HomeMy WebLinkAboutID-2676-04-18-12-1
City of Palo Alto (ID # 2676)
Finance Committee Staff Report
Report Type: Meeting Date: 4/18/2012
April 18, 2012 Page 1 of 13
(ID # 2676)
Summary Title: Water Utility Rate Adjustments
Title: Staff and Utilities Advisory Commission Recommendations on Proposed
Water Utility Rate Adjustments Effective July 1, 2012
From: City Manager
Lead Department: Utilities
Recommendation
Staff recommends that the Finance Committee recommend that the City Council adopt a
resolution (Attachment A) to:
1. Increase overall retail water rates and annual revenues for the Water Fund by 15.0 percent,
or $4.7 million, effective July 1, 2012; and
2. Amend Utility Rate Schedules W-1, W-2, W-3, W-4, and W-7, as attached.
The Utilities Advisory Commission recommends that Council:
1. Increase overall retail water rates and annual revenues for the Water Fund by 15% as
recommended by staff.
2. Not change specific rates in such a way that undermines conservation pricing.
3. Amend the water utility rate schedules as recommended by staff except as follows:
a. The volumetric charge for residential (W1 rates) tier 2 would remain at the current rate
of $7.34 per ccf, not decrease to $7.06 per ccf as recommended by CPAU staff; and
b. The amount of the increase in the volumetric charge for residential tier 1 would be
recalculated and reduced so that the overall increase in volumetric charges for
residential customers would increase by the amount recommended by staff, which is to
the average rate of $6.04 per ccf.
4. Direct staff to investigate and make a recommendation on the apparent anomaly of
charging master-metered multi-family buildings commercial rates for water.
The rate changes will trigger the notice and protest hearing procedures under Proposition 218.
April 18, 2012 Page 2 of 13
(ID # 2676)
Executive Summary
In March 2012, the Finance Committee reviewed the Water Fund’s long-term financial
projections, which indicated that water rates needed to increase by 20% for Fiscal Year (FY)
2013. Since that report, the San Francisco Public Utilities Commission, the City’s wholesale
water provider, lowered its wholesale rate increase projection for FY 2013. Based on the
revised wholesale water rate projection, the required revenue increase for the Water Fund is
15% for FY 2013.
The City engaged Raftelis Financial Consultants, Inc. (RFC) in November 2011 to review and
update the Water Utility cost of service study. RFC reviewed updated utility costs and customer
usage patterns and recommended rate changes to accurately align costs and revenues by
customer class in compliance with Proposition 218. Staff’s proposed rate changes for FY 2013
reflect RFC’s recommendations as presented in the updated cost of service study.
The UAC reviewed the water rate proposal on March 27 and were uncomfortable with the
residential (W-1) rates staff recommended since they provide less incentive for water use
efficiency for large water users and have a greater impact on small water users. The UAC voted
to maintain the current W-1 tier 2 rate and to set the tier 1 rate to achieve the same revenue.
Staff determined the volumetric W-1 rates that would be required to achieve the goals of the
UAC. Table S-1 summarizes the differences between staff’s recommendation and the UAC’s
recommendation for W-1 volumetric charges compared to current rates. Table S-2 shows the
monthly bill impact of the alternative W-1 rate recommendations.
Table S-1: Alternative W-1 Volumetric Charge Recommendations
Rate Schedule W-1
Oct 1, 2011
Current
Staff
Recommend.
UAC
Recommend.
Tier 1 0 - 6 ccf $3.60 $4.54 $4.11
Tier 2 over 6 ccf $7.34 $7.06 $7.34
Table S-2: Customer Monthly Bill Impact of Alternative W-1 Rate Recommendations
Customer
Usage
(ccf)
Oct 1, 2011
Current
Staff
Recommend.
$ Diff
Current vs.
Staff
Recommend.
UAC
Recommend.
$ Diff
Current
vs. UAC
Recommend
Small User (5/8" Meter)7 $38.94 $48.04 $9.10 $45.74 $6.80
Median User (5/8" Meter)9 $53.62 $62.16 $8.54 $60.42 $6.80
Average User (5/8" Meter)14 $90.32 $97.46 $7.14 $97.12 $6.80
Large User (5/8" Meter)40 $281.16 $281.02 ($0.14)$287.96 $6.80
If approved by Council, the impact of staff’s proposed water rate adjustments will be an
additional $8.54 on a typical residential customer’s monthly water utility bill. The impact on an
individual customer will vary depending on customer class and individual customer water usage
levels.
April 18, 2012 Page 3 of 13
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Background
The Water Fund’s revenue requirement consists of a number of components including: water
purchase costs, utility operations costs, Capital Improvement Program (CIP) projects, prudent
funding of the Water Rate Stabilization Reserve (W-RSR), and debt service payments. Any
change in one or more of these components, or a change in retail revenue levels, can trigger a
change, up or down, to the revenue requirement.
The last adjustment to Water Fund revenues was a 12.5%, or $3.4 million per year, increase for
FY 2012. Since the rate changes did not go into effect until October 1, 2011 after the summer
high water use season, the system average rate increase was 20.9%. The rate changes also
included alignments based on the cost of service by customer class. Therefore, the average
rate increases were 29.6% for residential customers (Rate Schedule W1), 4% for residential
master-metered and general non-residential customers (Rate Schedule W4), and 60% for
irrigation (Rate Schedule W7) accounts.
Financial projections presented to the Finance Committee on March 6, 2012 showed a revenue
requirement increase of 20%, or $6.3 million, for FY 2013 (Staff Report 2509) driven by the cost
of water supplies. Since that time the San Francisco Public Utilities Commission (SFPUC)
lowered its wholesale water rate increase projection from $3.44 per ccf for the high case
scenario to $2.89 per ccf for July to December of FY 2013 with an option to raise it to $2.97 per
ccf in January for FY 2013. The revenue requirement presented in this report reflects this
revision and other known revisions to the Water Fund budget request for FY 2013.
Discussion
Financial Projections
Table 1 below shows revised financial projections for the Water Fund for FY 2013 through FY
2017 as well as actual figures for FY 2011 and budgeted and projected figures for FY 2012. The
total use of funds for the Water Fund is projected to increase from $35.8 million in FY 2012 to
$45.9 million in FY 2017, an increase of $10.2 million. This increase is predominantly due to the
water purchase cost that increases by $7.2 million during this period.
For the budget year FY 2013, the Water Fund faces increases of $1.0 million in wholesale water
purchase costs, $0.8 million in operations costs and $1.6 million in CIP. Additionally, water
sales are expected to decrease by 2.2% from their expected levels of 5,107,000 hundred cubic
feet (ccf) in FY 2012 to 4,997,000 ccf in FY 2013.
April 18, 2012 Page 4 of 13
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Table 1: Water Utility Financial Projections
$(000')s
Adopted Actual Adopted Projected
2011 2011 2012 2012 2013 2014 2015 2016 2017
1 % CHANGE IN RETAIL RATE 0.0%0.0%12.5%20.8%15.0%15.0%9.0%3.0%2.0%
2 PROJECTED SYSTEM AVERAGE RATE ($/CCF)5.21 5.21 5.86 6.30 7.24 8.33 9.08 9.35 9.54
3 PROJECTED COMMODITY COST ($/CCF)2.00 1.96 2.74 2.69 2.93 3.31 3.86 4.16 4.58
4 SALES UNITS (THOUSAND CCFs)5,504 4,992 5,256 5,107 4,997 4,823 4,655 4,548 4,498
5 PROJECTED CHANGE IN RETAIL SALES REVENUE 0 0 3,422 3,328 4,719 5,238 3,488 1,238 841
6 REVENUE
7 Utilities Retail Sales 28,658 26,033 30,652 29,817 35,983 39,938 42,100 42,464 42,855
8 Service Connection & Capacity Fees 692 1,146 700 700 776 785 795 750 771
9 Other Revenues plus Transfers In 916 1,040 873 873 866 856 845 832 819
10 Interest & Gain or Loss on Investment 1,050 181 971 971 613 660 759 634 587
11 Sub Total 31,316 28,400 33,196 32,360 38,238 42,239 44,499 44,680 45,032
12 CIP Bond Proceeds / Reserve 3,500 3,500 0 0 0 0 0 0 0
13 Total Sources of Funds 34,816 31,900 33,196 32,360 38,238 42,239 44,499 44,680 45,032
14 OPERATING EXPENSE
15 Water Supply Purhcases 12,043 10,678 15,774 14,961 15,940 17,390 19,582 20,626 22,460
16 Operations 10,721 9,278 10,956 10,956 11,779 12,014 12,255 12,500 12,750
17 Debt Service & Other Related 2,981 3,885 3,338 3,338 3,219 3,220 3,219 3,223 3,219
18 Rent 2,107 2,107 2,142 2,142 2,185 2,228 2,273 2,318 2,365
19 CIP (Non-Bonded)5,348 5,348 4,369 4,369 6,000 9,813 6,794 5,189 5,151
20 Sub Total 33,201 31,297 36,578 35,765 39,123 44,666 44,122 43,856 45,946
21 CIP (Bonded)3,500 3,500 0 0 0 0 0 0 0
22 Total Uses of Funds 36,701 34,797 36,578 35,765 39,123 44,666 44,122 43,856 45,946
23
24 Into/ (Out of) Reserves (1,885)(2,897)(3,382)(3,405)(885)(2,426)376 825 (914)
25
26 Ending Rate Stabilization Reserve 10,851 10,639 7,257 9,529 8,645 6,218 6,595 7,419 6,506
27 Ending Plant Replacement Reserve 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
28 Ending Debt Service Reserve 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347
29 Ending Commitments and Reappropriations 13,873
30
31 Short Term Assessment of Risks 4,168 4,168 4,169 4,169 4,972 5,834 5,794 5,678 5,722
32 Rate Stabilization Guidelines
33 Miniumum 4,300 3,904 4,619 4,493 5,427 6,024 6,337 6,377 6,434
34 Maximum 8,600 7,808 9,238 8,987 10,854 12,047 12,674 12,755 12,867
35
Fiscal Year
City of Palo Alto
Water Utility
FINANCIAL PROJECTIONS
Updated as of March 2012
(FY 2013 - FY 2017)
Revenue Requirement
The revenue requirement of the Water Fund is the total amount of revenue it must collect in
order to meet its operations and maintenance (O&M) expenses, debt service payments, rate-
financed CIP expenditures and reserve requirements. This revenue is collected through water
rates, and may be supplemented by revenues from service connection and capacity fees,
interest income, transfers in from other funds, and other miscellaneous revenues.
The Water Fund is expected to have revenue shortfalls of $3.4 million and $5.6 million in FY
2012 and FY 2013, respectively. Due to healthy reserve levels and the proposed revenue
increase of $4.7 million in FY 2013, it is expected that reserve drawdowns of $3.4 million and
$0.9 million in FY 2012 and FY 2013, respectively, will be made.
April 18, 2012 Page 5 of 13
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Reserves and Risk Assessment
The City Council establishes guidelines for the W-RSR. As required by the reserve guidelines,
staff performs an assessment of short-term risks for the fund on an annual basis. Table 2 below
summarizes the end-of-year balances for the W-RSR, the short-term risk assessment level and
the long-term reserve guideline levels. The long-term reserve guidelines were established to
manage risks over the longer term. The short-term risk assessment level was provided to the
Finance Committee as part of the Water Fund’s financial forecast in March 2012. Staff does not
recommend any changes to the W-RSR guideline levels at this time.
Table 2: Water RSR Balance, Guideline Levels and Risk Assessment Level ($M)
Wastewater Rate Stabilization Reserve FY 2012 FY 2013 FY 2014
Estimated End of Year Balance 9.5 8.6 6.2
Risk Assessment Level 4.2 5.0 5.8
Reserve Minimum Level 4.5 5.4 6.0
Reserve Maximum Level 9.0 10.9 12.0
The W-RSR ended FY 2011 with a balance of $10.6 million. The expected balance at the end of
FY 2012 of $9.5 million is above the long-term maximum guideline level. For FY 2013, with the
proposed 15% revenue increase, the balance is projected to be within the long-term minimum
and maximum guidelines.
Water Utility Customer Profile and Revenue Collection
The City of Palo Alto’s Water Utility has approximately 20,000 water service accounts. Table 3
provides the distribution of accounts by customer segment and meter size.
Table 3: Number of Accounts (FY 2012)
Meter Size Residential
W1
Master MFR/
Commercial
W4
Irrigation
W7
Private Fire
Protection
W3
Total
5/8” 13,771 1,060 53 0 14,884
3/4” 489 79 6 0 574
1” 1,948 581 75 0 2,608
1 1/2” 181 370 62 0 613
2” 73 606 111 0 790
3” 1 79 13 0 93
4” 1 50 6 226 283
6” 0 22 1 217 240
8” 0 12 1 134 147
10” 0 0 0 7 7
Total 16,464 2,859 328 584 20,235
% Share 81% 14% 2% 3% 100%
April 18, 2012 Page 6 of 13
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Table 4 provides the distribution of revenue by rate schedule and rate component. While
approximately 81% of customer accounts fall into the residential classification (W-1 rate
schedule), these customers represent 51% of revenues. The remaining 49% of revenues are
collected from master-metered multi-family and commercial customers (W4 rate schedule) and
irrigation accounts (W-7 rate schedule) with a small amount collected from fire service accounts
(W-3 rate schedule). Currently, about 10% of retail rate revenue is collected through the fixed
monthly service charges and 90% through volumetric charges.
Table 4: Sales Revenue (FY 2012)
Revenue Source Residential
Master MFR/
Commercial Irrigation
Private Fire
Protection Total
W1 W4 W7 W3
Service Charge 2,052,091$ 1,077,680$ 136,090$ 124,370$ 3,390,231$
Volumetric Charge 13,730,818$ 11,099,433$ 2,573,090$ -$ 27,403,340$
Total Revenue 15,782,909$ 12,177,112$ 2,709,180$ 124,370$ 30,793,571$
Cost of Service Analysis (COSA)
The City hired Raftelis Financial Consultants, Inc. to conduct a cost of service analysis utilizing
the most recent data available for customer water usage (FY 2011) and associated costs for the
Water Fund. The analysis included a review of utility financial data, customer class load profiles
and the specific costs associated with providing utility services. The study was conducted based
on industry-recognized procedures involving the functional classification of utility assets and
expenses, and allocation of costs to customer classes based on the cost to provide the service.
