECTION 4A: WATER UTILITY HISTORY
The Water Utility was established on May 9, 1896, two years after the city was incorporated.
Voters of the 750 person community approved a $40,000 bond to buy local, private water
companies who operated one or more shallow wells to serve the nearby residents. The city
grew and the well system expanded until nine wells were in operation in 1932. Palo Alto began
receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these
sources.
A 1950 engineering report noted, “the capricious alternation of well waters and the San
Francisco Water Department water…has made satisfactory service to the average customer
practically impossible”. By 1950, only eight wells were still in operation. Despite this,
groundwater production increased in the 1950’s leading to lower groundwater tables and water
quality concerns. In 1962, a survey of water softening costs to CPAU customers determined that
CPAU should purchase 100% of its water supply needs from the SFWD. CPAU signed a 20-year
contract with SFWD, and CPAU’s wells were placed in standby condition. The SFWD later
became known as the SFPUC. Since 1962 (except for some very short periods) CPAU’s entire
supply of potable water has come from the SFPUC.
As the city grew, so did the number of mains in the water system. The system of mains
expanded along with the city, while existing sections of the system continued to age. In the
mid-1980s, the number of breaks in cast iron mains installed during the 1940s and earlier
started to accelerate. In FY 1994, to combat deterioration of older sections of the system, CPAU
performed an analysis of cost effective system improvements and increased the rate of main
replacement from one mile per year to three. CPAU began a plan to replace 75 miles of
deficient mains within 25 years.
In 1999, a study of system reliability concluded that major upgrades were needed to the
distribution system to provide adequate water supply during a natural disaster. This ultimately
resulted in the $40 million Emergency Water Supply and Storage Project, completed in 2013,
which involved a new underground reservoir in El Camino Park, the siting and construction of
several emergency supply wells, and the upgrade of several existing wells and the Mayfield
pump station. Upon completion, the city began to focus reliability efforts on its system of water
storage reservoirs and transmission lines in the Foothills.
At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in
consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy water
system, which crosses two major fault lines between the Sierras and the Bay Area. That
evaluation concluded that major upgrades to the system were required. This planning process
culminated in the SFPUC’s $4.8 billion Water System Improvement Project (WSIP), which is
ongoing. The SFPUC continues to evaluate its aging system for other needed infrastructure
improvements.
SECTION 4B: CUSTOMER BASE
CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a
handful of residential customers not in Palo Alto (Los Altos Hills, primarily). Nearly 20,300
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February 2018 11 | Page
Figure 1: Cost Structure (FY 2017)
50%
40%
10%
Water Purchases
Operations
Capital
Figure 2: Revenue Structure (FY 2017)
99%
1%
Sales of Water
Other Revenue
customers are connected to the water system, approximately 16,500 (81%) of which are
separately metered residential customers and 3,800 (19%) of which are commercial, master-
metered residential, irrigation and fire service customers.
Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is
used for irrigation, and that consumption is heavily weather dependent. It also varies
significantly by season. As a result of these two factors, there is significant variability in the
amount of water that is demanded from the system month to month and year to year.
SECTION 4C: DISTRIBUTION SYSTEM
To deliver water to its customers, CPAU owns roughly 233 miles of mains (which transport the
water from the SFPUC meters at the city’s borders to the customer’s service laterals and
meters), eight wells (to be used in emergencies), five water storage reservoirs (also for
emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow
and demand (due to fire suppression, heavy usage times, etc.). These represent the vast
majority of the infrastructure used to distribute water in Palo Alto.
SECTION 4D: COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 1, water purchase
costs accounted for roughly 50% of the
Water Utility’s costs in FY 2017.
Operational costs represented roughly
40%, and capital investment was
responsible for the remaining 10%. These
percentage distributions are projected to
remain similar over the forecast period
with the capital investment increasing to
approximately 20% of the Water Utility’s
costs and operations declining to
approximately 35%.
The Water Utility receives nearly all of its
revenue from sales of water and the
remainder from capacity and connection
fees, interest on reserves, and other
sources. Appendix A: Water Utility
Financial Forecast Detail shows more
detail on the utility’s cost and revenue
structures. Roughly 15% of the utility’s
revenues come from fixed service
charges, though most of its costs are
fixed.
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SECTION 4E: RESERVES STRUCTURE
CPAU maintains six reserves for its Water Utility to manage various types of contingencies. The
descriptions below summarize these reserves; see Appendix C: Water Utility Reserves
Management Practices for more detailed definitions and guidelines for reserve management:
• Reserve for Commitments: A reserve equal to the utility’s outstanding contract
liabilities for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
• Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including
the General Fund, have a Reappropriations Reserve.
• Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to
accumulate funds for future expenditure on CIP projects and is anticipated to be empty
unless a major one-time CIP expenditure is expected in future years. This CIP can also
act as a contingency reserve for the CIP. This type of reserve is used in other utility funds
(Electric, Gas, and Wastewater Collection) as well.
• Rate Stabilization Reserve: This reserve is intended to be empty unless the city
anticipates one or more large rate increases in the forecast period. In that case, funds
can be accumulated to spread the impact of those future rate increases across multiple
years. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater
Collection) as well.
• Operations Reserve: This is the primary contingency reserve for the Water Utility, and is
used to manage yearly variances from the budget for operational water supply costs.
This type of reserve is used in other utility funds (Electric, Gas, and Wastewater
Collection) as well.
• Unassigned Reserve: This reserve is for any funds not assigned to the other reserves
and is normally empty.
SECTION 4F: COMPETITIVENESS
Table 9 shows the current water bills for residential customers compared to what they would
be under surrounding communities’ rate schedules. CPAU has the highest monthly bills of the
group, although bills for smaller water users are less than in some surrounding communities.
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Table 9: Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of January 2018
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
4 43.41 50.51 37.10 33.20 50.10 22.76
(Winter median) 7 65.91 73.36 57.50 54.62 70.56 39.83
(Annual median) 9 84.27 88.60 71.10 68.90 84.20 51.21
(Summer median) 14 130.17 126.70 105.10 106.51 128.86 79.66
25 231.15 210.50 220.70 199.02 247.97 142.25
* All comparisons use the 5/8” meter size.
SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: LOAD FORECAST
Figure 3 shows 40 years of water consumption history. Average water use has trended
downward over time even as Palo Alto’s population has grown. Significant water use reductions
over the 40-year history were in response to requests to reduce water use in the 1976-77 and
1988-92 drought periods. During these periods, customers invested in efficient equipment and
modified behavior to achieve water reduction goals. Reductions in usage achieved during these
drought periods endured even after those periods. More recently, water sales decreased
substantially during the 2007-2009 recession and during the 2014 - 2017 drought. Usage has
started to recover after the drought, though the level at which usage will finally plateau is
unknown.
Figure 3: Historical Water Consumption
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Figure 4 shows the forecast of water consumption through FY 2028, as denoted by the dotted
line.
Figure 4: Forecast Water Consumption
California has until recently been experiencing drought conditions, and the State had mandated
a 24% water use restriction for Palo Alto up until May 2016. Customers continue to conserve,
but water usage has been increasing. Based on patterns experienced in previous droughts and
in recognition of continued state-level calls for conservation, this forecast assumes
consumption will only rebound by 50% of the difference between pre-drought and drought
levels, then resume with the previous trend of decreasing usage over time.
SECTION 5B: FY 2012 TO FY 2016 COST AND REVENUE TRENDS
Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs
have changed during the last five years as well as how staff projects they will change over the
next decade.
The annual expenses for the water utility rose substantially between 2013 and 2017. The
increases were primarily related to water purchase costs, which increased 21% from $16.6
million in FY 2013 to $20.1 million in FY 2017. Section 6A: Water Purchase Costs contains a
more in-depth discussion of water purchase costs. Operations costs have remained fairly steady
since FY 2014, while CIP costs have generally increased but fluctuated down in certain years.
For example, in FY 2013 a new water main replacement project was delayed to permit
completion of a backlog of projects budgeted in prior years. In FY 2017, delays were in part due
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February 2018 15 | Page
to the rising CIP costs; during that year a water main replacement project that was put out for
bid resulted in very few contractors competing, and project bids that were higher than
budgeted.
Figure 5: Water Utility Expenses, Revenues, and Rate Changes:
Actual Costs through FY 2017 and Projections through FY 2028
SECTION 5C: FY 2017 RESULTS
Actual revenues for FY 2017 were higher than projected ($47.5 million vs. $41.8 million). The
drought was declared over by the Governor during FY 2017, and customers started consuming
more water. Higher sales, along with the drought surcharge in place until the beginning of FY
2018, resulted in higher revenue. The trend of higher connection and capacity fee income
continued during FY 2017. Costs were also lower during FY 2017, mainly due to savings in
operations, administrative fees and some CIP savings, although increased purchase costs from
higher sales offset some of this. Table 10 summarizes the variances from forecast.
