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Home My WebLink About2003-05-15 City CouncilTO:HONOI~BLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: UTILITIES ATTENTION:FINANCE COMMITTEE DATE: SUBJECT: MAY 15, 2003 CMR: 267:03 ADOPTION OF A RESOLUTION AMENDING VARIOUS WATER RATE SCHEDULES TO EFFECT A WATER IL~TE INCREASE RECOMMENDATION Staff and the Utilities Advisory C ommission (UAC) recommend that the City Council adopt the attached resolution to increase water rates approximately $2.65 million, to be effective July 1, 2003. DISCUSSION The Water Utility is facing a dramatic increase in expenditures at the same time that sales revenues are down slightly due to economic conditions. Purchase water costs from the San Francisco Public Utilities Comn:ission (SFPUC) are projected to increase $1.1 million in FY 03-04 and another $1.1 million in 04-05. In addition, the Water.Utility Capital Improvement Project expenditures are expected to increase from $5.0 million to $11.7 million during 2003-04, which will reduce the Rate Stabilization Reserve (RSR) below its minimum guideline level. To mitigate this dramatic rise in costs and to replenish the RSR, staff is proposing consecutive 15 percent retail rate increases in 2003- 04 and 2004-05. The proposed 2003-04 rate increase will be spread to all customer classes based on the system average rate increase. Staff also evaluated the impact of alternative rate proposals. I f the two proposed rate increases are combined, the financial impact on residents and businesses dm-ing this recession could be difficult. Therefore staff proposes to spread the increase over a two- year period. On the other hand, if the rate increase is lower than proposed, the Rate Stabilization Reserve balance could end up with a negative balance. CMR:267:03 Page 1 of 2 BOARD/COMMISSION REVIEW AND RECOMMENDATIONS The UAC reviewed and approved this recommendation at the May 7, 2003 meeting. RESOURCE IMPACT Approval of this proposed rate increase will raise the Water Fund sales revenues approximately $2.65 million for FY 03-04 and another $3.2 million for FY 04-05. by POLICY IMPLICATIONS This recommendation is consistent with the Council approved Utilities Strategic Plan to provide superior financial performance to the City and invest in utilities infrastructure to deliver reliable sex-vice. It does not represent a change in current City policies. ENVIRONMENTAL REVIEW The adoption of the resolution does not constitute a project under the California Environmental Quality Act. Therefore, no environmental assessment is required. ATTACHMENTS A: Water Rate Schedules W-1, W-4, and W-7 B.UAC Report "Adoption of a Resolution Amending Various Water Rate Schedules to Effect a Water Rate Increase" PREPARED BY: DEPARTMENT HEAD: CITY MANAGER APPROVAL: Lucie Hirmina Utilities Rates Manager Directo~ of Utilit~ EMILY HARRISON Assistant City Manager CMR:267:03 Page 2 of 2 No Co GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE \V-1 APPLICABILITY: This schedule applies to all residential single family, water service. TERRITORY: Inside and outside the incorporated limits of the City.’ of Palo ,Alto and land owned or leased by; the City. lt4TES: CommodiW Rate: Per Meter Per Month First 7 Ccf Over 7 Ccf Temporary um~etered service to residential subdivision developers, per comaection Per Hundred Cubic Feet All Pressure Zones ........................................................................................................................ $3.36 ........................................................................ $6.00 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. W-1-1 dated 7-1~02 CiTY OF PALQ ALTO UTILITIES Effective 7-1-2003 Sheet No. W-1-1 Ao No Co GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY !~.TE SCHEDULE APPLICABILITY: This schedule applies to non-residential water service in the City of Palo Alto and its distribution area. Tt~s schedule is also applicable to multi-family residential customers served through a master meter. TERRITORY: Inside the incorporated limits of the City of Palo Alto, on land owned or leased by the Cit);, and any other land serviced by the Palo Alto Water Utility. RATES: Commodity Rates: Per Meter Per Month Per Hundred Cubic Feet All Pressure Zones Per Ccf ........................................................................................................................ $3.65 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. W-4-1 dated 7-!-02 CITY OF UTILITIES Effective 7-1-2003 Sheet No. W-4-1 IRRIGATION WATER SERVICE UTILITY tL,’4TE SCHEDULE W-7 YAPPLICABILIT : This schedule applies zo non-residential water service supplying dedicated in-igation meters in tl~e City of Palo Alto and its distribution area. TERRITORY: Inside the incorporated limits of the City of Palo Alto, on lm~d owned or leased by’ the CiU’, m~d any other land serviced by the Palo Alto Water Utility. C.RATES: Commodity Rates: Per Meter Per Month Per Hundred Cubic Feet All Pressure Zones Per Ccf $.