Specific customer class attributes included quantity of service and resource consumed;
variability of use during the year; and peak demands created on the system by each class.
The results of the study indicate that adjustments to rate schedules are required to accurately
align future revenues collected from each customer class with the costs attributable to serving
that class. The cost of service and rate study report is provided in Attachment D. Summary
results are presented in the following sections. The proposed adjustment to water rates is
consistent with the COSA results.
Current Rate Schedules and Recommended COSA Alignments
The study compared required revenue collection based on cost of service and revenue
collection under current rate schedules. The results are presented in Table 5. The column
entitled “Difference” indicates the required rate adjustment by customer class with an overall
revenue increase of 15%.
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Table 5: Required Revenue Collection based on COSA versus Current Rates (FY 2013)
Customer Class COS Current Difference
Residential - W1 $17,927,525 $15,869,347 13%
Master MFR/Commercial - W4 $14,112,793 $11,610,894 22%
Irrigation - W7 $3,251,807 $3,420,794 -5%
Fire Service - W3 $387,091 $124,370 211%
TOTAL $35,679,215 $31,025,405 15%
Current water rates consist of two components: a commodity rate (volumetric rate) and a
monthly fixed service charge (meter charge). The monthly service charge varies by meter size
and the volumetric rate varies for residential customers based on usage tier. The residential
volumetric rates are also referred to as “inverted block rates” where usage in the first tier has a
lower rate than usage in the second tier. For non-residential accounts a single volumetric rate
is used. The Tier 1 usage block for residential accounts is defined as 0.2 ccf per day or, for a 30-
day billing period, 6 ccf per month. Usage over 6 ccf per month falls into Tier 2. Table 6 shows
current and proposed water rates based on COSA results.
April 18, 2012 Page 8 of 13
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Table 6: Current and Proposed Water Rates (W1, W3, W4 and W7 Rate Schedules)
General Monthly Meter Service Charge
Meter Size Effective Oct 1, 2011 July 1, 2012
5/8"$10.00 $13.74
3/4"$10.00 $18.28
1"$13.00 $27.35
1 1/2"$27.00 $50.03
2"$43.00 $77.25
3"$114.00 $163.44
4"$195.00 $290.46
6"$406.00 $594.39
8"$644.00 $1,093.39
10"$644.00 $1,728.48
Monthly Fire Meter Service Charge
Meter Size Effective Oct 1, 2011 July 1, 2012
2"$3.63 $3.30
3"$0.00 $9.59
4"$7.27 $20.44
6"$16.13 $59.38
8"$28.53 $126.54
10"$44.48 $227.56
Commodity Rate ($/ccf)
Effective Oct 1, 2011 July 1, 2012
Residential - W1
Tier 1 0 - 6 ccf $3.60 $4.54
Tier 2 over 6 ccf $7.34 $7.06
Master MFR/Commercial - W4 $4.93 $5.75
Irrigation - W7 $7.86 $7.19
Fire Service - W3 $10.00 $10.00
Additionally, the commodity rate for Utility Rate Schedule W-2 (Water Service from Fire
Hydrants) is proposed to be adjusted by the same adjustment required for the commodity rate
applicable for W-4. This schedule applies to all water taken from fire hydrants for construction,
maintenance, and other uses in conformance with provisions of a Hydrant Meter Permit.
Note that the proposed service charges are increased from current rates. For the typical
residential customer on Rate Schedule W-1 with a 5/8 inch meter, the service charge is
increased by 37.4%. As a result of the proposed changes to water rate schedules, revenue
collection through the fixed service charges would increase from 10% currently to 15% in FY
2013. This falls well within the California Urban Water Conservation Council (CUWCC) guideline
of keeping fixed costs at less than 30% of the total revenue requirement, in support of water
conservation objectives. Even with the proposed increase in the fixed charge, the proposed
rates offer substantial incentives for residential customers to reduce water use.
April 18, 2012 Page 9 of 13
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For residential customers on Rate Schedule W-1, the proposed COSA volumetric rate for Tier 1
is increased by 26% while the volumetric rate for Tier 2 is decreased by 3.8%. The differential in
the rates for the tiers is reduced based on the COSA study. The volumetric rates for irrigation
customers (Rate Schedule W-7) are reduced by 8.5% to align with the COSA results.
As part of the cost of service study update, the consultant reviewed costs pertaining to
servicing customers in the hilly parts of the City’s service area and found that there were
additional costs to pump water up to the customers and storage reservoirs in the foothills, but
that the foothills reservoirs provided water storage and fire fighting reserves for all customers
in the City and were not just for the customers who reside in the foothills. Due to the design of
the water distribution system and the use of the foothills reservoirs, and since the pumping
costs would have to be incurred for all customers, the consultant concluded that there were no
significant additional costs identified to serve the customers in the foothills and, therefore,
there was no justification for imposing different rates for customers in these areas.
The consultant also examined using a different commodity rate structure for master-metered
Multi Family Residential (MFR) customers. Unlike individually-metered MFR customers that are
on the W-1 rate schedule, which has a tiered volumetric rate structure, master-metered MFR
customers are currently on rate schedule W-4, which has a uniform volumetric rate structure.
The consultant reviewed whether keeping these customers on the W-4 rate schedule met cost
of service principles, or whether a shift to a tiered rate schedule was a more equitable fit. The
consultant recommended retaining these customers on the W-4 rate schedule because master-
metered MFR customers have peaking factors similar to the commercial class as a whole,
master-metered customers have a larger irrigation variance, and price signals for these
customers are less effective for conservation.
Customer Bill Impact of Proposed Rate Changes
Table 7 below shows the impact of the proposed rate increase on customer bills based on
consumption level for the residential and commercial classes.
April 18, 2012 Page 10 of 13
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Table 7: Impact of Proposed Rate Increase on Monthly Customer Bills
Customer
Monthly
Usage
(CCF)
Current
Monthly
Bill ($)
Proposed
Monthly
Bill ($)
Amount of
Proposed
Increase ($)
Percent
Increase
(Decrease)
Small Residential
(5/8” Meter) 7 38.94 48.04 9.10 23.4%
Median Residential
(5/8” Meter) 9 53.62 62.16 8.54 15.9%
Average Residential
(5/8” Meter) 14 90.32 97.46 7.14 7.9%
Large Residential
(5/8” Meter) 40 281.16 281.02 -0.14 (0%)
Medium Commercial
(3" Meter) 300 1,593.00 1,888.44 295.44 18.5%
Large Commercial or Industrial
(6" Meter) 1200 6,322.00 7494.39 1,172.39 18.5%
Large Commercial or Industrial
(6" Meter) (irrigation only) (W-7) 3000 23,986.00 22,164.39 -1,821.61 (7.6%)
Comparison of Palo Alto Water Rates and Surrounding Cities
For several years, Palo Alto's retail water rates have generally been higher than those in
surrounding areas. Staff initiated a Benchmark Study for the Water Utility in May 2010 and
presented its findings to the UAC in October 2010 and to the Finance Committee in November
2010. The objective of the study was to develop benchmarks and to provide insight as to the
main reasons for the higher water rates in Palo Alto. The findings of this study highlighted
some key areas such as more spending by Palo Alto for replacement of aging infrastructure;
lack of access to lower cost water supply; more expensive service terrain to serve; higher
quality of service; and higher rent payment for its use of real estate in the service territory.
Table 8 below, which compares monthly water bills using municipal water rates as of January 1,
2012 for Mountain View, Redwood City, Los Altos, Hayward, Santa Clara and Menlo Park,
indicates that the median residential customer in surrounding cities pays approximately 23
percent less than the average Palo Alto residential customer. The residential bill comparison
with the average benchmark city is seven percentage points lower this year compared to the
same period a year ago as other cities facing similar cost increases have begun raising their
water rates as well. There are indications that nearby cities that purchase water supplies from
the SFPUC1 will continue to raise rates in FY 2013. At this time, the certainty or magnitude of
their rate increases is not known.
1 Based on the FY 2010 BAWSCA survey, the share of SFPUC as source of potable water supply was 91% for Menlo
Park, 100% for Redwood City, 85% for Mountain View, and 11% for Santa Clara.
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Table 8: Monthly Residential Water Bill Comparison
Residential Monthly Water Bill ($/month)
Based on Rates in Effect as of January 1, 2012
Season
Usage
CCF/mo Palo Alto
Menlo
Park *
Redwood
City
Mountain
View Los Altos
Santa
Clara Hayward
Summer
7 38.94 48.12 39.38 29.05 34.35 20.93 32.10
14 90.32 83.65 65.79 57.68 56.67 41.86 60.00
40 281.16 223.56 240.42 224.47 150.17 119.60 182.35
Median 9 53.62 57.94 46.02 37.23 40.51 26.91 39.50
Winter
4 24.40 33.39 30.12 16.78 25.13 11.96 22.20
10 60.96 62.85 49.34 41.32 43.58 29.90 43.60
25 171.06 140.83 125.52 102.67 92.65 74.75 105.10
* Menlo Park rates based on California Water Service’s Bear Gulch District
Proposition 218 Water Rate Increase Procedure
In addition to setting forth substantive requirements that certain types of utility rates, or
“property-related fees”, be cost of service-based, Proposition 218 set forth procedural
requirements that public agencies must follow in order to enact or increase a property-related
fee. Since Proposition 218 applies to the water rate increases described here, the City must
provide written notice by mail to water customers subject to the proposed fees, followed by a
public hearing held not less than 45 days after notice is mailed. The notice must include the
amount of the fee, the basis upon which the fee was calculated, the reason for the fee, and the
date, time and location of the public hearing. If a majority of customers submit written
protests against the proposed fees, the City may not impose the fee.
Possibility of Water Use Restrictions due to Water Shortage
In the event of a water shortage, the SFPUC will declare a water shortage emergency and
impose mandatory water use reductions. If this action is taken, then staff will return to the
Council with an updated proposal for a rate adjustment and water rate schedules. Staff does
not expect a water supply shortage to be declared for FY 2013 at this time.
Commission Review and Recommendation
The Utilities Advisory Commission (UAC) reviewed the proposed water revenue increase at its
meeting on March 27, 2012. The UAC spent considerable time discussing the proposal and the
cost of service study results. The majority of the UAC felt that the recommended change to the
residential (W-1) rates reduced the incentive to conserve water and, therefore, recommended
that the proposed rates should be modified so that the bill impact would be reduced for small
water users and increased for large water users.
The UAC’s motion was to recommend that Council approve the W-2, W-3, W-4, and W-7 rates
as recommended by staff, but modify the W-1 rates in a revenue neutral way. Specifically, the
UAC proposed keeping the current tier 2 rate at $7.34/ccf and reducing the proposed tier 1
rate to a level that would create the same amount of revenue as calculated by the cost of
April 18, 2012 Page 12 of 13
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service study for the W-1 rate class. The UAC accepted the proposed fixed meter charge
increase as recommended by staff. The motion passed by a 5-1 vote with Commissioner
Waldfogel opposed as he indicated he was uncomfortable with deviating from the cost of
service study results.
Tables 9 and 10 summarize the differences between staff’s recommendation and UAC’s
recommendation for W-1 volumetric charges compared to current rates, and residential
monthly bill impact of the alternative W-1 rate recommendations, respectively.
Table 9: Alternative W-1 Volumetric Charge Recommendations
Volumetric Rate ($/ccf)
Rate Schedule W-1
Current
Rates
Staff
Recommendation
UAC
Recommendation
Tier 1: 0-6 ccf $3.60 $4.54 $4.11
Tier 2: over 6 ccf $7.34 $7.06 $7.34
Table 10: Residential Monthly Bill Impact of Alternative W-1 Rate Recommendations
Customer
(5/8” meters)
Usage
(ccf/mo)
Current
Rates
($/month)
Staff
Recommend.
($/month)
Current vs.
Staff
Recommend.
($/month)
UAC
Recommend.
($/month)
Current vs.
UAC
Recommend.
($/month)
Small User 7 $38.94 $48.04 $9.10 $45.74 $6.80
Median User 9 $53.62 $62.16 $8.54 $60.42 $6.80
Average User 14 $90.32 $97.46 $7.14 $97.12 $6.80
Large User 40 $281.16 $281.02 (0.14) $287.96 $6.80
In addition, the UAC voted unanimously to recommend Council direct staff to investigate the
issue of master-metered multi-family homes being on the commercial (W-4) rate and not being
able to pay the lower tier 1 residential (W-1) rate since their water use is per dwelling is low
enough for each dwelling to fall into the first usage tier under W-1.
The draft notes from the UAC’s March 27, 2012 are provided in Attachment E.
Resource Impact
Approval of this rate proposal will increase the Water Fund retail sales revenues by
approximately $4.7 million for FY 2013.
Policy Implications
This recommendation does not represent a change to current City policies.
Environmental Review
The restructuring of wastewater rates to meet operating expenses and financial reserve needs
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.
April 18, 2012 Page 13 of 13
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15273(a)(1-4) (modification of rates for the purpose of meeting operating expenses, purchasing
supplies, equipment or materials, meeting financial reserve needs and requirements and
obtaining funds for capital projects necessary to maintain service within existing service areas.).
Attachments:
Attachment A: Draft Resolution for Water Rates Effective July 1, 2012 (PDF)
Attachment B: Updated Water Utility Financial Projections (FY 2012-FY 2017) (PDF)
Attachment C: Utility Rate Schedules W-1, W-2, W-3, W-4, and W-7 (PDF)
Attachment D: Water Utility Cost of Service and Rate Study (FY 2013) (PDF)
Attachment E: Excerpted draft minutes of the March 27, 2012 UAC meeting (PDF)
3-6-12 FIN Water Fund Excerpt (DOC)
Prepared By: Ipek Connolly, Sr. Resource Planner
Department Head: Valerie Fong, Director
City Manager Approval: ____________________________________
James Keene, City Manager
*NOT YET APPROVED*
120403 dm 6051693
ATTACHMENT A
Resolution No. _________
Resolution of the Council of the City of Palo Alto Adopting a
Water Rate Increase and Amending Utility Rate Schedules W-1,
W-2, W-3, W-4 and W-7
WHEREAS, 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; and
WHEREAS, pursuant to Article XIIID Sec. 6 of the California Constitution, on
June _, 2012, the City of Palo Alto held a public hearing to consider all protests against the
proposed water rate amendments; and
WHEREAS, the total number of written protests presented by the close of the
public hearing was less than fifty percent (50%) of the total number of customers and property
owners subject to the proposed water rate amendments;
NOW, THEREFORE, the Council of the City of Palo Alto does hereby
RESOLVE as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code,
Utility Rate Schedule W-1 (General Residential Water Service) is hereby amended to read in
accordance with sheets W-1-1 and W-1-2, attached and incorporated. Utility Rate Schedule W-1,
as amended, shall become effective July 1, 2012.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code,
Utility Rate Schedule W-2 (Water Service from Fire Hydrants) is hereby amended to read in
accordance with sheet W-2-1, attached and incorporated. Utility Rate Schedule W-2, as
amended, shall become effective July 1, 2012.