Actual Projected
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Table 10: FY 2017, Actual Results vs. Financial Plan Forecast
Net Cost/
(Benefit) (000)
Type of
change
Higher sales revenues $(3,185) Revenue increase
Increased connection and capacity fees, other income (2,453) Revenue increase
Operations and maintenance, general admin costs lower
than expected
(1,634) cost savings
Purchase costs higher than expected 833 cost increase
Net Cost / (Benefit) of Variances $(6,439)
SECTION 5D: FY 2018 PROJECTIONS
Sales levels for FY 2018 were increased based on recent usage trends, and estimated sales
revenues are also estimated to increase by about $4.2 million. Other revenues are also
expected to increase, partially due to the trend of higher connection and capacity fee income,
but also from higher interest income resulting from larger reserve balances. On the expense
side, the most notable change from the FY 2018 budget identified at this time are increases for
CIP expenditures. The effort to rehabilitate mains along University Avenue is anticipated to
have much higher costs than initially projected, and some additional projects were included
after last year’s financial plan was created. Additional expense increases are anticipated from
higher water supply costs associated with higher water sales, as well as some increases to
operations and administrative costs. Table 11 summarizes the changes from last year’s forecast.
Table 11: FY 2018 Change in Projected Results, 2018 Forecast vs 2019 Forecast
Net Cost/ (Benefit)
Type of Change
Higher sales revenues $(4,232) revenue increase
Higher misc. revenues (1,269) revenue increase
Increase in capital projects 4,185 cost increase
Higher operations and purchase budgets 1,233 cost increase
Net Cost / (Benefit) of Variances $(83)
SECTION 5E: FY 2019 – FY 2028 PROJECTIONS
Figure 5 above shows that costs for the Water Utility are increasing through the rest of the
forecast period. Water supply costs are the largest component, and are generally projected to
grow steadily by two to three percent over the coming years. Operations and capital
investment costs are also expected to increase at the same rate of inflation used in the City’s
long-term financial plans (2.5% to 3.0% per year). While future CIP costs have been revised
upwards to reflect the higher construction costs seen in recent projects, there is still
uncertainty with regard to the utility’s future costs for main replacement. See Section 6: Details
and Assumptions for more detail on the costs that make up these projections, as well as the
various assumptions underlying the projections.
As shown in Figure 5, above, staff currently projects revenues to be below expenses for FY 2018
and for the three subsequent years. Revenues exceeded expenses in FY 2017 due to delays in
water main replacement projects, leading to lower annual CIP spending in that year, as well as
drought surcharge revenue that made up for reduced distribution revenue as a result of
drought conservation. As main replacement resumes, the Water Utility requires rate increases
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February 2018 17 | Page
of between 4% and 7% per year through FY 2024 to bring revenues up to match annual
expenses. This forecast assumes the use of the Rate Stabilization Reserve to spread the
increases over multiple years.
Figure 6 below shows reserves trends based on these revenue projections. Staff projects the
Rate Stabilization Reserve to have a zero balance by the end of FY 2021, and the CIP Reserve to
decrease by $2.7 million by the end of FY 2020. Assuming these increases in revenue, staff
expects the Operations Reserve, the main contingency reserve, to remain above the minimum
reserve level and that this reserve will be adequate to meet all identified risks, as discussed in
Section 5F: Risk Assessment and Reserves Adequacy. In addition, the Unassigned reserve
reflects reserve funds in the Operations reserve above the maximum guideline level. With the
expected increase in costs between FY 2018 and FY 2019, these excess reserves will be utilized
quickly and moderate the pace of increases going forward, but must be used before Rate
Stabilization Reserve funds are utilized.
These projections assume that drought restrictions are not re-imposed by the State.
Figure 6: Water Utility Reserves
Actual Reserve Levels for FY 2017 and Projections through FY 2028
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SECTION 5F: RISK ASSESSMENT AND RESERVES ADEQUACY
The Water Utility currently has one contingency reserve, the Operations Reserve, and this
Financial Plan maintains reserves within the approved reserve maximum and minimum
guidelines throughout the forecast period, as shown in Figure 7. Funds in excess of the
maximum as of the end of FY 2018 will be recommended to be moved to the Unassigned
Reserve. Operations Reserve exceed the short term risk assessment for the utility.
Figure 7: Operations Reserve Adequacy
Table 12 summarizes the risk assessment calculation for the Water Utility through FY 2023.
Staff used the same methodology for FY 2024 through FY 2028 as well. The risk assessment
includes the revenue shortfall that could accrue due to:
1. Lower than forecasted sales revenue; and
2. An increase of 10% of planned system improvement CIP expenditures for the budget
year.
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Table 12: Water Risk Assessment ($000)
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Total non-commodity revenue $20,597 $22,039 $23,581 $24,760 $25,330
Max. revenue variance, previous ten years 13% 13% 13% 13% 13%
Risk of revenue loss $2,035 $2,178 $2,330 $2,447 $2,503
CIP Budget $13,695 $13,210 $16,765 $10,709 $11,023
CIP Contingency @10% $1,369 $1,321 $1,676 $1,071 $1,102
Total Risk Assessment value $3,405 $3,499 $4,007 $3,517 $3,605
SECTION 5G: ALTERNATE SCENARIOS
No alternative scenarios were considered as part of this financial plan.
SECTION 5H: LONG-TERM OUTLOOK
CPAU has put its Water Utility on strong footing by investing in its distribution system
infrastructure and emergency water facilities over the last 20 years. The Water System Master
Plan, recently completed and under review, will give CPAU a better picture of the long-term
outlook for its infrastructure and will result in a plan for an appropriate schedule for
infrastructure replacement and upgrades. In addition, CPAU’s water supplier, the SFPUC, has
replaced and seismically strengthened its water transmission infrastructure, which will benefit
Palo Alto and all Hetch Hetchy customers over the long term.
The opportunities for CPAU’s Water Utility to obtain additional supplies over the long term may
be in alternative water supplies such as recycled water, groundwater, and water from the Santa
Clara Valley Water District. These alternatives have been analyzed in the past, and will be
analyzed again in an upcoming update to the Water Integrated Resource Plan. Some of these
alternatives may provide cost savings or increased drought protection.
Climate change may begin to present challenges for the Water Utility over the next 20 to 40
years. Availability of water from SFPUC’s Regional Water System may change with changing
seasonal precipitation patterns. Water consumption patterns may change. Consumption could
increase due to drier weather or decrease as customers become even more focused on water
conservation. Droughts may become more frequent. The risk of wildfire in the foothills could
increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level
rise could result in greater exposure of utility infrastructure to saltwater intrusion or the need
to protect infrastructure from inundation, possibly resulting in higher maintenance and
replacement costs. It could also affect the groundwater aquifer that the utility relies on in
emergencies. Any of these could result in increases to the costs of operating the Water Utility.
As part of the Sustainability/Climate Action Plan, CPAU is currently working on a Climate
Change Adaptation Roadmap that will begin to assess some of these risks.
SECTION 6: DETAILS AND ASSUMPTIONS
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SECTION 6A: WATER PURCHASE COSTS
CPAU purchases all of the potable water supplies from the SFPUC, which owns and operates the
Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water
from the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation
Agency (BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA
member agencies.
The Hetch Hetchy Regional Water System begins with a system of reservoirs and tunnels in the
high Sierra in Yosemite County and water is transported by a gravity-fed pipeline to the Bay
Area. Currently, the SFPUC is in the midst of a $4.8 billion bond-financed capital improvement
program (the Water System Improvement Program, or WSIP) to seismically retrofit the facilities
that transport water to the Bay Area. As of September 2017, nearly 60% of the program (by
dollar value) had been completed, while 40% was under construction.1 This has resulted in
large increases in the annual debt service costs assigned to wholesale customers like Palo Alto.
The wholesale customer debt service share of the WSIP is increasing from $53 million in FY
2010 to over $200 million in FY 2020. As a result, the SFPUC’s wholesale water rate has already
increased from $1.43 per CCF in FY 2009 to $4.10 per CCF in FY 2018, and is forecasted to
increase to over nearly $6.00 per CCF by FY 2023 (these projections are subject to change based
on future SFPUC budget estimates). Figure 8 shows the SFPUC’s actual wholesale water rate
since FY 2009 and a projection through FY 2027. Note that the wholesale water rate decreased
in FY 2014, but the apparent rate decrease is due to a part of the debt being directly paid by the
BAWSCA agencies. This cost is paid in addition to the wholesale water rate and adds about
$0.35 to $0.45 per CCF to the wholesale rate.