~ -9 CITY OF PALO ALTO UTILITIES Issued by the City Council Supercedes Sheet No W-7-1 dated 7-1-02 CITY OF PALO ALTO UTILITIES Effective 7-1-2003 Sheet No. W-7-! MEMORANDUM 3D TO:UTILITIES ADVISORY COMMISSION FROM:UTILITIES DEPARTMENT DATE: SUBJECT: MAY 7, 2003 ADOPTION OF A RESOLUTION AMENDING VARIOUS WATER RATE SCHEDULES TO EFFECT A WATER RATE INCREASE RECOMMENDATION ¯ This report requests that the Utilities Advisory Commission (UAC) recommend that the City Council approve a 15 percent or $2.8 million water rate increase effective July 1, 2003. BACKGROUND The Water Utility’s revenue requirement consists of a number of components including the cost t o purchase water, operate and maintain a reliable system, p ay for the capital improvement program (CIP), fund prudent reserve levels, cover debt service, and provide a transfer to the General Fund. Any change in one or more of these components as well as a change in sales levels can trigger the need for a rate adjustment. On a quarterly basis, staff monitors the Water Fund revenues, reserves, and expenditures to insure that the Utility is financially sound. In addition, during the spring budget process, staff reviews the proposed t~vo-year Water Fund budget projections as well as a ten-year financial forecast to identify revenue requirements and to plan for rate adjustments. A review of the 2003-05 proposed budget indicates that current rates are not sufficient to meet the Utility’s financial obligations without depleting the Rate Stabilization Reserve. During the FY 01-02 budget process, Council approved a two pronged financial strategy to accommodate an abrupt rise in the CIP and wholesale purchase costs. The strategy uses a combination of one-time bond financing for a portion of the CIP and two consecutive rate increases. For FY 02-03, a 20 percent retail rate increase was approved to fund a portion of the CtP (CMR:289:02). In addition, staff informed the Council that a subsequent retail rate increase in FY 03-04 would be necessary if sales revenues remained flat. Page 1 of 5 DISCUSSION The Water Utility is facing a dramatic increase in expenditures while sales revenues are down slightly due to economic conditions. Water purchase costs from the San Francisco Public Utilities Commission (SFPUC) are projected to increase $1.1 million in FY 03-04 an additional $1.1 million in 04-05. The SFPUC wholesale rate increases are the initial increases to fund the Hetch Hetchy system capital improvements. In addition, the Water Utility CIP expenditures in 2003-04 are expected to increase from $5.0 rnillion to $11.7 million, or approximately $6.7 million. The CIP consists of a number of projects identified in the City’s Water Well Regional Storage and Distribution System Study. They include emergency water supply improvements, rehabilitation of and construction of water wells, land acquisition and construction of the E1 Camino Park Reser¥oir and Pump Station. These improvements will enhance the reliability and performance of the water distribution system under normal conditions, enable the City to meet an eight hour emergency demand, increase water flow for fire suppression demands, and accommodate chloramine conversion as required by the SFPUC. To cushion the rate impact of these increasing costs, staff proposes to spread the rate adjustment over a two-year cycle. Staff proposes two consecutive 15 percent annual retail rate increases to help fund the remaining portion of the CIP and offset wholesale purchase cost increases. In FY 04-05, the Rate Stabilization Reserve (RSR) balance will rise significantly, but will remain below the minimum guideline each year. Staff will monitor the RSR level and the 15 percent rate increase proposed for FY04-05 may be adjusted up or down, depending on water sales and actual reserve levels. Consolidation of Meter Service Charges into Commodity Rates The current water rate structure consists of a monthly service charge, based upon the size of the customer’s meter, and commodity rates per one hundred cubic feet (CCF) of water used. The se~wice charge was designed to recover a portion of the fixed costs of serving customers. To encourage energy conservation in the 1970-80’s, the meter service charge was eliminated in Palo Alto’s gas and electric rate structures. In this manner, an incentive to conserve was achieved. In the Water Fund, approximately 5 percent of revenue or $1 million is collected by monthly meter service charges. Staff proposes to discontinue the water meter charge and collect the corresponding $1 million in revenue from the commodity usage rates. Rate Incentive to Install Irrigation Metering Currently, the water rate for irrigation is the same rate that applies to water used for consumption and business pro-poses. Consequently, there is little or no incentive for customers to install separate irrigation meters (at their expense). One benefit of having a separate meter for landscaping purposes is it provides customers information on their usage characteristics so they can make decisions on improving water use efficiency. Another benefit is that during a drought, such outdoor usage is easily identified for usage reduction strategies. To date, approximately 75% of the potential irrigation meters have Page 2 of 5 not been installed by non-residential customers. To