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 in accordance
with sheets W-3-1 and W-3-2, attached and incorporated. Utility Rate Schedule W-3, as
amended, shall become effective July 1, 2012.
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 in accordance with sheets W-4-1 and W-4-2, attached and
incorporated. Utility Rate Schedule W-4, as amended, shall become effective July 1, 2012.
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
in accordance with sheets W-7-1 and W-7-2, attached and incorporated. Utility Rate Schedule
W-7, as amended, shall become effective July 1, 2012.
*NOT YET APPROVED*
120403 dm 6051693
SECTION 6. The Council finds that the revenue derived from the authorized adoption
enumerated herein shall be used only for the purpose set forth in Article VII, Section 2, of the
Charter of the City of Palo Alto.
SECTION 7. The Council finds that a restructuring of 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 water rates cost of service study and staff reports presented to the Utilities Advisory
Commission, the Finance Committee and 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:
___________________________ ___________________________
Sr. Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
$('000)
Adopted Actual Adopted Projected
2011 2011 2012 2012 2013 2014 2015 2016 2017
1 % CHANGE IN RETAIL RATE 0.0%0.0%12.5%20.8%15.0%15.0%9.0%3.0%2.0%
2 SYSTEM AVERAGE RATE ($/CCF)5.21 5.21 5.86 6.30 7.24 8.33 9.08 9.35 9.54
3 SALES UNITS (CCFs)5,504 4,992 5,256 5,107 4,997 4,823 4,655 4,548 4,498
4 WATER UTILITY REVENUE
5 SALES REVENUE:28,666 26,027 27,373 26,627 31,461 34,919 38,757 41,278 42,049
6 RATE ADJUSTMENT 0 0 3,422 3,328 4,719 5,238 3,488 1,238 841
7 PRORATION IMPACT 0 0 (143)(139)(197)(218)(145)(52)(35)
8 TOTAL ADJUSTED SALES 28,666 26,027 30,652 29,817 35,983 39,938 42,100 42,464 42,855
9 INTEREST 1,050 181 971 971 613 660 759 634 587
10 OTHER REVENUE 908 1,046 873 873 866 856 845 832 819
11 CONNECTION & CAPACITY FEES 692 1,146 700 700 776 785 795 750 771
12 FROM RESERVES:
13 RATE STABILIZATION 1,885 2,897 3,382 1,110 885 2,426 0 0 914
14 CIP BOND PROCEEDS 3,500 3,500 0 0 0 0 0 0
15 COMMITMENTS & REAPPROPRIATIONS 0 0 0 2,295 0 0 0 0 0
16 TOTAL FINANCIAL RESOURCES 36,701 34,797 36,578 35,765 39,123 44,666 44,499 44,680 45,946
17 OPERATING EXPENSES
18 RESOURCE MANAGEMENT & ADMIN 660 576 667 667 680 694 708 722 737
19 PURCHASES 12,043 10,678 15,774 14,961 15,940 17,390 19,582 20,626 22,460
20 CUSTOMER DESIGN & CONN. (CIP)410 410 420 420 430 440 450 460 473
21 SYSTEM IMPROVEMENT(CIP) - Nonbond 4,938 4,938 3,949 3,949 5,570 9,373 6,344 4,729 4,678
22 SYSTEM IMPROVEMENT(CIP) - Bond 3,500 3,500 0 0 0 0 0 0 0
23 ALLOCATED ADMIN & OVERHEAD 2,675 1,799 2,524 2,524 2,621 2,673 2,727 2,781 2,837
24 ENGINEERING SUPPORT & ADMIN 940 1,155 983 983 1,051 1,072 1,093 1,115 1,137
25 WATER OPERATIONS 4,335 3,993 4,862 4,862 5,419 5,527 5,638 5,750 5,865
26 CUSTOMER SERVICE & ADMIN 600 648 662 662 675 688 702 716 731
Fiscal Year
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FINANCIAL PROJECTIONS
(BASE CASE)
(FY 2013 - FY 2017)
City of Palo AltoWater Utility
27 METER READING 242 246 261 261 266 272 277 283 288
28 BILLING AND COLLECTIONS 248 229 256 256 261 267 272 277 283
29 WATER DEMAND SIDE MANAGEMENT 580 354 636 636 700 714 728 742 757
30 DEBT SERVICE & RELATED 2,981 3,885 3,338 3,338 3,219 3,220 3,219 3,223 3,219
32 RENT 2,107 2,107 2,142 2,142 2,185 2,228 2,273 2,318 2,365
33 TRANSFERS OUT 442 280 104 104 106 108 110 112 115
34 TOTAL OPERATING EXPENSES 36,701 34,797 36,578 35,765 39,123 44,666 44,122 43,856 45,946
35 RESERVE ADDITIONS:
36 PLANT REPLACEMENT 0 0 0 0 0 0 0 0 0
37 RATE STABILIZATION 0 0 0 0 0 0 376 825 0
38 DEBT SERVICE RESERVE 0 0 0 0 0 0 0 0 0
39 TOTAL RESERVE ADDITIONS:0 0 0 0 0 0 376 825 0
40 TOTAL REVENUE REQUIREMENT 36,701 34,797 36,578 35,765 39,123 44,666 44,499 44,680 45,946
41 RESERVES BALANCES
42 PLANT REPLACEMENT 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
43 RATE STABILIZATION 10,851 10,639 7,257 9,529 8,645 6,218 6,595 7,419 6,506
44 CIP DEBT SERVICE 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347 3,347
45 TOTAL RESERVES BALANCES 15,198 14,986 11,604 13,877 12,992 10,566 10,942 11,767 10,85346
47 COMMITMENTS & REAPPROPRIATIONS 13,873
48 RATE STABILIZATION RESERVES GUIDELINES
49
50 Short Term Risk Assessment Value 4,168 4,168 4,169 4,169 4,972 5,834 5,794 5,678 5,722
51 Long Term Rate Stabilization Guidelines
52 RSR Minimum 4,300 3,904 4,619 4,493 5,427 6,024 6,337 6,377 6,434
53 RSR Maximum 8,600 7,808 9,238 8,987 10,854 12,047 12,674 12,755 12,867
54
2011 2012 2013 2014 2015 2016 2017WATER
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GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 107-1-20112012
Supersedes Sheet No W-1-1 dated 710-1-200911 Sheet No W-1-1
A. APPLICABILITY:
This schedule applies to all separately metered single family residential water services.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
Per Meter
Monthly Customer Service Charge: Per Month
For 5/8-inch meter .................................................................................................... $ 10.0013.74
For 3/4 inch meter ..................................................................................................... 10.0018.28
For 1 inch meter ........................................................................................................ 13.0027.35
For 1 1/2 inch meter .................................................................................................. 27.0050.03
For 2-inch meter ........................................................................................................ 43.0077.25
For 3-inch meter ........................................................................................................ 114.00163.44
For 4-inch meter ........................................................................................................ 195.00290.46
For 6-inch meter ........................................................................................................ 406.00594.39
For 8-inch meter ........................................................................................................644.001,093.39
For 10-inch meter ......................................................................................................644.001,728.48
Commodity Rate: (To be added to ServiceCustomer Charge and applicable to all pressure zones.)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Tier 1 usage ........................................................................................................................$3.604.54
Tier 2 usage (All usage over 100% of Tier 1).......................................................................7.347.06
Temporary unmetered service to residential
subdivision developers, per connection ........................................................................ $6.00
GENERAL RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 107-1-20112012
Supersedes Sheet No W-1-2 dated 710-1-200911 Sheet No W-1-2
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 customer’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 water usage shall be calculated and billed based upon a level of 0.2 ccf per day
rounded to the nearest whole ccf, based on meter reading days of service. 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.
{End}
WATER SERVICE FROM FIRE HYDRANTS
UTILITY RATE SCHEDULE W-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 7-1-200912
Supersedes Sheet No W-2-1 dated 117-1-2009 Sheet No W-2-1
A. APPLICABILITY:
This schedule applies to all water taken from fire hydrants for construction, maintenance, and
other uses in conformance with provisions of a Hydrant Meter Permit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
1. Monthly Customer Service Charge.
METER SIZE
5/8 inch ........................................................................................................................... 50.00
3 inch ........................................................................................................................... 125.00
2. Commodity Rate: (per hundred cubic feet) ................................................................$4.9465.75
D. SPECIAL NOTES:
1. Monthly charges shall include the applicable monthly customer service charge in addition to usage
billed at the commodity rate.
2. Any applicant using a hydrant without obtaining a Hydrant Meter Permit or any permittee using a
hydrant without a Hydrant Meter Permit shall pay a fee of $50.00 for each day of such use in
addition to all other costs and fees provided in this schedule. A hydrant permit may be denied or
revoked for failure to pay such fee.
3. A meter deposit of $750.00 may be charged any applicant for a Hydrant Meter Permit as a
prerequisite to the issuance of a permit and meter(s). A charge of $50.00 per day will be added for
delinquent return of hydrant meters. A fee will be charged for any meter returned with missing or
damaged parts.
4. Any person or company using a fire hydrant as described in D.2 aboveimproperly or without a
permit, or who draws water from a hydrant without a meter installed and properly recording usage
shall, in addition to all other applicable charges be subject to criminal prosecution pursuant to the
Palo Alto Municipal Code.
{End}
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 107-1-20121
Supersedes Sheet No W-3-1 dated 1110-1-200811 Sheet No W-3-1
A. APPLICABILITY:
This schedule applies to all public fire hydrants and private fire service connections.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
1. Monthly Service Charges
Public Fire Hydrant.................................................................................................... $5.00
Private Fire Service:
2-inch connection.......................................................................................................$3.633.30
4-inch connection.......................................................................................................7.2720.44
6-inch connection....................................................................................................... 16.1359.38
8-inch connection.......................................................................................................28.53126.54
10-inch connection.....................................................................................................44.48227.56
2. Commodity (To be added to Service Charge unless water is used for fire extinguishing or
testing purposes.)
Per Hundred Cubic Feet
All water usage.......................................................................................................... $10.00
D. SPECIAL NOTES:
1. Service under this schedule may be discontinued if water is used for any purpose other
than fire extinguishing or testing and repairing the fire extinguishing facilities. Such
water usedUsing hydrants and fire services for other purposes is illegal and will be
subject to the commodity charge as noted above, and fines, and criminal prosecution
pursuant to the Palo Alto Municipal Code.
2. No commodity charge will apply for water used for fire extinguishing purposes.
32. For a combination water and fire service, the general water service schedule shall apply.
FIRE SERVICE CONNECTIONS
UTILITY RATE SCHEDULE W-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 107-1-20121
Supersedes Sheet No W-3-2 dated 1110-1-200811 Sheet No W-3-2
43. Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire
Services.
54. Repairs and testing of fire extinguishing facilities are not considered unauthorized use of
water if records and documentation are supplied by the customer.
6.Unauthorized use of water which is unrelated to fire protection is subject to criminal
prosecution pursuant to the Palo Alto Municipal Code.
{End}
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 107-1-20121
Supersedes Sheet No W-4-1 dated 710-1-200911 Sheet No W-4-1
A. APPLICABILITY:
This schedule applies to non-residential water service in the City of Palo Alto and its distribution
area. This schedule is also applicable to multi-family residential customers served through a master
meter.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
Per Meter
Monthly Customer Service Charge Per Month
For 5/8-inch meter ....................................................................................$ 10.0013.74
For 3/4-inch meter .................................................................................... 10.0018.28
For 1-inch meter .................................................................................... 13.0027.35
For 1 ½-inch meter .................................................................................... 27.00 50.03
For 2-inch meter .................................................................................... 43.00 77.25
For 3-inch meter .................................................................................... 114.00163.44
For 4-inch meter .................................................................................... 195.00290.46
For 6-inch meter .................................................................................... 406.00594.39
For 8-inch meter ....................................................................................644.001,093.39
For 10-inch meter ....................................................................................644.001,728.48
Commodity Rates: (to be added to Customer Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per ccf ............................................................................................................ $4.93 5.75
RESIDENTIAL MASTER-METERED AND
GENERAL NON-RESIDENTIAL WATER SERVICE
UTILITY RATE SCHEDULE W-4
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 107-1-20121
Supersedes Sheet No W-4-2 dated 710-1-200911 Sheet No W-4-2
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 customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
{End}
NON-RESIDENTIAL IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 107-1-20112
Supersedes Sheet No W-7-1 dated 710-1-200911 Sheet No W-7-1
A. APPLICABILITY:
This schedule applies to non-residential water service supplying dedicated irrigation meters in the
City of Palo Alto and its distribution area.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides water services.
C. RATES:
Per Meter
Monthly Customer Service Charge Per Month
For 5/8-inch meter .................................................................................... $ 10.0013.74
For 3/4-inch meter .................................................................................... 10.00 18.28
For 1-inch meter .................................................................................... 13.0027.35
For 1 1/2 inch meter .................................................................................... 27.00 50.03
For 2-inch meter .................................................................................... 43.00 77.25
For 3-inch meter .................................................................................... 114.00163.44
For 4-inch meter .................................................................................... 195.00290.46
For 6-inch meter .................................................................................... 406.00594.39
For 8-inch meter ....................................................................................644.001,093.39
For 10-inch meter ....................................................................................644.001,728.48
Commodity Rates: (to be added to Customer Service Charge)
Per Hundred Cubic Feet (ccf)
Per Month All Pressure Zones
Per Ccfccf ............................................................................................................ $7.86 7.19
NON-RESIDENTIAL IRRIGATION WATER SERVICE
UTILITY RATE SCHEDULE W-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Effective 107-1-20112
Supersedes Sheet No W-7-2 dated 710-1-200911 Sheet No W-7-2
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 customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
{End}
Palo Alto Water Cost of
Service and Rate Study
CITY OF PALO ALTO PUBLIC UTILITIES
March 2012
Raftelis Financial Consultants, Inc.