The SFPUC’s water rate projections show a less steeply increasing rate trajectory after all of the
debt for the WSIP has been issued. Still, debt service costs are projected to nearly double
between FY 2019 and FY 2028. Parts of SFPUC’s system not included in the WSIP will also need
rehabilitation after the WSIP is completed, and some of these projects are already included in
the SFPUC’s rate projections, such as additional Transmission, Supply & Storage and Treatment
system upgrade projects, slated to start after the WSIP ends. The SFPUC is also conducting
condition assessments of other “up-country” facilities, located in the Sierras, in the coming
years. Current estimates are that $1.8 billion will be needed between FY 2019 and FY 2028 for
these non-WSIP projects, but if these assessments identify other facilities that need
replacement, it may result in additional rate increases as new debt is issued to finance the
projects. For comparison, the WSIP was $4.8 billion.
In December 2017, the SFPUC provided an early estimate for FY 2019 wholesale water rates to
remain at $4.10 per CCF. Staff has yet to receive a new estimate, but there is much uncertainty
surrounding continued lower water usage by the BAWSCA agencies. While drought restrictions
ended in May 2016, customers’ behavior changes are showing a steady increase during the dry
winter of 2018.
1 First Quarter FY 2017-18 WSIP Regional Quarterly Report, http://www.sfwater.org/index.aspx?page=307
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February 2018 21 | Page
As the drought ended in FY 2017 and sales have started increasing, if that trend continues in
upcoming years, rate projections may level out. However, if snow and rain do not materialize in
future years further calls for restricted usage may reoccur.
Figure 8: Historical and Projected SFPUC Wholesale Water Rate
SECTION 6B: OPERATIONS
CPAU’s Water Utility operations include the following activities:
• Administration, a category that includes charges allocated to the Water Utility for
administrative services provided by the General Fund and for Utilities Department
administration, as well as debt service and other transfers. Additional detail on Water
Utility debt service is provided in Section 6D: Debt Service
• Customer Service
• Engineering work for maintenance activities (as opposed to capital activities)
• Operations and Maintenance of the distribution system; and
• Resource Management
Appendix D: Description of Water Utility Operational Activities includes detailed descriptions of
the work associated with each of these activities.
From FY 2013 to FY 2017 Operations costs (excluding debt service, rent, and transfers)
increased 3.5% per year on average (see Figure 9). Operations costs were the main driver. Debt
service costs increased by $2.4 million per year as a result of a bond issued to finance the
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February 2018 22 | Page
Emergency Water Supply and Storage Project. Transfers have varied from year to year, but are
expected to remain relatively low and stable through the forecast period.
Staff project inflationary increases for Operations costs with underlying assumptions for salary
and benefit costs, consumer price index, and other cost projections that match the City’s
long-range financial forecast.
Figure 9: Historical and Projected Operational Costs
SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP)
The Water Utility’s CIP consists of the following types of projects:
• One time projects, or large, non-recurring replacement of system assets (such as
reservoir rehabilitation).
• Water main replacement, which represents the ongoing replacement of aging water
mains, and sometimes the services associated with those mains.
• Ongoing projects, which represent the cost of replacing aging and under-recording
meters and degraded boxes and covers, minor replacements of various types of
distribution system equipment, and the cost of capitalized tools and equipment.
• Customer connections, which represents the cost when the Water Utility installs new
services or upgrades existing services at a customer’s request in response to
Actual
Projected
WATER UTILITY FINANCIAL PLAN
February 2018 23 | Page
development or redevelopment. CPAU charges a fee to these customers to cover the
cost of these projects.
Table 13 shows the FY 2018 projected budget and the five year CIP spending plan, although
these figures are preliminary pending budget discussions starting in May. The ‘committed’
column represents funds committed to contracts for which work has not yet been completed or
invoices paid.
Table 13: Budgeted Water Utility CIP Spending ($000)
The water main replacement program funds the replacement of deteriorating water mains. The
water system consists of over 236 miles of mains, approximately 2,000 fire hydrants, and over
20,000 metered service connections spanning 9 pressure zones over a 26 square mile service
area. CPAU utilizes an asset management database in conjunction with hydraulic modeling
software to prioritize capital improvements. CPAU selects mains for replacement by
researching the maintenance history of the system and identifying those that are undersized,
corroded, and subject to recurring breaks. CPAU uses a scoring system based on criticality in
order to prioritize which mains to replace first, and coordinates with the Public Works street
maintenance program to avoid cutting into newly repaved streets. CPAU replaces
approximately 3 miles of main per year, or 1.3% of the system.
Costs for the water main replacement program are increasing for a variety of reasons:
• Fire Code regulations now mandate fire sprinklers for new residential units. To
accommodate increased fire flows, new main replacement projects require larger
diameter pipe.
• CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs
for this material are slightly higher, though lifecycle costs are lower, and the material
performs better. Joints in distribution mains are the most likely place for failure, and
sections of HDPE pipe can be fused together rather than connected with fittings. In the
long run, this will reduce losses and maintenance costs.
• To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along
with the water mains with new HDPE services. In the past, the existing services were
reconnected, regardless of the material. This new practice costs more in the short run,
but will provide long term benefits.
• Lastly, costs have escalated after the recession. The regional and even national focus
on infrastructure improvement has created labor shortages in the construction market,
leading to higher bids than were seen in the past.
Project Category
Current
Budget*
Spending,
Curr. Yr
Remain.
Budget**Committed FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
One Time Projects 6,123 (606) 5,516 3,578 2,200 2,200 2,200 - -
Water Main Replacement 10,637 (1,387) 9,251 4,780 7,685 6,454 6,647 6,847 7,055
Ongoing Projects 3,086 (518) 2,568 749 2,025 1,982 2,039 2,099 2,161
Customer Connections 773 (373) 401 72 732 754 777 800 824
TOTAL 20,619 (2,884) 17,736 9,180 12,642 11,389 11,663 9,746 10,040
*Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year
**Equal to CIP Reserves (Reserve for Reappropriations + Reserve for Commitments).
WATER UTILITY FINANCIAL PLAN
February 2018 24 | Page
These factors have created some uncertainty in future water main replacement costs. As bids
for new projects, such as upgrades to University Avenue, have consistently come in higher over
the last few years, future main replacement project budgets have been increased from prior
year’s estimates to reflect expected bid estimates. If the cost of water main replacement
continues to rise at its current levels, budgets may need to be revised further. However, CPAU
is nearing the end of a long term water main replacement program initiated in 1993 to replace
the oldest and most degraded parts of the system. Roughly 25% of the system has been
replaced, and the rate of water leaks has decreased 50%. CPAU initiated a master planning
process in FY 2015 that was completed in 2016 to evaluate the current state of the distribution
system and determine the necessary rate of main replacement in future years. Currently the
replacement rate of about 1.3% of the system each year is an 80-year replacement cycle.
In last year’s financial forecast, staff projected a two year delay in new main replacement
projects. However, some of these delayed projects are now moving forward. The University
Avenue Business District project is progressing, and may require a budget increase of $3 million
in FY 2018 to continue. However, there still could be delays due to rising construction costs and
also the ongoing issue with keeping and maintaining qualified staff to design and work on
projects. The Water CIP estimates assume the resumption of annual main replacement
projects, starting in FY 2019. Staff assumes capital investment cost increases in 2024 and
beyond of approximately 3% annually.
Included in the one-time project budget is seismic water system upgrades and/or replacement
for the Corte Madera, Park, Boronda and Dahl reservoirs to improve earthquake resistance.
This work will improve protection from water loss at these reservoirs in a seismic event. If an
earthquake caused a significant water leak, this could lead to loss of water for firefighting, loss
of water storage for drinking, property damage from flooding or mudslides, and environmental
damages. Staff estimates this work will cost $2 million each year for three years beginning in FY
2019. In FY 2021, as part of the Electric fund CIP plan, there is an initiative to move meters to an
Advanced Metering Infrastructure, or AMI, to allow for more advanced monitoring, metering
and billing of the electric usage. This AMI network, however, can also be used to read water
and gas meters as well, and thus the plan to transition all Utility meters to the AMI platform.
Staff has included an additional $1.5 million in FY 2019 and FY 2020 for preparatory work and
meter testing, and $4.16 million for general meter replacement costs in FY2021.