encourage the installation of meters for imgation and landscaping, staff recommends a 10 percent discount to be implemented (Rate Schedule W-7) for water used entirely for irrigation. In addition, providing this incentive supports an a~eement between the City and the California Urban Water Conservation Council. In 1991, the City signed a "Memorandum of Understanding" with the California Urban Water Conselwation Council. This Memorandum sets forth 14 Best Management Practices (BMP’s) that the City has a~eed to undertake in good faith. To date, the-City has implemented or partially implemented 10 of the 14 BMP’s. BMP 4 (Metering) encourages the provision of an incentive for non-residential customers to install dedicated landscape meters. This is to allow customers to recoup their infrastructure costs to install metering and make revisions to their irrigation systems. BMP 5 (Large Landscape Conser~,ation Programs and Incentives) encourages financial incentives to non-residential customers to improve their landscape water use efficiency. Providing an incentive helps the City comply with BMP’s 4 and 5. Table 1 below shows the impact of the proposed rates on customer bills based on different consumption levels for the residential and non-residential classes. The proposed 15 percent rate adjustment has been applied to a!l rate schedules. Consolidating the fixed meter charge revenue with the cormnodity usage rates accounts for the percentage differences between customers. Also, the proposed 10% rate differential for metered in’igation services partially offsets the 15% rate increase applicable to these customers. TABLE 1 Impact of Rate Increase on Customer Bills Customer Small Residentia! Average Residential Residential Large Residential Medium Commercial 3" Meter Large Commercial or Industrial Large Commercial or Industrial 6" Meter 6" Meter (irrigation 0nly) Usage (CCF’s) 7 14 2O 35 IO0 120O 3000 Amount of Proposed Proposed Monthly Bill Increase $23.52 49.07 70.97 125.72 365.00 4,380.00 9,855.00 $2,07 6.62 10.52 20.27 39.05 612.00 525.00 Percent Increase 10 16 17 19 12 16 6 Pa~,~ 3 of 5 Comparison of Palo Alto Water Rates and Surroundin~ Cities: In recent years, Palo Alto’s water rates have generally been higher than surrounding areas, primarily due to an ag~essive infrastruct-ure pro~am. A recent bill comparison of water bills in Redwood City, Mountain View, Los Altos Hills, Los Altos and Menlo Park (California Water Service) indicates-that Palo Alto residents (average usage) pay approximately 23% more than customers in surrounding cities. Comparing the current rates of surrounding cities with the proposed rates for Palo Alto, the residential rate differential would rise to approximately 41 percent. However, California Water Service Company currently has a rate increase case pending before the Public Utilities Commission for all of their districts. Also, nearby cities purchasing water from the SFPUC will be equally impacted by the rising wholesale costs of Hetch Hetchy water and may be raising rates as well this year. Therefore, the projected 41 percent rate differential between Palo Alto and nearby cities may not materialize and the differential will likely be less. Service Ca!l Rates In June 2002, the City Council approved Rate Schedule C-1 that sets the charges for hourly rates to perform certain service calls, such as restoring service following a turn-off for non-payment. Periodically, these rates are evaluated and changed to reflect any changes in labor costs to perform these duties. This schedule has been revised to reflect updated labor costs. The increase is based on the proposed salaries and costs for FY 03- 04, and the service call increases range from 3 percent to 11 percent RESOURCE IMPACT Approval of this rate proposal will increase the Water Fund metered retail sales revenues by approximately $2.8 million on a fiscal year basis. The Rate Stabilization Reserve in the Water Utility is projected to be below the minimum reserve guidelines through FY O4-05. ALTERNATIVES Staff evaluated other alternative rate increases. A rate increase less than 15 percent will cause a higher rate increase for FY 04-05 and will have a negative impact on the financial health of the Water Utility. Therefore, staff recommends that the Council approve the proposed 15 percent rate increase. POLICY IMPLICATIONS This rate proposal funds or meets the following Utilities Strategic Plan objectives: to invest in utility infrastructure to deliver reliable service and to provide superior financial Page 4 of 5 sezwice to the City and competitive rates to customers. Approval of the proposed water rate increase does not represent a change to existing policies. TIMELINE The effective date of the proposed water rate increase is July 1, _00_~. ENVIRONMENTAL REVIEW The adoption of the resolution does not constitute a project under the California Environmental Quality Act; therefore, no environmental assessment is required. ATTACHMENTS: A. Water Rate Schedules W-1, W-4, and W-7 PREPARED BY: REVIEWED BY: ~LUCIE~HIRMINA Pricing Manager RANDY,(/BALDSCHUN Assistant Director of Utilities DEPARTMENT HEAD: Ior of Utilities Page 5 of 5