■ 201 S. Lake Blvd, Suite 301
Pasadena • CA
Raftelis Financial Consultants, Inc.
March 15, 2012
Ms. Ipek Connolly
Senior Resource Planner
City of Palo Alto Public Utilities
250 Hamilton Ave
Palo Alto, CA 94301
Subject: Water Cost of Service and Rate Study Report
Dear Ms. Connolly:
Raftelis Financial Consultants Inc. (RFC) is pleased to present this r
rate study to the City of Palo Alto (City
service analysis will result in fair and equitable water
The study involved a comprehensive review of the City’s water rates based on cost of service principles
The City has conducted a long range financial plan to determine the revenue needs of the water utility in
the next five years. However, water rates, based on that financi
fiscal year beginning July 2012.
All assumptions, including all increases in operating and capital costs, were
range financial plans and were factored into the rates.
among customer classes and encourage efficient use of services for greater environmental
sustainability. The recommendations and findings of the study
calculation of the rates are included.
It was a pleasure working with you and we appreciate the
other staff members provided during the course of the study. If you have any questions, please call me
at (626) 583-1894.
Sincerely,
Sudhir Pardiwala
Vice President
201 S. Lake Blvd, Suite 301
CA • 91101
■ Phone
Fax
626•583•1894
626•583•1411
■ www.raftelis.com
ts, Inc.
and Rate Study Report
Raftelis Financial Consultants Inc. (RFC) is pleased to present this report on the water cost of service and
City). We are confident that the recommendations
ult in fair and equitable water rates to the City’s customers.
comprehensive review of the City’s water rates based on cost of service principles
The City has conducted a long range financial plan to determine the revenue needs of the water utility in
the next five years. However, water rates, based on that financial plan, are only calculated for the next
All assumptions, including all increases in operating and capital costs, were based on the City’s long
factored into the rates. The rates were restructured to enhance
and encourage efficient use of services for greater environmental
he recommendations and findings of the study and various tables describing the
calculation of the rates are included.
was a pleasure working with you and we appreciate the assistance that you, Mr. Eric Keniston
other staff members provided during the course of the study. If you have any questions, please call me
Hannah Phan
Senior Consultant
www.raftelis.com
Page ii
water cost of service and
based on a cost of
comprehensive review of the City’s water rates based on cost of service principles.
The City has conducted a long range financial plan to determine the revenue needs of the water utility in
al plan, are only calculated for the next
based on the City’s long-
ructured to enhance equity
and encourage efficient use of services for greater environmental
arious tables describing the
assistance that you, Mr. Eric Keniston, and
other staff members provided during the course of the study. If you have any questions, please call me
Hannah Phan
Senior Consultant
Palo Alto Water Cost of Service and Rate Study
Raftelis Financial Consultants, Inc. Page i
Table of Contents
SECTION 1: EXECUTIVE SUMMARY ............................................................................................................. 1
System Description ............................................................................................................................... 1
Financing Plan ....................................................................................................................................... 1
Cost of Service Analysis ......................................................................................................................... 2
Proposed Water Rates .......................................................................................................................... 3
Customer Impacts ................................................................................................................................. 4
SECTION 2: WATER FINANCIAL PLAN .......................................................................................................... 6
Water System Infrastructure ................................................................................................................ 6
Existing Water Rates ............................................................................................................................. 6
Water Accounts and Usage Characteristics .......................................................................................... 7
Water System Revenues ..................................................................................................................... 10
Water System Expenditures ................................................................................................................ 11
SECTION 3: COST OF SERVICE ANALYSIS ................................................................................................... 16
Cost of Service to be Allocated ........................................................................................................... 16
Unit Cost of Service ............................................................................................................................. 20
Allocation of Cost to Customer Classes .............................................................................................. 21
SECTION 4: RATE DESIGN .......................................................................................................................... 24
Proposed Rate Structure ..................................................................................................................... 24
Proposed Water Rates ........................................................................................................................ 28
SECTION 5: CUSTOMER IMPACTS ............................................................................................................. 30
Residential Customer Impacts ............................................................................................................ 30
Non-Residential Customer Impacts .................................................................................................... 30
SECTION 6: RATE SURVEY .......................................................................................................................... 31
Palo Alto Water Cost of Service and Rates Study
Raftelis Financial Consultants, Inc. Page 1
SECTION 1:
EXECUTIVE SUMMARY
The City of Palo Alto (City) engaged Raftelis Financial Consultants, Inc. (RFC) to conduct a cost of service
and rates study for the water enterprise. The City provided a financial plan detailing the water usage,
operating and capital expenses and revenue adjustments. This report documents the resultant findings,
analyses, and proposed changes that were developed with input from and approved by City staff.
The major objectives of the study include the following:
1. Ensure that rates are Fair and Equitable and are based on Cost of Service guidelines used in the
industry.
2. Review existing user classifications to achieve optimal cost causality.
3. Revise rates to encourage efficient use for environmental sustainability.
4. Ensure rates are consistent with the requirements of Proposition 218.
This executive summary provides an overview of the study and includes findings and recommendations
for water rates.
System Description
The water enterprise provides service to over 20,200 customers in a service area of over 26 square
miles. The water supply is purchased treated water from San Francisco Public Utilities Commission
(SFPUC). The cost of water has increased in the last several years due to the statewide water supply
shortage. Additionally, SFPUC has undertaken a major capital program that will cause the cost of
purchased water to increase significantly over the next several years.
The current retail water rate structure consists of a fixed monthly service charge that varies by meter
size, a two-tiered commodity rate for individually metered residential customers (W1), and uniform
commodity rates for non-residential customers, including irrigation customers (W7), and master
metered multi-family residential (MFR) customers (W4), which is grouped under the Commercial W4
rate. The existing rate structure is shown in Table 1-1.
Financing Plan
In order to determine water rates, RFC used the revenue requirements, including operations and
maintenance (O&M), capital improvement expenses, debt service costs, reserve requirements, etc., for
the study period from FY 2012 to 2017 provided in the City’s financial plan updated as of February 29,
2012. O&M expenses include the cost of purchasing water, operating and maintaining water supply,
treatment, storage, and distribution facilities, as well as the costs of providing technical services such as
laboratory services and other administrative costs of the water system such as meter reading and billing.
The O&M projections are based on the City’s long-range financial plan, using an inflationary factor of
two percent per year to project all O&M expenditures, except water purchased costs, which are
calculated separately. Water supply costs are projected to increase an average of 8.2 percent per year
from FY 2013 to 2017.
Palo Alto Water Cost of Service and Rate Study
Raftelis Financial Consultants, Inc. Page 2
In addition to the operating expenses, the City is planning significant capital expenditures over the next
five years. The City is planning to finance the entire five-year Capital Improvement Program (CIP) of
$32.9 million from FY 2013 to 2017 through rate revenues. Existing debt service results in annual
payments of approximately $3.2 million.
The number of water accounts is projected to remain at current levels. Water usage is projected to
decrease an average of approximately 1.6 percent per year as the City encourages conservation to meet
state regulations, SBX7- 7, requiring usage reduction by 20 percent by 2020.
The City’s financial plan indicates that revenue adjustments of 15 percent per year are required for FY
2013 and 2014, 9 percent in FY 2015, and 4 percent per year in FY 2016 and 2017. The adjustments are
needed to meet the operating and capital expenses as well as meet reserves target. The City currently
has three separate reserves: emergency plant replacement reserve, rate stabilization reserve, and debt
service reserve. According to the City’s reserve policies adopted in March 2009 [CMR 180:09], the rate
stabilization reserve balance should be kept at a minimum of 15 percent and maximum of 30 percent of
total sales revenue.
Figure 1-1 shows the ending balance and minimum and maximum targets for the rate stabilization
reserve.
Figure 1-1
Ending Reserves Balance
Cost of Service Analysis
To calculate fair and equitable rates so that customers pay in proportion to the cost of providing service,
RFC performed a cost allocation of the total revenue requirements consistent with industry standards.
The City currently has three classes of customers – individually metered residential, commercial
including master metered multi- family customers, and irrigation customers. The water system is
designed to meet the instantaneous demands, including peak demands, of all customers. Different
customer classes have different peaking characteristics depending on their water usage behaviors. For
example, residential customers have two major peaks during the day – early morning and in the
evening. Commercial customers tend to use water more uniformly during the day and thus have lower
$0
$2
$4
$6
$8
$10
$12
$14
FY 2012 FY 2014 FY 2016
Mi
l
l
i
o
n
s
Rate Stabilization Reserves Balance
Ending Balance Min Balance Max Balance
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peaks. Irrigation customers have the highest peaks as their usage during the winter month drops off
and irrigation typically requires high demands in summer time. Rates for the different customer classes
are designed to equitably capture these peaking costs.
Based on the analysis of peaking factors for different customer classes, shown in Section 3 – Allocation
of Costs to Customer Classes, RFC recommends that the City retain the existing customer classes as they
have similar peaking factors. Based on the analyzed usage patterns, RFC recommends retaining the
existing rate structure and tiers for individually metered residential customers. Master metered multi-
family residential (MFR) customers are retained on the uniform commercial rate structure. Because
they are non-homogenous, commercial and irrigation accounts are not ideally suited for a tiered rate
structure, therefore, all non-residential customers should continue to be billed on a uniform rate
structure. Rates are calculated for each customer class based on their respective peaking factors,
recognizing that different customer classes have different usage patterns.
An examination of the distribution system and reservoirs design showed there are not significant
differences in costs of serving customers at higher elevations. RFC recommends that that service to
customers at the higher elevations be provided at the same rate as the other customers.
Proposed Water Rates
Table 1-1 shows the proposed water rates for fiscal year (FY) 2013, effective July 1, 2012. Based on cost
of service analysis, it is recommended that the City retains the tiered structure for Residential W1
customers and the uniform rate structure for all other customers based on the customer class. All
commodity rates are calculated according to cost of service principles. At the current rates,
implemented in October 2011, the City collects approximately 11 percent of the total rate revenue from
the fixed monthly service charge. The proposed monthly service charge will collect approximately 15
percent of the total rate revenue, which will enhance revenue stability for the utility.
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Table 1-1
Current and Proposed Water Rate Schedule
Customer Impacts
The following table, Table 1-2, shows the impacts to Residential W1 at different levels of usage,
assuming a 5/8” meter. Low volume users will experience higher impacts due to the increase in the
meter charge and first tier rate. Correspondingly, large volume customers may not experience as much
of an increase. Usage greater than 34 ccf monthly represents the top five percent of the annual water
bills in the City.
General Monthly Meter Service Charge
Meter Size Effective Oct 1, 2011 July 1, 2012
5/8" $10.00 $13.74
3/4" $10.00 $18.28
1" $13.00 $27.35
1 1/2" $27.00 $50.03
2" $43.00 $77.25
3" $114.00 $163.44
4" $195.00 $290.46
6" $406.00 $594.39
8" $644.00 $1,093.39
10" $644.00 $1,728.48
Monthly Fire Meter Service Charge
Meter Size Effective Oct 1, 2011 July 1, 2012
2" $3.63 $3.30
4" $7.27 $20.44
6" $16.13 $59.38
8" $28.53 $126.54
10" $44.48 $227.56
Commodity Rate ($/ccf)
Effective Oct 1, 2011 July 1, 2012
Residential - W1
Tier 1 0 - 6 ccf $3.60 $4.54
Tier 2 over 6 ccf $7.34 $7.06
Master MFR/Commercial - W4 $4.93 $5.75
Irrigation - W7 $7.86 $7.19
Fire Service - W3 $10.00 $10.00
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Table 1-2
Monthly Customer Impacts – Residential W1
Note: Assumes 5/8” meter
Usage Monthly
Level Usage (ccf) Current Bill Proposed Bill % Change $ Change
Very Low 4 $24.40 $31.90 31% $7.50
Low 8 $46.28 $55.10 19% $8.82
Average 12 $75.64 $83.34 10% $7.70
High 20 $134.36 $139.82 4% $5.46
Very High 34 $237.12 $238.66 1% $1.54
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SECTION 2:
WATER FINANCIAL PLAN
This subsection of the report provides a summary of the projected revenues, O&M and capital
expenditures, capital improvement financing plan, debt service requirements, and the revenue
adjustments required to ensure the financial stability of the water enterprise as presented in the City’s
financial plan.
Water System Infrastructure
The water enterprise provides service to over 20,200 customers in a service area of over 26 square
miles. The sole potable water supply is purchased water from San Francisco Public Utilities Commission
(SFPUC). The water supply costs are approximately $1,276 per acre foot (AF) in FY 2012, projected to
increase 9 percent to $1,391 per AF in FY 2013. The purchased costs have increased in the last several
years and are projected to increase significantly until FY 2019 according to estimates from SFPUC.
The City delivers water to its customers through a distribution system consisting of 214 miles of water
mains. In addition, the City owns eight standby wells (including one that is currently under construction)
and six reservoirs with a total storage capacity of 10.5 million gallons.
Existing Water Rates
The current water rate structure consists of a monthly service charge and a per-unit volume rate. The
service charge varies by meter size. Individually metered residential customers have a two-tier water
volume rate, and the remaining customers, including master metered MFR, commercial, and irrigation
customers, pay a uniform rate per hundred cubic foot (ccf) of water used. The current rate structure is
shown in Table 2-1.
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Table 2-1
Existing Water Rate Structure
Water Accounts and Usage Characteristics
Customer accounts and usage information in FY 2011 are used as the basis for projecting water
revenues during the study period. The projections are based on the City’s long-range financial plan.
While water accounts are projected to remain stable for the next five years, water usage is projected to
decrease at an average rate of approximately 1.6 percent per year due to customer installations of
efficient appliances and overall water conservation.
Table 2-2 shows the estimated total customer accounts by meter size for the current fiscal year. As
stated above, the financial projections assume no significant change to customer accounts in the next
five years.