One project not included in this forecast is the seismic strengthening of a large water
transmission line in the foothills. Staff has engaged a consultant to investigate alternatives for
this project. The consultant is analyzing an alternative that involves installing a valve and hose
system that could be used to bypass breaks in the line while they are repaired after an
earthquake. This is a relatively low cost alternative that would not substantially affect the
financial forecast. The study is not finalized yet, however, and if it is determined that the entire
pipeline needs to be replaced, it could cost between $15 million and $20 million, which would
likely require bond financing and would substantially affect the financial forecast.
Ongoing Projects and Customer Connections are projected to cost approximately $2.8 million in
FY 2019 and increase by an average of 2% per year through the end of the forecast period.
Actual expenses for these projects fluctuate annually depending on how many defective meters
are discovered and replaced during routine maintenance, as well as how much development
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February 2018 25 | Page
and redevelopment is going on that prompts the replacement or upgrade of water services. It is
worth noting that property owners pay a fee for water service replacement or expansion during
redevelopment, so when the number of projects go up (meaning higher costs for this activity),
so does fee revenue.
Aside from customer connections, the CIP plan for FY 2019 to FY 2023 is funded by revenue
from utility rates and capacity fees. Appendix B: Water Utility Capital Improvement Program
(CIP) Detail shows the details of the plan.
SECTION 6D: DEBT SERVICE
The Water Utility’s annual debt service is roughly $3.2 million per year. This is related to two
bond issuances, one requiring payments through 2026, the other through 2035. CPAU is in
compliance with all covenants on both bonds.
The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance
construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new
wells, rehabilitation of existing wells and tanks, etc.) and to be retired by 2035. As part of the
‘Build America’ bond program, there is an interest payment subsidy from the Federal
Government of 35%. There is always the possibility that the federal government will choose to
stop payment on this subsidy. The automatic federal spending cuts under the Budget Control
Act (BCA) of 2011 have already reduced the subsidy by $50,000 per year, and if planned cuts
through 2021 proceed without amendment, staff estimates that the subsidy would be reduced
by over $200,000 per year by 2021. The Bipartisan Budget Act of 2013, which relieved some of
the discretionary spending cuts in the 2011 BCA, did not affect automatic cuts to the subsidy,
and actually extended the automatic cuts through 2023.
The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be
retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond
issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital
improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8
million.
Table 14 shows the cost of debt service for the Water Utility’s share of these bond issuances for
the financial forecast period:
Table 14: Water Utility Debt Service ($000)
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
2009 Water Revenue Bonds,
Series A (net of grants)
2,066 2,081 2,097 2,114 2,132 2,151 2,151 2,151
2011 Utility Revenue Bonds,
Series A
656 654 654 656 657 658 658 658
Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available
Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available
Reserves shall be at least 5 times the maximum annual debt service. Note that “Available
Reserves,” as defined for both bonds, include the reserves for the Gas and Electric systems, not
WATER UTILITY FINANCIAL PLAN
February 2018 26 | Page
just the Water system. This Financial Plan maintains compliance with these covenants
throughout the forecast period, as shown in Appendix A: Water Utility Financial Forecast Detail.
The net revenues (but not the reserves) of the Water Utility are also pledged for one other
bond as shown in Table 15 below, even though the Water Utility is not responsible for the debt
service payments. The Water Utility’s reserves or net revenues would only be called upon if the
responsible utilities are unable to make their debt service payments. Staff does not currently
foresee this occurring. Requirements of the California Constitution require that any amounts
advanced from one utility to pay debt service for another utility must be repaid by the
borrowing fund.
Table 15: Other Issuances Secured by the Water Utility’s Revenues or Reserves
Bond Issuance Responsible
Utilities
Annual Debt
Service ($000)
Secured by Water Utility’s:
Net Revenues Reserves
1995 Series A Utility
Revenue Bonds Storm Drain $680 Yes No
SECTION 6E: OTHER REVENUES
The Water Utility receives most of its revenues from sales of water. The next largest source is
connection and capacity fees, which in FY 2017 represented 58% of revenue from sources other
than water sales. The remainder consisted of a variety of miscellaneous charges, transfers and
interest income.
Revenues from connection and capacity fees have more than doubled since FY 2009.
Connection fees are charged to new developments that need new or replacement service
connections, while capacity fees are charged to development that put additional demands on
the water distribution system. Revenue from these sources decreased slightly during the
recession, but has increased substantially since then. Staff is forecasting lower revenue from
these sources in subsequent years, but has increased connection fees that are expected to
offset these reductions to some extent.
Other revenue sources are projected to stay stable through the forecast period, though interest
income always fluctuates depending on changes in interest rates. Some uncertainty also exists
related to the Federal government’s commitment to continuing to pay the interest subsidy on
the Build America Bonds.
SECTION 6F: SALES REVENUES
Staff based the sales revenue projections on the load forecast in Section 5A: Load Forecast and
the projected rate changes shown in Figure 5. Except where stated otherwise, these load
forecasts are based on normal precipitation. Precipitation can vary substantially, and this can
affect revenues substantially. In dry years customers use more water, increasing revenues, and
in wet years they use less. One factor that is difficult to predict is customer usage recovery
post-drought. Usage will continue to rise until customers reach their level of desired
consumption. Where this new ‘normal’ level plateaus at, and the speed with which it reaches
WATER UTILITY FINANCIAL PLAN
February 2018 27 | Page
level, is difficult to predict. Staff will continue to monitor these patterns and adjust projections
accordingly.
SECTION 7: COMMUNICATIONS PLAN
In FY 2019, communications will continue to focus on water utility rate increases, including the
reasons why and how rates may change contingent upon varying precipitation levels.
Additionally, we will focus on how infrastructure costs and rising rates from our wholesale
water supplier, the San Francisco Public Utilities Commission, increases CPAU costs and must be
recovered through rate increases. Rates communications will include a substantial update to
information on a webpage dedicated to Utilities rates, “breaking news” on the Utility home
webpage, discussion in the Proposition 218 rate adjustment notice, bill insert and frequent
educational updates to internal and external stakeholders (customer service, marketing, City
Manager’s Office, UAC, City Council, business and residential customers). Other
communications vehicles will include financial plans, presentations to UAC, Finance Committee,
City Council and any media coverage as a result of the rate increases. CPAU will continue its
outreach about continuing to make water conservation a way of life, regardless of drought or
rain conditions. Messaging will reinforce the importance of water use efficiency, and that
although rates are increasing, efficient usage should mean that a customer should not see a
significant increase in water utility costs on their bills.
Water conservation outreach will promote water use efficiency rebates, incentives and easy
water-saving behaviors through bill inserts, web updates, email newsletters, videos for the web
and television, presentations to customer groups and the use of social media. To keep
customers apprised of the status and accomplishments of CIP projects, a network of project
web pages are maintained. Traffic is driven to the website via ads in publications, newspaper
inserts, and through the comprehensive portfolio of outreach strategies as outlined above.
Safety topics are also emphasized year-round. For all utility outreach, while print materials and
website pages still feature prominently, CPAU is placing more emphasis on digital advertising
content, direct mail, community safety/emergency preparation events and presentations.