General Monthly Meter Service Charge
Meter Size Effective Oct 1, 2011
5/8" $10.00
3/4" $10.00
1" $13.00
1 1/2" $27.00
2" $43.00
3" $114.00
4" $195.00
6" $406.00
8" $644.00
10" $644.00
Monthly Fire Meter Service Charge
Meter Size Effective Oct 1, 2011
2" $3.63
4" $7.27
6" $16.13
8" $28.53
10" $44.48
Commodity Rate ($/ccf)
Effective Oct 1, 2011
Residential - W1
Tier 1 0 - 6 ccf $3.60
Tier 2 over 6 ccf $7.34
Master MFR/Commercial - W4 $4.93
Irrigation - W7 $7.86
Fire Service - W3 $10.00
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Table 2-2
Projected Customer Accounts by Meter Size
Table 2-3 shows the projected water usage by customer class for the next five years.
Table 2-3
Projected Water Usage (ccf)
As shown in Figure 2-1, Residential W1 customers use approximately 49 percent of the total water
consumption within the City and contribute 51 percent of the revenue. On the other hand, master-
metered MFR and Commercial customers use 43 percent of the water and contribute 39 percent of the
revenue and Irrigation customers use 8 percent of the water and contribute 10 percent of the revenue.
Rates that vary by customer class, based on the usage characteristics of the class, typically will produce
revenues that are not in the same proportion as usage. The cost of service analysis, Allocation of Costs
to Customer Classes in Section 3, shows how the revenues collected from the different classes are
proportional to the cost of service provided to these classes.
Meter Size Residential -
W1
Master MFR/
Commercial -
W4
Irrigation - W7 Fire Service -
W3
5/8" 13,771 1,060 53
3/4" 489 79 6
1" 1,948 581 75
1 1/2" 181 370 62
2" 73 606 111 0
3" 1 79 13 0
4" 1 50 6 226
6" 0 22 1 217
8" 0 12 1 134
10" 0 0 0 7
TOTAL METERS 16,464 2,859 328 584
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Estimated Projected Projected Projected Projected Projected
Residential - W1
Tier 1 46%1,134,529 1,109,963 1,071,251 1,033,889 1,010,184 999,093
Tier 2 54%1,358,903 1,329,479 1,283,112 1,238,361 1,209,967 1,196,683
Commercial - W4 2,182,348 2,135,093 2,060,630 1,988,761 1,943,162 1,921,828
Irrigation - W7 426,568 417,332 402,777 388,729 379,816 375,646
Fire Service - W3 1,333 1,304 1,258 1,214 1,187 1,174
Fire Hydrant - W2 3,732 3,732 3,732 3,732 3,732 3,732
TOTAL USAGE 5,107,412 4,996,902 4,822,760 4,654,687 4,548,048 4,498,156
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Figure 2-1
Water Usage and Revenue Comparison – FY 2012
Meters & Equivalent Meters
Most residential customers in the City are provided water service through a 5/8-inch meter, as shown in
Table 2-2.
To allocate meter-related costs appropriately, the concept of “equivalent meters” is utilized. Most rate
studies calculate equivalent meters based on meter hydraulic capacity. The ratio of hydraulic capacity is
calculated by dividing large meter capacities by the base meter capacity. The actual number of meters
by size is multiplied by the corresponding capacity ratio to calculate equivalent meters. The capacity
ratio is calculated using the meter capacity in gallons per minute (gpm) provided in the AWWA M22
Manual. By using equivalent meters instead of a straight meter count, the analysis reflects the fact that
larger meters impose larger demands, are more expensive to install, maintain, and replace than smaller
meters and commit a greater capacity in the system.
Equivalent meters are used in calculating meter service costs. The equivalent meter ratios used for this
study are shown in Table 2-4 below.
49%
43%
8% 0%
51%
39%
10% 0%
0%
10%
20%
30%
40%
50%
60%
Residential - W1 Master
MFR/Commercial -
W4
Irrigation - W7 Fire Service - W3
FY 2012 Usage & Revenue Comparison
FY 2012 Usage FY 2012 Revenue
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Table 2-4
Equivalent Meter Ratios
Meter Capacity in gallons per minute
Water System Revenues
The City’s water enterprise derives its required annual operating and capital revenues from a number of
sources. The principal source of operating revenues is the water service charges from the City’s water
customers. At the existing rates, revenues are expected to decrease from $29.8 million in FY 2012 to
$28.3 million by FY 2017 due to projected reduction in water usage. Other revenue sources include
miscellaneous operating revenues such as installation fees, interest earnings, etc. Capital revenue
sources include connection fees, bond proceeds, and grants and loans.
RFC reviewed the various sources of operating and capital revenues and the City’s financing plan. Table
2-5 presents the details of the operating and capital related revenues.
Meter Size Meter
Capacity AWWA Ratio
5/8" 20 0.67
3/4" 30 1.00
1" 50 1.67
1 1/2" 100 3.33
2" 160 5.33
3" 350 11.67
4" 630 21.00
6" 1,300 43.33
8" 2,400 80.00
10" 3,800 126.67
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Table 2-5
Revenue Summary under Existing Rates
The City derived approximately 9.7 percent of its rate revenues from fixed service charges and the
remainder from the variable commodity rates in FY 2012, since the City increased its water rates in
October 2011, three months into the fiscal year. If the current rates were effective for the entire fiscal
year, the City would collect approximately 11 percent of its rate revenues from fixed service charges.
This rate structure exposes the water fund to higher risks associated with reduced water usage since a
large percentage of revenue is based on variable consumption while a large percentage of operation
costs are fixed.
Water System Expenditures
For sound financial operation of the City's water system, the revenues generated must be sufficient to
meet the revenue requirements or cash obligations of the system. Revenue requirements include water
purchase costs, O&M expenses, capital improvement program (CIP) expenditures, principal and interest
payments on existing debt, and other obligations.
Operation and Maintenance Expenses
O&M expenditures include the cost of operating and maintaining water supply, treatment, storage, and
distribution facilities. O&M expenses also include the costs of providing technical services such as
laboratory services and other administrative costs of the water system such as meter reading and billing.
These costs are a normal obligation of the system, and are met from operating revenues as they are
incurred. The comprehensive forecasted annual O&M expenditures for the study are based upon the
City's long-range financial plan, using an inflationary factor of two percent per year to project all O&M
expenditures, except water purchase costs, which are calculated separately. Water supply costs
increase from $15 million to $22.5 million from FY 2012 through 2017. Total water supply costs are
forecasted to increase at an average of approximately 8.2 percent per year over the study period.
Projected O&M expenditures for the study period are summarized by functions in Table 2-6.
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Estimated Projected Projected Projected Projected Projected
Sales Revenues - Fixed $2,887,929 $3,451,891 $3,451,891 $3,451,891 $3,451,891 $3,451,891
Sales Revenues - Variable $26,928,589 $27,573,513 $26,611,858 $25,683,718 $25,094,831 $24,819,315
Total Sales Revenues $29,816,518 $31,025,405 $30,063,750 $29,135,609 $28,546,722 $28,271,207
Interest Income $970,600 $612,905 $650,644 $743,787 $615,767 $577,724
Other Income $776,000 $785,000 $795,000 $749,840 $771,000
Connection Charges $175,000 $346,000 $345,000 $345,000 $289,840 $298,000
Capacity Fees $525,000 $430,000 $440,000 $450,000 $460,000 $473,000
Transfer from Other Utility Funds $74,996 $74,996 $74,996 $74,996 $74,996 $74,996
Misc And Reimbursements $193,400 $193,400 $193,400 $193,400 $193,400 $193,400
Grant Funds $604,601 $597,587 $587,861 $576,632 $563,822 $550,452
Subtotal Other Income $1,572,997 $1,641,983 $1,641,257 $1,640,028 $1,582,058 $1,589,848
TOTAL REVENUE $32,360,114 $33,280,292 $32,355,651 $31,519,424 $30,744,548 $30,438,779
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Table 2-6
Projected O&M Expenses
Water Capital Improvement Program
The City has developed a comprehensive water Capital Improvement Program (CIP) to address current
water system needs. As Table 2-7 indicates, the total estimated water CIP for the study period of FY
2012 to FY 2017 is $37.3 million. This inflation rate is a conservative estimate and ensures that the City
has adequate resources reserved to complete the necessary projects. In the financial plan, the City
assumes that all capital costs will be rate funded. Funding the capital costs through rates is especially
prudent for the City because the City’s capital costs are fairly uniform over the planning period, except
for a spike in FY 2014, and rates will provide the necessary cash to fund those projects and save on
interest costs. However, issuing debt would spread the costs over a longer term and minimize the rate
adjustments needed in the short term.
Table 2-7
Capital Improvement Plan
O&M EXPENSES FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Estimated Projected Projected Projected Projected Projected
Resource Management & Admin $667,113 $680,455 $694,064 $707,945 $722,104 $736,546
Purchases $14,960,517 $15,940,087 $17,390,108 $19,582,002 $20,625,706 $22,460,313
Allocated Admin & Overhead $2,523,981 $2,620,912 $2,673,330 $2,726,796 $2,781,332 $2,836,959
Engineering Support & Admin $983,460 $1,050,712 $1,071,726 $1,093,161 $1,115,024 $1,137,324
Transmission $1,769,881 $1,856,279 $1,893,404 $1,931,272 $1,969,898 $2,009,296
Distribution $3,092,520 $3,562,370 $3,633,617 $3,706,290 $3,780,416 $3,856,024
Customer Service & Admin $661,674 $674,908 $688,406 $702,174 $716,217 $730,542
Meter Reading $261,106 $266,328 $271,655 $277,088 $282,629 $288,282
Billing And Collections $256,164 $261,288 $266,513 $271,844 $277,281 $282,826
Water Demand Side Management $635,865 $699,582 $713,574 $727,845 $742,402 $757,250
Rent $2,141,887 $2,184,725 $2,228,419 $2,272,988 $2,318,447 $2,364,816
Operating Transfer Out to Other Funds $103,737 $105,812 $107,928 $110,087 $112,288 $114,534
TOTAL O&M EXPENSES $28,057,905 $29,903,456 $31,632,745 $34,109,492 $35,443,746 $37,574,713
WBS Description FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
WS-13004 Asset Management Mobile Deployment $100,000
WS-13002 Fusion and General Equipment Tools $50,000 $53,000 $56,180
WS-13003 GPS Equipment Upgrade $200,000
WS-09000 Seismic Water System Improvement $600,000 $3,820,000 $0 $0 $0
WS-07000 Turnouts Regulator Station $0 $600,000
WS-11003 Water Distribution System Improvements $212,000 $218,000 $225,000 $232,000 $238,960
WS-80015 Water Meters $222,000 $229,000 $236,000 $243,080 $250,372
WS-07001 Water Recycling Facility $0 $0 $0 $0
WS-08001 Water Reservoir Coating $500,000 $1,000,000 $1,000,000 $0 $0
WS-80014 Water Service Hydrants $222,000 $229,000 $236,000 $243,080 $0
WS-11004 Water Supply Sys Improvement $212,000 $218,000 $225,000 $232,000 $238,960
WS-80013 Water System Extension $420,000 $430,000 $440,000 $450,000 $460,000 $473,000
WS-02014 W-G-W Utility GIS Data $100,000 $100,000 $100,000 $0 $0
WS-07003 WMR Project 21 $0
WS-11000 WMR-Project 25 $3,152,000 $0 $0 $0
WS-12001 WMR-Project 26 $3,245,000 $0 $0 $0
WS-13001 WMR-Project 27 $314,000 $3,345,000 $0 $0
WS-14001 WMR-Project 28 $0 $324,000 $3,445,000 $0
WS-15002 WMR-Project 29 $0 $0 $334,000 $3,550,000
WS-16001 WMR - Project 30 $0 $0 $344,020
WS-16002 WMR - Project 31 $0 $0 $0
Adjustment to match Financial plan $3,949,000
TOTAL CIP $4,369,000 $6,000,000 $9,813,000 $6,794,000 $5,189,160 $5,151,492
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Revenue Adjustments
The City’s financial plan projects the following revenue adjustments for the next five years, as shown in
Table 2-8. The adjustments are necessary to meet projected expenditures and to maintain sufficient
reserves balances.
Table 2-8
Revenue Adjustments Schedule
Fiscal Year Revenue Adjustments
2013 15%
2014 15%
2015 9%
2016 4%
2017 4%
Debt Service Requirements
Debt service requirements consist of principal and interest payments on existing debt. The City
currently has debt service obligations associated with the outstanding 2009 Water Revenue Bonds and
the 2011 Revenue Refunding Bonds. Existing debt service payments are approximately $3.2 million
annually. Table 2-9 shows the existing debt service of the Water Enterprise.
Table 2-9
Existing Debt Schedule
Note: Debt service for FY 2012 includes the 2002 bonds, which are refunded by the 2011 bonds.
Debt Service Coverage
The City must meet debt service coverage requirements on its outstanding bond issues. Coverage
requirements typically vary between 100 percent and 160 percent or higher. The City’s required debt
coverage is 125 percent, which means that the City’s Adjusted Net System Revenues shall amount to at
least 125 percent of the Annual Debt Service. The system revenues include funds derived from the
ownership and operation of the system including water service charges from the City’s customers,
miscellaneous service charges, revenues received from contracts, and interest income. Annual Debt
Service includes annual principal and interest payments on outstanding debt. With the proposed
revenue adjustments, the City exceeds the coverage requirement during each year of the study’s
planning period.
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Water Revenue Bonds - 2009 Series A (Direct Payment Build America Bonds)
Principal $835,000 $855,000 $885,000 $915,000 $955,000 $990,000
Interest $1,727,430 $1,707,390 $1,679,603 $1,647,521 $1,610,921 $1,572,721
Total 2009 Debt Service $2,562,430 $2,562,390 $2,564,603 $2,562,521 $2,565,921 $2,562,721
2011 Utility Revenue Refunding - Series A
Principal $479,250 $414,000 $425,250 $438,750 $452,250 $470,250
Interest $177,864 $242,775 $230,355 $217,598 $204,435 $186,345
Total 2011 Debt Service $657,114 $656,775 $655,605 $656,348 $656,685 $656,595
TOTAL EXISTING DEBT SERVICE $3,338,027 $3,219,165 $3,220,208 $3,218,869 $3,222,606 $3,219,316
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Table 2-10 and Figure 2-2 show the operating financial plan for the next five years based on the revenue
and expenses information presented above. The plan includes the revenue adjustments shown in Table
2-8.
Table 2-10
Operating Financial Plan
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Estimated Projected Projected Projected Projected Projected
Revenue from Existing Rates $29,816,518 $31,025,405 $30,063,750 $29,135,609 $28,546,722 $28,271,207
Total Additional Revenue $0 $4,653,811 $9,695,559 $12,864,100 $14,250,124 $15,807,942
Total Revenue from Rates $29,816,518 $35,679,215 $39,759,309 $41,999,709 $42,796,847 $44,079,149
Interest Income $970,600 $612,905 $650,644 $743,787 $615,767 $577,724
Other Operating Revenue $872,997 $865,983 $856,257 $845,028 $832,218 $818,848
Total Operating Revenue $31,660,114 $37,158,102 $41,266,210 $43,588,524 $44,244,832 $45,475,721
Capital Revenue
Connection Charges $175,000 $346,000 $345,000 $345,000 $289,840 $298,000
Capacity Fees $525,000 $430,000 $440,000 $450,000 $460,000 $473,000
Proposed Bonds Proceeds $0 $0 $0 $0 $0
Total Capital Revenue $700,000 $776,000 $785,000 $795,000 $749,840 $771,000
TOTAL REVENUE $32,360,114 $37,934,102 $42,051,210 $44,383,524 $44,994,672 $46,246,721
Operating Expenses
Operations $10,955,501 $11,778,645 $12,014,218 $12,254,502 $12,499,592 $12,749,584
Purchases $14,960,517 $15,940,087 $17,390,108 $19,582,002 $20,625,706 $22,460,313
Rent $2,141,887 $2,184,725 $2,228,419 $2,272,988 $2,318,447 $2,364,816
Existing Debt Service $3,338,027 $3,219,165 $3,220,208 $3,218,869 $3,222,606 $3,219,316
Proposed Debt Service $0 $0 $0 $0 $0
Total Operating Expenses $31,395,932 $33,122,621 $34,852,952 $37,328,361 $38,666,352 $40,794,029
Capital Expenditures $4,369,000 $6,000,000 $9,813,000 $6,794,000 $5,189,160 $5,151,492
Net Cash Flow ($3,404,818) ($1,188,519) ($2,614,742) $261,164 $1,139,160 $301,200
Debt Coverage Ratio 129% 249% 324% 319% 296% 269%
Required Debt Coverage Ratio 125% 125% 125% 125% 125% 125%
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Figure 2-2
Operating Financial Plan
Reserves
The City currently maintains three separate reserves: emergency plant replacement reserve, rate
stabilization reserve, and debt service reserve. According to the City’s current reserves policy, the rate
stabilization reserve is set at a minimum of 15 percent of rate revenue and a maximum of 30 percent of
rate revenue. The emergency plant replacement reserve is set at a minimum of $1 million to cover the
liability insurance deductible for losses resulting from damages to water assets during disasters. The
debt service reserve is maintained according to the covenants of the outstanding debt and currently
includes $3.3 million.
The estimated FY 2012 total ending rate stabilization reserve balance is approximately $9.5 million.
The reserve balance and the minimum and maximum reserves targets are shown in Figure 2-3. The
reserve level is projected to be just below the minimum in some years in the five-year forecast horizon.
Figure 2-3
Ending Reserves Balance
-$10
$0
$10
$20
$30
$40
$50
FY 2012 FY 2014 FY 2016
Mi
l
l
i
o
n
s
Operating Financial Plan
Operations Purchases Rent Reserves
Debt Service CIP Current Revenue Proposed Revenue
$0
$2
$4
$6
$8
$10
$12
$14
FY 2012 FY 2014 FY 2016
Mi
l
l
i
o
n
s
Rate Stabilization Reserves Balance
Ending Balance Min Balance Max Balance
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SECTION 3:
COST OF SERVICE ANALYSIS
The City’s customer classifications and the revenue requirements reviewed and finalized through the
operating and capital cash flow analysis provide the basis for performing the cost of service analysis.
This section of the report discusses the allocation of operating and capital costs to the appropriate
parameters consistent with industry standards and the determination of unit costs.
The total revenue requirements net of revenue credits from miscellaneous sources, is by definition, the
cost of providing service as shown in Table 3-1. This cost is then used as the basis to develop unit costs
for the water parameters and to allocate costs to the various customer classes in proportion to the
water services rendered. The concept of proportionate allocation to customer classes requires that
allocations should take into consideration not only the average quantity of water used but also the peak
rate at which it is consumed. There are costs associated with design and construction of facilities used
to meet peak demands, and these need to be allocated so that peaking costs can be recovered
appropriately. In this Study, water rates were calculated for FY 2013, and accordingly FY 2013 is defined
as the Test Year. Test Year revenue requirements are used in the cost allocation process.
Cost of Service to be Allocated
The annual revenue requirements or costs of service to be recovered from commodity charges include
operation and maintenance (O&M) expenses, costs associated with annual renewal and replacements,
and other capital related costs. O&M expenses include costs directly related to the supply, treatment,
and distribution of water as well as routine maintenance of system facilities. This maintenance is often
referred to as routine capital and represents the annual recurring capital outlay for minor system
improvements and purchases of materials and supplies.
The total FY 2013 cost of service to be recovered from the City’s water customers, shown in Table 3-1, is
estimated at approximately $35.7 million, of which approximately $27.2 million is operating costs and
the remaining $8.4 million is capital costs, which consists of capital expenditures and existing debt
service. The cost of service analysis is based upon the premise that the utility must generate annual
revenues adequate to meet the estimated annual revenue requirements. As part of the cost of service
analysis, revenues from sources other than water rates and charges (e.g. revenues from miscellaneous
services) are deducted from the appropriate cost elements. Additional deductions are made to reflect
interest income and other non-operating income during FY 2013. Adjustments are also made to account
for cash balances to ensure adequate collection of revenue and to determine annual revenues needed
from rates.
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Table 3-1
Allocation of Revenue Requirements
To allocate the cost of service among the different customer classes, costs first need to be allocated to
the appropriate water parameters. The following section describes the allocation of the operating and
capital costs of service to the appropriate parameters of the water system.
Functional Cost Components
The total cost of water service is analyzed by system function in order to equitably distribute costs of
service to the various classes of customers. For this analysis, water utility costs of service are assigned
under the Base-Extra Capacity method to three basic functional cost components including base costs,
extra capacity or peaking costs and customer service related costs as described in the M1 Manual,
Principles of Water Rates, Fees, and Charges, published by the American Water Works Association
(AWWA). This method is widely used in the water industry to serve retail customers.
Base Costs
Base costs are those operating and capital costs of the water system associated with serving customers
at a constant average rate of use. Supply costs are typically considered to be based on average usage.
Extra Capacity Costs
Extra capacity or peaking costs represent those costs incurred to meet customer peak demands for
water in excess of average day usage. Total extra capacity costs are subdivided into costs associated
Operating Capital Total
Revenue Requirements
Operations $11,778,645 $11,778,645
Purchases $15,940,087 $15,940,087
Rent $2,184,725 $2,184,725
Existing Debt Service $3,219,165 $3,219,165
Proposed Debt Service $0 $0
Capital Expenditures $6,000,000 $6,000,000
Subtotal Revenue Requirements $29,903,456 $9,219,165 $39,122,621
Less: Revenue from Other Sources
Interest Income $603,952 $603,952
Other Operating Revenue $865,983 $865,983
Capital Revenue $776,000 $776,000
Subtotal Revenue Requirements $1,469,934 $776,000 $2,245,934
Less: Adjustments
Annual Cash Balance $1,197,471 $1,197,471
Mid-year Rate Increase $0
Subtotal Revenue Requirements $1,197,471 $0 $1,197,471
Total Revenue to be Recovered from Rates $27,236,050 $8,443,165 $35,679,215
FY 2013
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with maximum day and maximum hour demands. The maximum day demand is the maximum amount
of water used in a single day in a year. The maximum hour demand is the maximum usage in an hour on
the maximum usage day. Different facilities are designed to meet different peaking characteristics. For
example, transmission lines are designed to meet Max Day requirements. Transmission lines have to be
designed larger than they would be if the same annual amount of water were being used at a constant
rate throughout the year. The cost associated with constructing a larger line is based on the overdesign”
and is proportioned on the Max Day factor. For example if the Max Day factor is 2.0, then the line has to
be designed twice as large as required to meet just the average usage conditions. In this case half of the
cost would be allocated to Base or average and the other half allocated to Max Day. The calculation of
the Max Hour and Max Day demands is explained below.
Customer Service Related Costs
Customer service costs include customer related and meter related costs. Customer costs are uniform
for all customers and include such costs as meter reading, billing, collecting, and accounting. Meter
service costs include maintenance and capital costs associated with meters and a portion of the capacity
related costs. These costs are assigned based on meter size or equivalent meter capacity.
The allocation of costs of service into these principal components provides the means for determining
the costs to the various customer classes on the basis of their respective base, extra capacity and
customer requirements for service.
Allocation to Functional Cost Components
The water utility is comprised of various facilities each designed and operated to fulfill a given function.
In order to provide adequate service to its customers at all times, the utility must be capable of not only
providing the total amount of water used, but also supplying water at peak or maximum rates of
demand. The separation of costs by function allows allocation of such costs to the functional cost
components.
Determination of Allocation Percentages
To determine how costs should be allocated to average and peak (Max Day and Max Hour) demands,
the allocation percentages assigned to each cost components need to be determined. Allocation
percentages were derived from actual historical data. RFC performed the following steps to derive the
allocation percentages for apportioning the City’s O&M and capital costs. Customer service related
costs are allocated 100% to the customer service component. Costs related to meter maintenance are
allocated to meter service component. These two components are included in the fixed monthly service
charges. The methodology for calculating volume related cost allocation is explained below. Table 3-3
will help in understanding the allocation calculations.
The first step is to determine system peaking factors. Peaking factors are based on the City’s usage
characteristics. RFC analyzed two years of hourly usage data provided by the City to determine the
peaking factors. The Base or average daily demand (ADD) is the average of the annual usage expressed
as the usage per day. This Base Demand, or ADD, for the City is 13,560 CCF per day and is assigned a
value of 1.0. The City’s Max Day demand is 20,775 CCF per day, or 1.53 times the ADD, and is therefore,
assigned a value of 1.53. The maximum hourly (Max Hour) usage is estimated to be 2.40 times the ADD,
and is therefore, assigned a value of 2.40. Table 3-2 below shows the peaking factors of the whole
system, calculated from the prior two years of hourly usage data.
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Table 3-2
System Peaking Factors
To determine the relative proportion of costs to assign to Base, Max Day and Max Hour, allocations are
calculated based on these factors. Cost components that are solely Base related to provide average day
demand, such as source of supply, are allocated 100 percent to Base. Cost components that are
designed to meet Max Day peaks, such as reservoirs and transmission facilities, are allocated to Base
and Max Day factors. Since facilities such as reservoirs and distribution systems are also designed to
handle fire flow, an allocation is also provided for fire flow. The Max Day factor of the City’s system is
1.53, which means that Max Day facilities are designed to provide 153% of the average day capacity. In
other words, 53 out of 153, or 35% (53/153) represents the portion required to meet Max Day
requirements. Therefore the Max Day facilities are designed 35% larger than required to meet average
usage conditions to meet Max Day requirements.
Base: 65% = (1.00/1.53)x100
Max Day: 35% = (1.53-1.00)/1.53x100
Cost components such as those related to the distribution system that are designed for Max Hour peaks
are allocated similarly. The Max Hour factor is 2.4, so Max Day facilities are designed to provide 240% of
the average day capacity. Out of this 240, 100 represents the ADD, 54 represents the Max Day
requirement and the remainder of 87 represents the Max hour requirement. This means that the Max
Hour capacity represents 87 out of 240, or 36% (87/240), the Max Day represents 53 out of 240, or 22%
(53/240), and the remaining 100 out of 240 represents the base capacity of the facilities designed for
Max Hour. The allocation of Max Hour facilities is shown below:
Base: 42% = (1.00/2.40)x100
Max Day: 22% = (1.53-1.00)/2.40x100
Max Hour: 36% = (2.40-1.53)/2.40x100
The results of the allocation are presented in Table 3-3 below.
Table 3-3
Calculation of Allocation Factors
2-yr Peaking Factors
Base 1.00
Max Day 1.53
Max Hour 2.40
Base Max Day Max Hour
Facilities Designed for Base 100%
Facilities Designed for Max Day 65% 35%
Facilities Designed for Max Hour 42% 22% 36%
Allocation Percentages
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These percentages are used to allocate the operating and capital improvement costs amongst Base, Max
Day, and Max Hour parameters for cost of service calculations, which is explained in detail in the
following sections.
Allocation of Operating Expense
Projected net operating expenses for FY 2013 are allocated to cost components on the basis of the
design criteria of the facilities. Water supply costs are allocated to base; storage or reservoir costs are
allocated to max day and fire; distribution system costs are allocated to max hour and fire; transmission
costs are allocated to max day; billing and customer service costs are allocated to customer service, etc.
Administration and general expenses are related to total system operations and cannot be specifically
allocated to individual functions such as storage or distribution, etc. These expenses are therefore
allocated in the same proportion as all the remaining operating expenses. The resulting allocation of
operation and maintenance expense serves as the basis for allocating the FY 2013 net operating costs
shown in Table 3-1 to the base, extra capacity and customer costs functions.
Allocation of Plant Investment and Capital Costs
Capital costs include capital improvements financed from annual revenues, debt service and other
sources. Capital costs related to specific facilities will vary significantly from year to year. Allocating
these costs based on the functions of these specific facilities would cause the rates to the different
customer classes to change from year to year. A reasonable method of assigning capital costs to
functional components, widely practiced in the industry, is to allocate such costs on the basis of net
plant investment recognizing that over a period of time these allocations will provide costs to be passed
on to customers equitably.
Net plant investment is represented by the total replacement cost of water utility facilities less
accumulated depreciation. The estimated fiscal year net plant investment in water facilities consists of
net plant in service as of June 30, 2011.
Costs are allocated based on the design criteria of each facility. For example, treatment facilities are
allocated to Max Day since these facilities are designed to handle the maximum day demand. The
investment in general plant is allocated to each cost component on the basis of all other plant
investment. The resulting allocation of net plant investment serves as the basis for allocating the capital
costs shown in Table 3-1.