WATER UTILITY FINANCIAL PLAN
February 2018 28 | Page
APPENDICES
Appendix A: Water Utility Financial Forecast Detail
Appendix B: Water Utility Capital Improvement Program (CIP) Detail
Appendix C: Water Utility Reserves Management Practices
Appendix D: Description of Water Utility Operational Activities
Appendix E: Sample of Water Utility Outreach Communications
APPENDIX A: WATER UTILITY FINANCIAL FORECAST DETAIL
1 FISCAL YEAR FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028
2
3 WATER SUPPLY
4 Purchases 5,532,947 5,507,153 4,671,433 4,127,085 4,172,038 4,852,150 4,986,189 4,926,355 4,867,238 4,808,832 4,751,126 4,694,112 4,637,783 4,582,129 4,527,144 4,472,818
5 Sales 5,097,392 5,047,148 4,433,016 3,858,825 3,852,185 4,580,430 4,706,962 4,650,479 4,594,673 4,539,537 4,485,063 4,431,242 4,378,067 4,325,530 4,273,624 4,222,340
6
7 BILL AND RATE CHANGES
8 Variable Charge (Supply)11%-16%25%22%9%7%-6%5%5%6%5%7%2%4%2%2%
9 Variable Charge (Distribution)17%30%-16%10%5%-1%13%8%9%6%3%2%1%3%1%2%
10 Service Charge (Distribution)75%9%0%-10%3%0%12%7%7%5%2%1%1%2%2%4%
11 Change in System Average Rate 22%8%0%11%7%2%4%7%7%6%4%4%1%3%1%2%
12 Change in Average Residential Bill 21%7%-1%17%4%-2%3%5%5%5%3%3%1%2%2%3%
13
14 STARTING RESERVES
15 Reappropriations (Non-CIP)- - - - - - - - - - - - - - - -
16 Commitments (Non-CIP)714,000 2,000 347,000 347,000 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273
17 Restricted for Debt Service 3,225,000 3,225,000 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000
18 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 - - - - - - - - - - - - -
19 Capital Reserve - - - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 - - - - - - - -
20 Rate Stabilization Reserve 7,996,000 17,272,000 20,133,000 6,567,000 1,877,437 4,069,000 4,069,000 4,069,000 4,069,000 - - - - - - -
21 Operations Reserve - - - 11,663,836 14,606,828 12,734,948 13,741,000 12,896,930 11,728,634 9,937,852 11,244,928 12,473,900 13,253,905 13,498,028 13,525,556 13,122,780
22 Unassigned - - - - - 7,056,052 4,986,007 - - - - - - - - -
23 TOTAL STARTING RESERVES 12,935,000 21,499,000 24,811,000 25,893,836 22,686,828 30,023,369 28,959,376 23,129,299 19,234,907 13,375,125 14,682,201 15,911,173 16,691,178 16,935,301 16,962,829 16,560,053
24
25 REVENUES
26 Net Sales 36,647,924 39,029,262 33,654,549 36,136,644 41,657,382 43,189,169 45,946,518 48,550,827 51,381,619 53,992,359 55,490,378 56,986,955 57,211,828 58,435,519 58,630,830 59,331,362
27 Other Revenues and Transfers In 6,811,461 4,053,920 7,504,848 3,258,936 5,829,851 4,702,923 3,671,998 3,735,314 3,800,902 3,870,756 3,942,093 4,034,793 4,129,947 4,227,619 4,327,878 4,430,793
28 TOTAL REVENUES 43,459,385 43,083,182 41,159,397 39,395,579 47,487,233 47,892,092 49,618,516 52,286,141 55,182,521 57,863,115 59,432,471 61,021,747 61,341,775 62,663,138 62,958,709 63,762,155
29
30 EXPENSES
31 Water Purchases 16,605,351 15,705,288 15,669,935 17,626,020 20,075,322 22,061,917 22,611,475 23,355,859 24,190,148 25,318,382 26,207,075 27,533,642 27,680,356 28,458,072 28,558,184 28,658,677
32 Operating Expenses 679.9%2.9%5.8%-54.7%158.5%
33 Administration
34 Allocated Charges 2,422,880 2,366,077 2,342,985 2,953,291 3,151,373 2,438,768 2,490,375 2,540,960 2,597,475 2,657,609 2,719,082 2,773,765 2,829,463 2,911,318 2,966,458 3,034,716
35 Rent 1,911,963 2,192,454 2,249,457 1,803,087 1,720,711 2,931,563 3,092,799 3,120,634 3,148,720 3,177,058 3,208,829 3,240,917 3,273,326 3,306,059 3,339,120 3,372,511
36 Debt Service 3,219,165 3,220,208 3,218,869 3,222,606 3,219,316 3,222,669 3,220,858 3,220,638 3,222,843 3,223,563 3,224,553 3,224,553 3,224,553 3,224,553 3,224,553 3,224,553
37 Transfers and Other Adjustments 2,241,793 335,808 63,612 (377,200) (256,608) 391,302 399,129 407,111 415,253 423,558 432,030 432,030 432,030 432,030 432,030 432,030
38 Subtotal, Administration 9,795,801 8,114,546 7,874,923 7,601,785 7,834,792 8,984,302 9,203,160 9,289,342 9,384,290 9,481,788 9,584,493 9,671,264 9,759,372 9,873,960 9,962,160 10,063,809
39 Resource Management 557,910 570,040 488,331 592,744 868,038 1,089,530 1,121,904 1,163,283 1,204,080 1,241,610 1,278,957 1,312,198 1,344,159 1,378,016 1,399,695 1,432,650
40 Operations and Mtc 4,944,064 4,986,274 5,283,426 5,038,570 5,290,549 6,426,788 6,623,269 6,878,570 7,128,663 7,356,594 7,583,011 7,784,574 7,977,523 8,175,463 8,301,450 8,497,350
41 Engineering (Operating)338,659 381,502 358,128 282,472 355,852 397,451 409,827 426,073 441,926 456,290 470,543 483,234 495,348 507,516 515,230 527,406
42 Customer Service 1,584,759 1,677,926 1,821,447 2,076,559 1,616,008 2,193,588 2,262,089 2,352,159 2,439,994 2,519,510 2,598,397 2,668,637 2,735,657 2,802,749 2,845,252 2,912,511
43 Allowance for Unspent Budget - - - - - (464,458) (477,834) (494,626) (511,325) (526,854) (542,343) (556,130) (569,447) (583,993) (593,360) (607,300)
44 Subtotal, Operating Expenses 17,221,192 15,730,288 15,826,254 15,592,128 15,965,239 18,627,201 19,142,414 19,614,801 20,087,627 20,528,938 20,973,059 21,363,777 21,742,612 22,153,711 22,430,426 22,826,428
45 Capital Program Contribution 1,068,841 8,335,605 8,580,372 9,082,021 4,110,131 8,266,967 13,694,704 13,209,873 16,764,528 10,708,718 11,023,365 11,344,323 11,674,684 12,023,827 12,372,875 12,736,548
46 TOTAL EXPENSES 34,895,385 39,771,182 40,076,561 42,300,170 40,150,692 48,956,085 55,448,593 56,180,534 61,042,304 56,556,039 58,203,499 60,241,742 61,097,652 62,635,610 63,361,485 64,221,653
47 9.04
48 ENDING RESERVES
49 Reappropriations (Non-CIP)- - - - - - - - - - - - - - - -
50 Commitments (Non-CIP)2,000 347,000 347,000 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273 177,273
51 Restricted for Debt Service 3,225,000 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000
52 Emergency Plant Replacement 1,000,000 1,000,000 - - - - - - - - - - - - - -
53 Capital Reserve - - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 - - - - - - - - -
54 Rate Stabilization Reserve 17,272,000 20,133,000 6,567,000 1,877,437 4,069,000 4,069,000 4,069,000 4,069,000 - - - - - - - -
55 Operations Reserve - - 11,663,836 14,606,828 12,734,948 13,741,000 12,896,930 11,728,634 9,937,852 11,244,928 12,473,900 13,253,905 13,498,028 13,525,556 13,122,780 12,663,281
56 Unassigned - - - - 7,056,052 4,986,007 - - - - - - - - - -
57 TOTAL ENDING RESERVES 21,499,000 24,811,000 25,893,836 22,686,828 30,023,369 28,959,376 23,129,299 19,234,907 13,375,125 14,682,201 15,911,173 16,691,178 16,935,301 16,962,829 16,560,053 16,100,554
58
59 OPERATIONS RESERVE
60 Min (60 days of non-capital expenses)- - 5,230,611 5,145,323 6,320,551 7,015,601 7,197,171 7,403,859 7,625,531 7,890,478 8,116,649 8,398,943 8,485,334 8,680,756 8,742,700 8,824,316
61 Target (90 days of non-capital expenses)- - 9,395,240 8,698,557 9,527,750 10,378,300 10,847,792 11,159,004 11,493,609 11,893,618 12,235,541 12,668,887 12,808,565 13,116,527 13,219,432 13,354,222
62 Max (120 days of non-capital expenses)- - 13,559,870 12,251,790 12,734,948 13,741,000 14,498,412 14,914,150 15,361,686 15,896,759 16,354,432 16,938,832 17,131,796 17,552,298 17,696,164 17,884,127
63 Risk Assessment Value 2,481,768 2,677,436 2,229,786 2,645,469 3,404,677 3,498,658 4,006,561 3,517,485 3,605,222 3,662,346 3,720,662 3,806,640 3,893,630 4,036,251
64
65 DEBT SERVICE COVERAGE RATIO
66 Net Revenues (125% of Debt Service)951%876%878%931%1020%1163%1196%1234%1274%1322%1363%1416%1433%1470%1481%1497%
67 Available Reserves (5x Debt Service)*5.7 6.6 6.9 6.0 8.3 7.9 6.1 4.9 3.1 3.5 3.9 4.1 4.2 4.2 4.1 3.9
Appendix A (continued)
1 FISCAL YEAR FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028
2
3 REVENUES
4 Net Sales 84%91%82%92%88%90%93%93%93%93%93%93%93%93%93%93%
5 Other Revenues and Transfers In 16%9%18%8%12%10%7%7%7%7%7%7%7%7%7%7%
6 TOTAL REVENUES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
7
8 EXPENSES
9 Water Purchases 48%39%39%42%50%45%41%42%40%45%45%46%45%45%45%45%
10 Operating Expenses
11 Administration
12 Allocated Charges 7%6%6%7%8%5%4%5%4%5%5%5%5%5%5%5%
13 Rent 5%6%6%4%4%6%6%6%5%6%6%5%5%5%5%5%
14 Debt Service 9%8%8%8%8%7%6%6%5%6%6%5%5%5%5%5%
15 Transfers and Other Adjustments 6%1%0%-1%-1%1%1%1%1%1%1%1%1%1%1%1%
16 Subtotal, Administration 28%20%20%18%20%18%17%17%15%17%16%16%16%16%16%16%
17 Resource Management 2%1%1%1%2%2%2%2%2%2%2%2%2%2%2%2%
18 Operations and Mtc 14%13%13%12%13%13%12%12%12%13%13%13%13%13%13%13%
19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%
20 Customer Service 5%4%5%5%4%4%4%4%4%4%4%4%4%4%4%5%
21 Allowance for Unspent Budget 0%0%0%0%0%-1%-1%-1%-1%-1%-1%-1%-1%-1%-1%-1%
22 Subtotal, Operating Expenses 49%40%39%37%40%38%35%35%33%36%36%35%36%35%35%36%
23 Capital Program Contribution 3%21%21%21%10%17%25%24%27%19%19%19%19%19%20%20%
24 TOTAL EXPENSES 100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
25
26 RISK ASSESSMENT DETAIL
27 Distribution Revenue Variance 1,623,731 1,769,234 1,818,772 1,818,772 2,035,206 2,177,671 2,330,108 2,446,613 2,502,885 2,527,914 2,553,193 2,604,257 2,656,342 2,762,596
28 10% CIP Program Contingency 858,037 908,202 411,013 826,697 1,369,470 1,320,987 1,676,453 1,070,872 1,102,337 1,134,432 1,167,468 1,202,383 1,237,287 1,273,655
29 Total Risk Asssessment Value 2,481,768 2,677,436 2,229,786 2,645,469 3,404,677 3,498,658 4,006,561 3,517,485 3,605,222 3,662,346 3,720,662 3,806,640 3,893,630 4,036,251
30 Projected Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,000 12,896,930 11,728,634 9,937,852 11,244,928 12,473,900 13,253,905 13,498,028 13,525,556 13,122,780 12,663,281
31 Operations Reserve, % of Risk Value 470%546%571%519%379%335%248%320%346%362%363%355%337%314%
32
33 OPERATIONS RESERVE
34 Min (60 days of non-capital expenses)- - 5,230,611 5,145,323 6,320,551 7,015,601 7,197,171 7,403,859 7,625,531 7,890,478 8,116,649 8,398,943 8,485,334 8,680,756 8,742,700 8,824,316
35 Target (90 days of non-capital expenses)- - 9,395,240 8,698,557 9,527,750 10,378,300 10,847,792 11,159,004 11,493,609 11,893,618 12,235,541 12,668,887 12,808,565 13,116,527 13,219,432 13,354,222
36 Max (120 days of non-capital expenses)- - 13,559,870 12,251,790 12,734,948 13,741,000 14,498,412 14,914,150 15,361,686 15,896,759 16,354,432 16,938,832 17,131,796 17,552,298 17,696,164 17,884,127
37 Risk Assessment Value 2,481,768 2,677,436 2,229,786 2,645,469 3,404,677 3,498,658 4,006,561 3,517,485 3,605,222 3,662,346 3,720,662 3,806,640 3,893,630 4,036,251
38
39 DEBT SERVICE COVERAGE RATIO
40 Net Revenues (125% of Debt Service)951%876%878%931%1020%1163%1196%1234%1274%1322%1363%1416%1433%1470%1481%1497%
41 Available Reserves (5x Debt Service)*5.7 6.6 6.9 6.0 8.3 7.9 6.1 4.9 3.1 3.5 3.9 4.1 4.2 4.2 4.1 3.9
42 *For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of other utilities to meet its debt covenants.
WATER UTILITY FINANCIAL PLAN
February, 2017 31 | Page
APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Project #Project Name
Reappropriated / Carried
Forward from Previous
Years
Current Year
Funding
Proposed Budget
Amendments
Spending, Current
Year
Remaining in CIP
Reserve Fund Commitments FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
ONE TIME PROJECTS
WS-07000 Regulation Station Imp.776,358 196,054 - - 972,412 624,149 - - - - -
WS-07001 Water Recycling Facilities - 395,649 - - 395,649 - - - - - -
WS-08001 Water Reservoir Coating 1,130,852 - - (152,532) 978,320 621,825 - - - - -
WS-09000 Seismic Water System 2,495,234 1,128,594 - (453,807) 3,170,021 2,332,347 2,000,000 2,000,000 2,000,000 - -
WS-15004 Water System Master Plan 16 - - - 16 16 - - - - -
WS-19000 Mayfield Reservoir - - - - - - 200,000 200,000 200,000 - -
Subtotal, One-time Projects 4,402,460 1,720,297 - (606,339) 5,516,418 3,578,337 2,200,000 2,200,000 2,200,000 - -
WATER MAIN REPLACEMENT PROGRAM
WS-11000 WMR-Project 25 381,939 - - - 381,939 - - - - - -
WS-12001 WMR- Project 26 5,410,048 1,143,000 3,027,320 (1,386,803) 8,193,565 4,780,180 600,000 - - - -
WS-13001 WMR - Project 27 80,000 595,000 - - 675,000 - 6,500,000 - - - -
WS-14001 WMR - Project 28 - - - - - - 585,107 5,851,070 - - -
WS-15002 WMR - Project 29 - - - - - - - 602,660 6,026,602 - -
WS-16001 WMR - Project 30 - - - - - - - - 620,740 6,207,400 -
WS-19001 WMR - Project 31 - - - - - - - - - 639,362 6,396,320
WS-20000 WMR - Project 32 - - - - - - 658,820
Subtotal, Water Main Replacement Prog.5,871,987 1,738,000 3,027,320 (1,386,803) 9,250,504 4,780,180 7,685,107 6,453,730 6,647,342 6,846,762 7,055,140
ONGOING PROJECTS
WS-80014 Services/Hydrants 11,158 412,000 - (231,440) 191,718 30,534 424,360 437,091 450,204 463,710 477,621
WS-80015 Water Meters - 565,000 - (87,733) 477,267 - 500,000 515,000 530,450 546,364 562,755
WS-02014 W-G-W Utility GIS Data 148,826 402,628 - (43,526) 507,928 405,300 442,890 456,177 469,862 483,958 498,477
WS-13002 Equipment/Tools - 50,000 - - 50,000 - 50,000 50,000 50,000 50,000 50,000
WS-11003 Dist. Sys. Improvements 863,136 247,000 - (128,810) 981,326 126,122 354,000 261,620 269,469 277,553 285,880
WS-11004 Supply Sys. Improvements 139,213 247,000 - (26,493) 359,720 187,227 254,000 261,620 269,469 277,553 285,880
Subtotal, Ongoing Projects 1,162,333 1,923,628 - (518,002) 2,567,959 749,183 2,025,250 1,981,508 2,039,454 2,099,138 2,160,613
CUSTOMER CONNECTIONS (FEE FUNDED)
WS-80013 Water System Extensions 62,665 710,700 - (372,686) 400,679 71,918 732,021 753,981 776,601 799,899 823,896
Subtotal, Customer Connections 62,665 710,700 - (372,686) 400,679 71,918 732,021 753,981 776,601 799,899 823,896
GRAND TOTAL 11,499,445 6,092,625 3,027,320 (2,883,830)17,735,560 9,179,618 12,642,378 11,389,219 11,663,397 9,745,799 10,039,649
Funding Sources
Connection/Capacity Fees 902,280 - 929,348 957,228 985,946 1,015,524 1,045,990
Other Utility Funds (Asset Mgmt, GIS Systems)268,418 - 295,260 304,118 313,242 322,640 332,320
Water Service Hydrant Replacement 1,224,608 1,261,346 1,299,188 1,338,164 1,378,310
Utility Rates 4,921,927 3,027,320 10,193,162 8,866,527 9,065,021 7,069,471 7,283,029
CIP-RELATED RESERVES DETAIL
6/30/2017
(Actual)
6/30/2018
(Unaudited)
Reappropriations (excl. Bond Funded)1,292,081 8,555,942
Commitments (excl. Bond Funded)10,207,364 9,179,618
WATER UTILITY FINANCIAL PLAN
February, 2017 32 | Page
APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Water Utility
Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, for the Water Utility Financial Plan
delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial
Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Water Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Water Utility’s Capital
Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 8 (Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all contracts in force for the Water Utility at
that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
WATER UTILITY FINANCIAL PLAN
February, 2017 33 | Page
Section 5. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels
are calculated for each fiscal year of the Financial Planning Period based on the levels of
CIP expense budgeted for that year.