Unit Cost of Service
In order to allocate costs of service to the different customer classes, unit costs of service need to be
developed for each cost component. The unit costs of service are developed by dividing the total annual
costs allocated to each parameter by the total annual service units of the respective component.
The volume related cost components are based on volumetric units of one hundred cubic feet or CCF
(about 748 gallons). Customer service related cost components are based on number of accounts and
meter related costs are based on equivalent meters. Table 3-4 shows the determination of the total
annual units by customer class. The extra capacity units are determined based on the respective
peaking factor for each class, as shown in Table 3-6.
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Table 3-4
Determination of Total Annual Units
Table 3-5 shows the units of service and the development of the FY 2013 unit costs for each of the cost
components. To ensure that the costs are appropriately shared between fixed and variable components
and recognize the demands based on capacity of meters, a portion of the extra capacity related costs
are allocated to meters to recognize the demand that meters place on the system. The allocated costs
are divided by the total number of units for each component to determine the unit costs of each
component as shown in Table 3-5.
Table 3-5
Development of Unit Cost
Allocation of Cost to Customer Classes
The unit cost of each of the cost categories shown in Table 3-5 is then applied to the projected FY 2013
usage and units of each customer class to derive customer class costs. Costs are allocated to each
customer class based on the respective peaking factors for each class. The primary differentiator of
rates amongst different customer classes is based on the demand that they put on the system. This
demand is expressed in terms of the maximum day and maximum hour factors. These are the maximum
demands expressed as a multiple of the average demands of the customer class. Residential customers
generally have higher peaking factors than commercial customers and irrigation customers have the
highest peaking factors. The max day factor for each customer class is based on the maximum month
demands. The ratio of the max hour and max day for the whole system is used to estimate the max
hour factor for each customer class. The peaking factors, shown in Table 3-6, were determined for the
three customer classes.
Annual Average Total Extra Total Extra
Use Daily Use Capacity Capacity Capacity Capacity Capacity Capacity Monthly Equivalent
Customer Class (ccf) (ccf/day) Factor (ccf/day) (ccf/day) Factor (ccf/hour) (ccf/hour) Bills Meters
Residential - W1 2,439,441 6,683 2.00 13,367 6,683 3.14 20,968 7,601 16,464 13,942
Master MFR/Commercial - W4 2,135,093 5,850 1.75 10,237 4,387 2.75 16,058 5,821 2,859 10,104
Irrigation - W7 417,332 1,143 3.00 3,430 2,287 4.71 5,381 1,950 328 1,366
TOTAL 4,991,866 13,676 27,034 13,357 42,406 15,372 19,651 25,412
Maximum Day Requirements Maximum Hour Requirements
Base Max Day Max Hour Fire Meter Billing General Total
Operating Expenses $17,809,449 $1,717,027 $1,136,457 $368,830 $184,415 $1,099,147 $4,920,726 $27,236,050
Capital Expenses $3,300,939 $1,718,968 $1,916,247 $782,065 $470,434 $0 $254,512 $8,443,165
Total Cost $21,110,387 $3,435,994 $3,052,704 $1,150,895 $654,849 $1,099,147 $5,175,238 $35,679,215
Allocation of General Costs $1,552,571 $1,742,476 $1,548,100 $332,090 ($5,175,238) $0
Allocation of Public Fire Costs ($718,247) $718,247 $0
Allocation Peak to Meter ($1,294,618) ($1,150,201) $2,444,819 $0
Total Cost of Service $22,662,959 $3,883,853 $3,450,603 $432,649 $4,150,005 $1,099,147 $0 $35,679,215
TRUE
Total Units of Service 4,991,866 13,357 15,372 7,286 304,944 235,812
Unit of Measure ccf ccf/day ccf/day Private fire equiv meter bills/yr
Total Unit Cost of Service
Unit Rate $4.54 $290.77 $224.47 $59.38 $13.61 $4.66
Average Cost of Service $6.01
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Table 3-6
Peaking Factor by Customer Class
Table 3-7 shows the FY 2013 customer class units and cost responsibility for each customer class.
Table 3-7
Customer Class Cost
The Residential W1 customer class has the highest assignment of costs at $17.9 million followed by the
Commercial W4 customer class at $14 million. The City’s residential class is responsible for 50 percent
of the total cost of service. The commercial class is responsible for approximately 40 percent of the
annual cost of service, and the remaining 10 percent is associated with irrigation and private fire
protection customers.
Table 3-7 presents a comparison of the distribution of projected revenue (FY 2013) at current rates and
the annual cost of service allocated among customer classes. Approximately 50 percent of both costs
and revenues can be attributed to the Residential W1 customer class. Figure 3-1 indicates that based on
cost of service, more revenue should be recovered from Commercial W4 customers than under current
rates and less revenue should be recovered from irrigation customers and residential customers. This
helps to improve the recovery of costs proportionate to use from the different customer classes. Note
that the percentage of revenues from the different customer classes at the current rates are different
than shown in Figure 2-1; this results because rates changed in October 2011 and Figure 2-1 shows the
revenues at the average rate for the year, whereas Figure 3-1 shows the revenues at the October 2011
rates.
Customer Specific Peaking Factors Max Day Max Hour
Residential - W1 2.00 3.14
Master MFR/Commercial - W4 1.75 2.75
Irrigation - W7 3.00 4.71
Customer Class Base Max Day Max Hour Fire Meter Billing Total
Residential - W1 $11,075,008 $1,943,304 $1,706,151 $2,276,798 $920,887 $17,922,148
Master MFR/Commercial - W4 $9,693,275 $1,275,641 $1,306,628 $1,650,127 $159,914 $14,085,585
Irrigation - W7 $1,894,676 $664,908 $437,824 $223,080 $18,346 $3,238,834
Fire Service - W3 $432,649 $432,649
TOTAL $22,662,959 $3,883,853 $3,450,603 $432,649 $4,150,005 $1,099,147 $35,679,215
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Figure 3-1
Cost of Service and Current Revenue by Customer Classes in FY 2013
Once the customer class cost responsibility is determined, the next step is to design customer rate
schedules to recover the revenues required from each customer class, which is discussed in the next
section. The rate design analysis will illustrate how revenues are collected within each class using the
current rate structure and how they compare to costs.
50%
39%
9% 1%
51%
37%
11% 0%
0%
10%
20%
30%
40%
50%
60%
Residential - W1 Master
MFR/Commercial
- W4
Irrigation - W7 Fire Service - W3
Comparison of COS and Current Structure
COS Current
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SECTION 4:
RATE DESIGN
The revenue requirements and cost of service analysis described in the preceding sections of this report
allocate the costs equitably amongst the different customer classes. Rate design is the process of
developing rate schedules for each customer class such that the annual cost of service determined for
each customer class is equitably recovered from the customers in that class. In this study, the focus of
rate design is on the development of rate schedules for each of the City’s retail service customer classes.
This subsection of the report discusses the current water rate structure and develops a schedule of
water rates for the City’s residential customer class and rates for the non-residential class that meet the
City’s objectives of equitable collection of costs and efficient use of resources. Finally, this subsection
analyzes the impact of the proposed cost allocations and rate design on residential customers.
Proposed Rate Structure
Rate structures should be designed to ensure that customers pay their proportionate share of costs. In
addition, rate structures should be easy to understand, simple to administer, and comply with
regulatory requirements. A review of the current rate structure provides insights into the equitability of
the current methodology and changes, if any, that should be considered.
Proposed Changes
RFC proposes that the City retains the current tiers and rate structures for both residential and non-
residential customers because the current rate structure differentiates rates by customer class
consistent with typical peaks observed for the different classes; tiered rates are generally provided for
homogenous classes such as the residential class and uniform rates for non residential classes because
individual customer’s usage can vary significantly. Several factors are considered in the rate design
process including efficient use of resources, conservation to meet regulatory requirements, and revenue
stability to mitigate some of the risks associated with high dependence on variable revenues from sales.
Additionally, RFC recommends that the City increase the fixed monthly service charge to collect
approximately 15 percent of total rate revenue from fixed charges. In the current fiscal year, the City
will collect 9.8 percent of total rate revenue from fixed charges. The California Urban Water
Conservation Council (CUWCC) Best Management Practice (BMP) # 11 recommends a maximum of 30
percent rate revenue from fixed charges. The fixed charge proposed is well under the 30 percent and
should still provide incentives for conservation and efficient use of water.
The City has expressed an interest in examining current rate structures, including an evaluation of
charging different rates for customers in different zones such as the foothills, and an evaluation of
master metered MFR customers’ rate structures.
A review of the costs pertaining to servicing customers in the higher elevations of the City’s service area
revealed that there were additional costs to pump water up to the customers and storage reservoirs in
the foothills, but that the foothills reservoirs provided water storage and fire fighting reserves for all
customers in the City and were not just for the customers who reside in the foothills. Due to the design
of the water distribution system and the use of the foothills reservoirs, and since the pumping costs
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would have to be incurred for all customers, it is concluded that there were no significant additional
costs identified to serve the customers in the foothills and, therefore, there is no justification for
imposing different rates for customers in these areas.
An examination of current commodity rate for master metered MFR customers was also done. The
individually metered MFR customers have the same rate structure as single family residential (SFR)
customers in the Residential W1 class and master metered MFR customers are charged the uniform
commercial rate. Mastered metered MFR customers are not individually metered and the water bills
are not paid directly by MFR customers but rather by the landlord, the property owner or the home
owners association. Meters can vary in size from a small 5/8” meter to 4” or larger meters.
Additionally, a master metered MFR account may have a separate irrigation meter or a meter that
provides both domestic as well as irrigation use. Typically, as more users are served by a single meter,
or as customers get larger, their peaking use reduces. While many agencies treat all residential
customers, SFR and MFR, as a single class, master metered MFR customers are more likely to have lower
peaking factors similar to commercial customers. Finally, typically a utility’s data on the number of
dwelling units for each master metered MFR customer may not be readily available for each meter
and/or the billing system may not be set up to bill each account based on the number of dwelling units.
If the City were to charge the master metered MFR class the same rate as the Residential W1 class, it
would have the option of either tiered MFR rates or a uniform rate. The uniform rate option would
result in a rate that is slightly higher than the uniform commercial rate based on customer class cost of
service. Since the number of dwelling units associated with a master meter can vary significantly, tiered
rates for master metered MFR customers are typically based on the number of dwelling units assigned
to each account. To use tiered rates for MFR customers, the data regarding the number of MFR units
per account and the usage per account both would need to be identified so that the appropriate tiers
could be defined. The City is investigating ways to obtain this data reliably and cost effectively. At the
current time, the water system does not have the number of dwelling units identified for the master
metered accounts and implementing tiered rates for these customers is not practical. Also, since the
MFR customers do not pay the bill themselves, or they pay a portion of a shared bill that may not
represent their individual use, sending a conservation signal to these customers through tiered rates
may not be very effective. Additionally, the billing system should be capable of billing each account
based on the number of dwelling units. Considering the different factors, RFC recommends that master
metered MFR customers continue to be billed at the commercial uniform rate since their peaking factors
are similar to commercial customers.
Monthly Meter Service Charges
A service charge is a cost recovery mechanism that is generally included in the rate structure to recover
some of the fixed costs including meter and customer related costs, and a portion of the capacity
related cost to provide a stable source of revenue independent of water consumption.
Customer related costs are fixed expenditures that relate to operational support activities including
accounting, billing, customer service, and administrative and technical support. The customer related
costs are essentially common-to-all customers that are reasonably uniform across the different
customer classes. In addition, there are capacity related costs such as meter maintenance and peaking
charges that are included based on the hydraulic capacity of the meters. Since facilities are designed to
meet peaking requirements, RFC has assigned a portion of the costs related to peaking to the service
charge. Increasing the fixed charge reduces the variable rates and incentive for conservation, but
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provides a mechanism for recovering a portion of the fixed costs and ensures a stable source of
customer revenues for the utility. A good rate design seeks an appropriate balance between these
pricing objectives. A guideline used in deciding the amount of revenue that should be recovered from
fixed charges is provided by the CUWCC’s Best Management Practice #11 which states that the
maximum amount of the fixed revenue should not exceed 30 percent of the total rate revenue. The City
collects approximately 9.8 percent of the total rate revenues from the fixed service charges in FY 2012
due to a rate increase implemented in October 2011. However, if the current rates are in effect for the
entire fiscal year, the City would collect approximately 11 percent of its rate revenues from fixed service
charges. The cost of purchased water is allocated to the variable commodity rate and as it increases, the
total fixed service charge revenue decreases. RFC’s rate design allows 15% of the total rate revenues to
be collected from fixed charges.
The Meter Unit Cost, determined in the previous section, is multiplied by the meter capacity ratios from
the AWWA M22 Manual Sizing Water Service Lines and Meters to calculate the Meter Capacity Cost.
The Meter Capacity Cost is then added to the Customer Service Cost to compute the cost based service
charge shown in the right hand column of Table 4-1.
Table 4-1
Proposed Monthly Meter Service Charges Calculation
Commodity Rates
The commodity rate is the rate developed for each customer class which will recover the City’s variable
volume related costs. The annual estimated FY 2013 revenue requirement, less annual cost based
service charge revenues, are the revenues that need to be recovered through commodity rates.
Cost of service based commodity rates are developed for each customer class based on the principle of
maintaining inter-class and intra-class revenue neutrality and equity. This means that each customer
class would only pay its assigned share of costs of service (Refer to Table 3-7 for revenues required from
each customer class), and that each member of each class would only pay his or her fair share of
customer class costs. Since a portion of the revenues required from each customer class is to be
recovered through uniform monthly service charges, commodity rates are designed to recover only that
portion of revenues that is not recovered through the service charge.
Annual service charge revenues for each customer class for FY 2013 are calculated based on the forecast
number of meters by size in a given class and the COS based monthly service charges calculated in Table
Meter Size Meter Ratio No. of Meters
Meter
Capacity Cost Billing Cost
Proposed
Charge
Current
Charge Difference
5/8" 0.67 14,884 $9.07 $4.66 $13.74 $10.00 37%
3/4" 1.00 574 $13.61 $4.66 $18.28 $10.00 83%
1" 1.67 2,604 $22.68 $4.66 $27.35 $13.00 110%
1 1/2" 3.33 613 $45.36 $4.66 $50.03 $27.00 85%
2" 5.33 790 $72.58 $4.66 $77.25 $43.00 80%
3" 11.67 93 $158.77 $4.66 $163.44 $114.00 43%
4" 21.00 57 $285.79 $4.66 $290.46 $195.00 49%
6" 43.33 23 $589.73 $4.66 $594.39 $406.00 46%
8" 80.00 13 $1,088.73 $4.66 $1,093.39 $644.00 70%
10" 126.67 0 $1,723.82 $4.66 $1,728.48 $644.00 168%
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4-1. Table 3-7 shows the total assigned cost by class, the annual costs recovered from the service
charge, and the annual costs that are to be recovered from the commodity rate.