Minimum Level 12 months of budgeted CIP expense
Maximum Level 24 months of budgeted CIP expense
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added or removed from to that reserve
as a result of a change in contractual commitments related to CIP projects. Any other
additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level:
i) Funds held in the Reserve for Commitments may be counted as part of the CIP
Reserve for the purpose of determining compliance with the CIP Reserve minimum
guideline level.
ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve
reaching its minimum level by the end of the next fiscal year. For example, if the CIP
Reserve is below its minimum level at the end of FY 2017, staff must present a plan
by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In
addition, staff may present, and the Council may adopt, an alternative plan that
takes longer than one year to replenish the reserve, or that does so in a shorter
period of time.
d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds
may be added to this reserve. If there are funds in this reserve in excess of the
maximum level staff must propose to transfer these funds to another reserve or return
them to ratepayers in the next Financial Plan. Staff may also seek City Council to
approve holding funds in this reserve in excess of the maximum level if they are held for
a specific future purpose related to the CIP.
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and
held to manage the trajectory of future year rate increases. Withdrawal of funds from
the Rate Stabilization Reserve requires Council action. If there are funds in the Rate
Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility
Financial Plan must result in the withdrawal of all funds from this Reserve by the end of
the next Financial Planning Period.
WATER UTILITY FINANCIAL PLAN
February, 2017 34 | Page
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves
described in Section 3-Section 6 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for
that year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Water Utility shall be designed
to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Water Utility’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section
8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the
City Council must include a plan to assign them to a specific purpose or return them to the
Water Utility ratepayers by the end of the first fiscal year of the next Financial Planning
Period. For example, if there were funds in the Unassigned Reserves at the end of FY 2015,
and the next Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall
include a plan to return or assign any funds in the Unassigned Reserve by the end of
FY 2016. Staff may present an alternative plan that retains these funds or returns them over
a longer period of time.
WATER UTILITY FINANCIAL PLAN
February, 2017 35 | Page
APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES
This appendix describes the activities associated with the various operational activities referred
to in Section 6B: Operations of this Financial Plan.
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City’s General Fund staff, as well as shared communications services, CPAU administrative
overhead, and billing system maintenance costs. This category also includes Water Utility debt
service and rent paid to the General Fund for the land associated with reservoirs and various
other facilities.
Customer Service: This category includes the Water Utility’s share of the call center, meter
reading, collections, and billing support functions. Billing support encompasses staff time
associated with bill investigations and quality control on certain aspects of the billing process. It
does not include maintenance of the billing system itself, which is included in Administration.
This category also includes CPAU’s key account representatives, who work with large
commercial customers who have more complex requirements for their water services.
Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
Operations and Maintenance: This category includes the costs of a variety of distribution
system maintenance activities, including:
• investigating reports of damaged mains or services and performing emergency repairs;
• testing and operating valves;
• monitoring water quality and reservoir levels;
• monitoring the status of the different pressure zones;
• flushing water at hydrants and other closed end points of the system;
• building and replacing water services for new or redeveloped buildings; and
• testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
• the Field Services team (which does field research of various customer service issues);
• the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal tanks and reservoirs); and
• the General Services team (which manages and maintains equipment, paves and
restores streets after gas, water, or sewer main replacements, and provides welding
services)
Resource Management: This category includes water procurement, contract management,
water resource planning, interaction with BAWSCA, the SFPUC, and the SCVWD, and tracking of
legislation and regulation related to the water industry.
February, 2017 36 | Page
APPENDIX E: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS
Attachment C
180308 jb 6054082 1
Resolution No. _____
Resolution of the Council of the City of Palo Alto Increasing Water Rates by
4% by Amending Rate Schedules W-1 (General Residential Water Service), W-2
(Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4
(Residential Master-Metered and General Non-Residential Water Service),
and W-7 (Non-Residential Irrigation Water Service)
R E C I T A L S
A. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of the
City of Palo Alto may by resolution adopt rules and regulations governing utility services, fees and
charges.
B. On , 2018, the City Council held a full and fair public hearing regarding the
proposed rate increase and considered all protests against the proposals.
C. As required by Article XIII D, Section 6 of the California Constitution and applicable
law, notice of the 2018 public hearing was mailed to all City of Palo Alto
Utilities water customers by , 2018.
D. The City Clerk has tabulated the total number of written protests presented by the
close of the public hearing, and determined that it was less than fifty percent (50%) of the total
number of customers and property owners subject to the proposed water rate amendments,
therefore a majority protest does not exist against the proposal.
The Council of the City of Palo Alto hereby RESOLVES as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule W-1 (General Residential Water Service) is hereby amended to read as attached and
incorporated. Utility Rate Schedule W-1, as amended, shall become effective July 1, 2018.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule W-2 (Water Service from Fire Hydrants) is hereby amended to read as attached and
incorporated. Utility Rate Schedule W-2, as amended, shall become effective July 1, 2018.
SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule W-3 (Fire Service Connections) is hereby amended to read as attached and incorporated.
Utility Rate Schedule W-3, as amended, shall become effective July 1, 2018.
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule W-4 (Residential Master-Metered and General Non-Residential Water Service) is hereby
amended to read as attached and incorporated. Utility Rate Schedule W-4, as amended, shall become
effective July 1, 2018.
SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule W-7 (Non-Residential Irrigation Water Service) is hereby amended to read as attached and
incorporated. Utility Rate Schedule W-7, as amended, shall become effective July 1, 2018.
SECTION 6. The City Council finds as follows:
Attachment C
180308 jb 6054082 2
a. Revenues derived from the water rates approved by this resolution do not exceed the
funds required to provide water service.
b. Revenues derived from the water rates approved by this resolution shall not be used
for any purpose other than providing water service, and the purposes set forth in Article VII, Section 2,
of the Charter of the City of Palo Alto.
c. The amount of the water rates imposed upon any parcel or person as an incident of
property ownership shall not exceed the proportional cost of the water service attributable to the
parcel.
SECTION 7. The Council finds that the fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor that are
not provided to those not charged, and do not exceed the reasonable costs to the City of providing
the service or product.
SECTION 8. The Council finds that the adoption of this resolution changing water rates
to meet operating expenses, purchase supplies and materials, meet financial reserve needs and
obtain funds for capital improvements necessary to maintain service is not subject to the California
Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and
Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the staff report and all
attachments presented to Council, the Council incorporates these documents herein and finds that
sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA
exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
____________________________ City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
_____________________________ Assistant City Attorney City Manager
_____________________________
Director of Utilities
____________________________
Director of Administrative Services
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-1 Effective 7-1-20187
dated 7-1-20176 Sheet No W-1-1
A. APPLICABILITY:
This schedule applies to all separately metered single -family residential dwellings receiving Wwater
Sservices from the City of Palo Alto Utilities.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wwater Sservices.
C. RATES:
Per Meter
Monthly Service Charge: Per Month
For 5/8-inch meter ..................................................................................................... $ 16.7718.71
For 3/4 inch meter ..................................................................................................... 22.6025.21
For 1 inch meter ........................................................................................................ 34.2638.22
For 1 1/2 inch meter .................................................................................................. 63.4070.73
For 2-inch meter ........................................................................................................ 98.37109.75
For 3-inch meter ........................................................................................................ 209.11233.29
For 4-inch meter ........................................................................................................ 372.31415.36
For 6-inch meter ........................................................................................................ 762.81851.02
For 8-inch meter ........................................................................................................1,403.94566.29
For 10-inch meter ......................................................................................................2,219.92476.63
For 12-inch meter .......................................................................................................32,919.34256.93
Commodity Rate: (To be added to Service Charge and applicable to all pressure zones.)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Tier 1 usage ........................................................................................................................ $6.66
Tier 2 usage (All usage over 100% of Tier 1) ........................................................................ 9.4818
ATTACHMENT D
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-2 Effective 7-1-20187
dated 7-1-20176 Sheet No W-1-2
Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable cCommodity Rrate for Tier 1 and
Tier 2 Wwater usage when the City Council has determined that a Wwater reduction level is in effect
for the City as described in Section D.3. The drought surcharges in the table below are measured in
dollars per hundred cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Tier 1 0.20 0.43 0.64
Tier 2 0.58 1.21 1.85
Temporary Service – Developers
Temporary unmetered service to residential
subdivision developers, per connection ........................................................................ $6.00
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a Ccustomer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2. Calculation of Usage Tiers
Tier 1 Wwater usage shall be calculated and billed based upon a level of 0.2 ccf per day
rounded to the nearest whole ccf, based on Mmeter reading days of Sservice. As an
example, for a 30 day bill, the Tier 1 level would be 0 through 6 ccf. For further
discussion of bill calculation and proration, refer to Rule and Regulation 11.
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-1-3 Effective 7-1-20187
dated 7-1-20176 Sheet No W-1-3
3. Drought Surcharge
During period of Wwater shortage or restrictions on local Wwater use, the City Council
may, by resolution, declare the need for citywide Wwater conservation at the 10/15%,
20% or 25% level. While such a resolution is in effect, a drought surcharge will apply.
The purpose of the dDrought sSurcharge is to recover revenues lost as a result of reduced
consumption.
{End}
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-2-1 Effective 7-1-20187
dated 7-1-20167 Sheet No W-2-1
A. APPLICABILITY: This schedule applies to all Wwater taken from fire hydrants for construction, maintenance, and
other uses in conformance with provisions of a Hydrant Meter Permit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wwater Sservices.
C. RATES: 1. Monthly Service Charge.
METER SIZE
5/8 inch ........................................................................................................................... 50.00
3 inch ........................................................................................................................... 125.00 2. Commodity Rate: (per hundred cubic feet) ................................................................ $7.687.80 3. Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable CCommodity Rrate when the
City Council has determined that a Wwater reduction level is in effect for the City as described
in Section D.5. The drought surcharges in the table below are measured in dollars per hundred
cubic feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.26 0.53 0.77
D. SPECIAL NOTES: 1. Monthly charges shall include the applicable monthly Sservice Ccharge in addition to usage billed
at the commodity rate. 2. Any person or company applicant using a hydrant without first obtaining a valid Hydrant Meter
Permit or any permittee using a hydrant without a Hydrant Meter Permit shall pay a fee of $50.00
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-2-2 Effective 7-1-20187
dated 7-1-20167 Sheet No W-2-2
for each day of such use in addition to all other costs and fees provided in this schedule. A hydrant
permit may be denied or revoked for failure to pay such fee. 3. A Mmeter deposit of $750.00 may be charged any applicant for a Hydrant Meter Permit as a
prerequisite to the issuance of a permit and Mmeter(s). A charge of $50.00 per day will be added
for delinquent return of hydrant Mmeters. A fee will be charged for any Mmeter returned with
missing or damaged parts. 4. Any person or company using a fire hydrant improperly or without a permit, or who draws Wwater
from a hydrant without a Mmeter installed and properly recording usage shall, in addition to all
other applicable charges be subject to criminal prosecution pursuant to the Palo Alto Municipal
Code.
5. During period of Wwater shortage or restrictions on local Wwater use, the City Council may, by
resolution, declare the need for citywide Wwater conservation at the 10/15%, 20% or 25% level.
While such a resolution is in effect, a drought surcharge will apply. The purpose of the dDrought
sSurcharge is to recover revenues lost as a result of reduced consumption.
{End}
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-3-1 Effective 7-1-20186
dated 97-1-20165 Sheet No W-3-1
A. APPLICABILITY:
This schedule applies to all public fire hydrants and private fire Sservice connections.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wwater Sservices.
C. RATES:
1. Monthly Service Charges
Public Fire Hydrant .................................................................................................... $5.00
Private Fire Service:
2-inch connection .......................................................................................................$3.794.23
4-inch connection .......................................................................................................23.4226.13
6-inch connection ....................................................................................................... 68.0375.90
8-inch connection .......................................................................................................144.97161.73
10-inch connection .....................................................................................................260.70290.85
12-inch connection .....................................................................................................421.11469.81
2. Commodity (To be added to Service Charge unless Wwater is used for fire extinguishing
or testing purposes.)
Per Hundred Cubic Feet
All water usage........................................................................................................... $10.00
D. SPECIAL NOTES:
1. Service under this schedule may be discontinued if Wwater is used for any purpose other
than fire extinguishing or testing and repairing the fire extinguishing facilities. Using
hydrants and fire Sservices for other purposes is illegal and will be subject to the
commodity charge as noted above, fines, and criminal prosecution pursuant to the Palo
Alto Municipal Code.
2. For a combination Wwater and fire Sservice, the general Wwater Sservice schedule shall
apply.
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-3-2 Effective 7-1-20186
dated 97-1-20165 Sheet No W-3-2
3. Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire
Services.
4. Repairs and testing of fire extinguishing facilities are not considered unauthorized use of
Wwater if records and documentation are supplied by the Ccustomer.
{End}
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-4-1 Effective 7-1-20178
dated 7-1-20176 Sheet No W-4-1
A. APPLICABILITY:
This schedule applies to Water Services to non-residential buildings, and multi-family residential
dwellings served through a Master-Meter. water service in the City of Palo Alto and its distribution
area. This schedule is also applicable to multi-family residential customers served through a master
meter.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wwater Sservices.
C. RATES: Per Meter
Monthly Service Charge Per Month
For 5/8-inch meter .................................................................................... $ 16.7718.71
For 3/4-inch meter .................................................................................... 22.6025.21
For 1-inch meter .................................................................................... 34.2638.22
For 1 ½-inch meter .................................................................................... 63.4070.73
For 2-inch meter .................................................................................... 98.37109.75
For 3-inch meter .................................................................................... 209.11233.29
For 4-inch meter .................................................................................... 372.31415.36
For 6-inch meter .................................................................................... 762.81851.02
For 8-inch meter ....................................................................................1,403.94566.29
For 10-inch meter ....................................................................................2,219.92476.63
For 12-inch meter ....................................................................................32,919.34256.93
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 7.687.80
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-4-2 Effective 7-1-20178
dated 7-1-20176 Sheet No W-4-2
Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable Ccommodity Rrate when the City
Council has determined that a Wwater reduction level is in effect for the City as described in
Section D.2. The drought surcharges in the table below are measured in dollars per hundred cubic
feet (ccf).
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.26 0.53 0.77
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a Ccustomer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2. Drought Surcharge
During period of Wwater shortage or restrictions on local Wwater use, the City Council
may, by resolution, declare the need for citywide Wwater conservation at the 10/15%,
20% or 25% level. While such a resolution is in effect, a drought surcharge will apply.
The purpose of the Ddrought sSurcharge is to recover revenues lost as a result of reduced
consumption.
{End}
NON-RESIDENTIAL IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-7-1 Effective 7-1-20187
dated 7-1-20176 Sheet No W-7-1
A. APPLICABILITY:
This schedule applies to non-residential Wwater Wservice supplying dedicated irrigation Mmeters in
the City of Palo Alto and its distribution area.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wwater Sservices.
C. RATES:
Per Meter
Monthly Service Charge Per Month
For 5/8-inch meter .................................................................................... $ 16.7718.71
For 3/4-inch meter .................................................................................... 22.6025.21
For 1-inch meter .................................................................................... 34.2638.22
For 1 1/2 inch meter .................................................................................... 63.4070.73
For 2-inch meter .................................................................................... 98.37109.75
For 3-inch meter .................................................................................... 209.11233.29
For 4-inch meter .................................................................................... 372.31415.36
For 6-inch meter .................................................................................... 762.81851.02
For 8-inch meter ....................................................................................1,403.94566.29
For 10-inch meter ....................................................................................2,219.92476.63
For 12-inch meter ....................................................................................32,919.34256.93
Commodity Rates: (to be added to Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $ 9.089.37
Drought Surcharges (deactivated):
A drought surcharge will be added to the Customer’s applicable cCommodity Rrate when the City
Council has determined that a Wwater reduction level is in effect for the City as described in Section
D.2. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf).
NON-RESIDENTIAL IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No W-7-2 Effective 7-1-20187
dated 7-1-20176 Sheet No W-7-2
Water Usage
Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%)
Surcharge 0.53 1.25 2.02
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or taxes. On a Ccustomer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
2. Drought Surcharge
During period of Wwater shortage or restrictions on local Wwater use, the City Council
may, by resolution, declare the need for citywide Wwater conservation at the 10/15%,
20% or 25% level. While such a resolution is in effect, a drought surcharge will apply.
The purpose of the Ddrought Ssurcharge is to recover revenues lost as a result of reduced
consumption.
{End}