The water commodity rate for each customer class is computed based on the customer class’ annual
usage revenues required and the estimated annual volume of water usage. The cost based commodity
unit rate is shown in Table 4-2.
The customer classes can be sorted into groups with similar peaking characteristics and a uniform water
commodity rate is calculated for each class of customers.
The City currently differentiates between Residential W1 class and all other classes for rate design. To
encourage conservation within an overall cost of service based rate design, Residential W1 rates are
tiered. Many agencies across the state use such a structure to encourage conservation. The State of
California also encourages use of conservation rate structures. RFC recommends the City retain its
existing tiered rate structure to encourage conservation. Tiered rates are more practical to implement
for the individually metered residential class because this class is a fairly homogenous class. The first
tier is designed to provide low volume domestic demand usage inside the residence; since it does not
put much demand on the system, the first tier usage is provided a lower rate by excluding peaking costs.
All residential customers will receive the lower first tier rate. The second tier is designed to recover the
remainder of the revenues from this class based on the COS and also sends a pricing signal that may
encourage conservation. All remaining customers including non-residential, master metered MFR and
irrigation customers will continue to be charged a uniform rate based on COS. These customer classes
are not ideally suited for tiered rates because of their non-homogenous character. Master metered
MFR and commercial customers have very similar peaking factors which are lower than Residential W1
peaking factors and thus receive a lower uniform rate. Irrigation customers with higher peaking factors
are charged a higher uniform rate.
Table 4-2 shows the current and proposed rates for the different customer classes. Proposed rates for
FY 2013 include a 15 percent revenue increase over current rates.
Table 4-2
Proposed Commodity Rates Calculation
The increase in the fixed monthly service charge and the increase in the rate for the first tier consistent
with the cost of providing service will impact low volume customers. These impacts are described in
Section 5.
Customer Class Tier (ccf) Total Usage Revenue
Required Rate ($/ccf) Current Rates Difference
Residential - W1
Tier 1 6 985,748 $4.54 $3.60 26%
Tier 2 over 6 1,453,694 $7.06 $7.34 -4%
Subtotal 2,439,441 $14,724,463 $6.04 $5.83 4%
Master MFR/Commercial - W4 2,135,093 $12,275,545 $5.75 $4.93 17%
Irrigation - W7 417,332 $2,997,408 $7.19 $7.86 -9%
Fire Service - W3 1,304 $0 $10.00 $10.00 0%
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Monthly Fire Meter Service Charges
Fire service charges are assessed to private fire protection meters. Based on the cost of service analysis
discussed above, a portion of the total costs are allocated to private fire protection. The proposed
monthly charges are shown in Table 4-3 below.
Table 4-3
Proposed Monthly Fire Meter Service Charges
Proposed Water Rates
The proposed water rates for FY 2013 are shown in Table 4-4 below.
Meter Size No. of Meters
Proposed
Charge
Current
Charge Difference
2" 0 $3.31 $3.63 -9%
4" 226 $20.45 $7.27 181%
6" 217 $59.38 $16.13 268%
8" 134 $126.54 $28.53 344%
10" 7 $227.56 $44.48 412%
Palo Alto Water Cost of Service and Rate Study
Raftelis Financial Consultants, Inc. Page 29
Table 4-4
Proposed Water Rate Schedule
General Monthly Meter Service Charge
Meter Size Effective July 1, 2012
5/8" $13.74
3/4" $18.28
1" $27.35
1 1/2" $50.03
2" $77.25
3" $163.44
4" $290.46
6" $594.39
8" $1,093.39
10" $1,728.48
Monthly Fire Meter Service Charge
Meter Size Effective July 1, 2012
2" $3.30
4" $20.44
6" $59.38
8" $126.54
10" $227.56
Commodity Rate ($/ccf)
Effective July 1, 2012
Residential - W1
Tier 1 0 - 6 ccf $4.54
Tier 2 over 6 ccf $7.06
Master MFR/Commercial - W4 $5.75
Irrigation - W7 $7.19
Fire Service - W3 $10.00
Palo Alto Water Cost of Service and Rates Study
Raftelis Financial Consultants, Inc. Page 30
SECTION 5:
CUSTOMER IMPACTS
RFC performed an analysis to evaluate the impact of the proposed rate structure on customers with
various water usage levels. The impacts of each of these changes among customer classes and within
customer classes are discussed below.
Residential Customer Impacts
For Residential W1 customers, the bill impacts at various usage levels assuming a 5/8” meter are shown
below in Table 5-1. Low volume users see higher impacts due to the increase in the meter charge and
the first tier rate. The very high use represents the top five percent of the annual bills starting at 34 ccf
monthly.
Table 5-1
Residential W1 Customer Impacts
Note: Assumes 5/8” meter
Non-Residential Customer Impacts
Under the proposed rate structure, Master metered MFR/Commercial W4 and Irrigation W7 customers’
rate impacts vary depending on the meter size and the level of usage for each customer. Table 5-2
shows an example of the impacts at different usage levels.
Table 5-2
Non-Residential Customer Impacts
Note: Assumes 1” meter for Master MFR/Commercial customers and 2” meter for Irrigation customers
Usage Monthly
Level Usage (ccf) Current Bill Proposed Bill % Change $ Change
Very Low 4 $24.40 $31.90 31% $7.50
Low 8 $46.28 $55.10 19% $8.82
Average 12 $75.64 $83.34 10% $7.70
High 20 $134.36 $139.82 4% $5.46
Very High 34 $237.12 $238.66 1% $1.54
Monthly
Usage (ccf) Current Bill Proposed Bill % Change $ Change
10 $62.30 $84.85 36% $22.55
25 $136.25 $171.10 26% $34.85
50 $259.50 $314.85 21% $55.35
30 $278.80 $292.95 5% $14.15
60 $514.60 $508.65 -1% ($5.95)
90 $750.40 $724.35 -3% ($26.05)
Master MFR/Commercial - W4
Customer Class
Irrigation - W7
Irrigation - W7
Master MFR/Commercial - W4
Master MFR/Commercial - W4
Irrigation - W7
Palo Alto Water Cost of Service and Rate Study
Raftelis Financial Consultants, Inc. Page 31
SECTION 6:
RATE SURVEY
The City conducted a water rate survey with neighboring utilities. Rate surveys can provide insights into
a utility’s pricing policies related to service. Care should be taken, however, in drawing conclusions from
such a comparison as some factors including geographic location, demand, customer constituency, level
of treatment, level of grant funding, age of system, sources of water costs, and rate-setting
methodology can affect the cost of providing services. The following table and figures show the
comparison between the City’s current and proposed rates with those of neighboring utilities.
Table 6-1
Comparison of Neighboring Utilities
Figure 6-1
Comparison of Neighboring Utilities – Total Water Bill
Agency
Monthly
Meter Charge
Commodity
Charge Total Bill As of
Santa Clara $9.20 $26.91 $36.11 7/1/2011
Mountain View $6.75 $30.48 $37.23 7/1/2011
Los Altos - CWS $13.41 $27.07 $40.48 1/1/2012
Redwood City $19.64 $26.38 $46.02 7/1/2011
Palo Alto - Current $10.00 $43.62 $53.62 10/1/2011
Bear Gulch - CWS $14.08 $40.61 $54.69 1/1/2012
Palo Alto - Proposed $13.74 $48.42 $62.16 7/1/2012
Note: Assume 5/8" meter and 9 ccf per month usage
$36.11 $37.23 $40.48 $46.02
$53.62 $54.69
$62.16
$0
$20
$40
$60
$80
$100
Santa Clara Mountain
View
Los Altos -
CWS
Redwood
City
Palo Alto -
Current
Bear Gulch -
CWS
Palo Alto -
Proposed
Total Water Bill Comparison - 5/8" meter and 9 ccf
Monthly Meter Charge Commodity Charge
Palo Alto Water Cost of Service and Rate Study
Raftelis Financial Consultants, Inc. Page 32
Figure 6-2
Comparison of Neighboring Utilities – Monthly Meter Charge
$6.75
$9.20 $10.00
$13.41 $13.74 $14.08
$19.64
$0
$5
$10
$15
$20
$25
Mountain
View
Santa Clara Palo Alto -
Current
Los Altos -
CWS
Palo Alto -
Proposed
Bear Gulch -
CWS
Redwood
City
Monthly Meter Charge Comparison - 5/8" meter
Excerpted Draft Minutes of the March 27,2012 UAC Meeting
NEW BUSINESS
ITEM 1:ACTION:Water Utility Proposed Rate Adjustments Effective July 1,2012
Chair Foster called for public comments on the item.
Public Comment:
Joe Baldwin,President of Waverley Park condominiums,spoke about how the ten
condominiums pay commercial rates for water,but residential rates for sewer.Since they are
residential customers,they want to be on the residential rate for water with the first usage tier
calculated by multiplying the W 1 first usage tier by the number of units.The homeowners
association began through the long process to get remedy for the issues raised long ago and
was told that only the Council can make a decision so they have been following the process,
which starts here with the UAC.When reviewing staff’s proposal,they saw that their issue was
not addressed except for a small mention in the cost of service study.He views the issue as one
of fairness and doesn't understand why CPAU can't address this issue and "eliminate this
inequity."He stated that,if it's a billing system issue,then CPAU should address this issue.
Chair Foster clarified that commercial customers and master metered multi family units,are
billed a rate that includes a fixed charge and a volumetric rate.Staff confirmed this
understanding.
Senior Resource Planner Ipek Connolly provided a presentation of the written report.She
noted that the City's water supplier,the San Francisco Public Utilities Commission (SFPUC)
lowered its wholesale rate projection for FY 2013 after the UAC reviewed the water financial
forecast presented in February.This caused staff to lower the recommended revenue increase
to 15%,or $4.7 million.The need for the revenue increase is to pay for infrastructure
investments both for CPAU's local system and for SFPUC's and to account for lost revenue due
to lower sales than anticipated.As staff has been communicating for some time,SFPUC rates
have increased and are expected to continue increasing for the next 5 years.The City engaged
Raftelis Financial Consultants (RFC)to conduct a cost of service study to develop rates
compliant with Proposition 218.After UAC review,the Finance Committee will review the rate
proposal on April 18.If approved by Council in June,the rates will become effective on July 1,
2012.
Sudhir Pardiwala,Vice President of RFC,presented a summary of the Water Cost of Service
Study.Pardiwala reviewed the objectives of the study and the proposed 15%revenue
adjustment for FY 2013.He reviewed the cost of service concept,which is to follow the
American Water Works Association methodology to assign costs to meet peak usage to those
contributing to peak usage.The revenue requirement is then allocated to cost components and
these costs are allocated to each customer class based on their usage characteristics.Finally,
the rate structure and rate design is done to collect the revenue requirement from each class of
customers.
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Pardiwala discussed the rate structure review and noted that RFC recommended continuing
with the existing rate structure and customer classes.This would mean that individually
metered residential rate W 1 would retain 2 usage tiers,but should increase the amount of
revenue collected from the fixed monthly charge.RFC found no justification to charge different
rates for customers in higher elevations and recommended continuing to use the W 4 rate for
master metered multi family residential customers.Pardiwala noted that the W 4 volumetric
rate was lower than the average volumetric rate for W 1 rate schedule since they have a lower
peaking factor.
Overall,RFC recommends increasing meter charges for all customers to collect 15%of revenues
from these fixed charges.For W 1,the recommendation is to increase the first tier volumetric
rate while reducing the second tier rate.The average volumetric rate for W 1 is increased by
4%.The W 4 volumetric rate is increased 17%and the W 7 irrigation rate is reduced 9%.The
customer impacts were shown for each customer class for a variety of usage levels.Overall,
CPAU's rates are higher than most of the neighboring communities,but the comparison does
not include rate adjustments that other agencies may undertake this year.
Chair Foster asked if master metered multi family residences can install single meters for each
individual housing unit and,if they did,what rate schedule would they be on.Connolly said
that it is possible to replumb and install separate meters,but there are costs to do that,and,if
they did,they would be on the W 1 rate schedule.Chair Foster asked Mr.Baldwin if he was
proposing to be on the W 1 rate and pay the tier 1 rate for usage up to 6 ccf and pay the tier 2
rate for usage above that.Mr.Baldwin said that the usage for the 10 units ranges from 37 to 44
ccf per month so that the per household is much lower than 6 ccf per household.
Commissioner Keller asked if the cost allocation is driven by peak usage.Pardiwala responded
that the costs are allocated by how the customers use the system.
Commissioner Keller asked if the cost of the water relates to how much we use relative to how
much is used by other communities who buy water from SFPUC.Pardiwala responded that if
you use more water,it will cost more from SFPUC and that cost is figured into the rates.SFPUC
looks at the amount of water it sells to the wholesale entities and uses that to determine how
to set the rate to collect the total amount it needs to cover its costs.If more water is used,
then the unit rate goes down.Ratchye added that the volumetric rate charged to each
BAWSCA entity is the same and doesn’t depend on how much each agency uses.So to the
extent Palo Alto can reduce its share of the total water use,its costs are reduced,but the rate
charged by SF is set to recover its costs.
Commissioner Waldfogel asked what percentage of the actual system capacity is consumed at
the max hour.Pardiwala said we know average,max day and max hour usage so if you are
looking at it as how much you use as a max day basis,it is 1.5 times the average day.
Commissioner Waldfogel said that the system is somewhat overdesigned and that the system
would be overloaded if all meters used the max amount at the same time.Pardiwala confirmed
that this is true and that the system takes into account the fact that people use the system at
different times and not all at once.
Commissioner Eglash asked for the justification for multiple tiers for residential customers
within the cost of service study.Pardiwala said that there are many reasons for tiers for
residential customers.Many agencies have different water supplies which are priced
differently so that the higher priced water is incorporated into the higher priced tiers.Another
factor that is taken into account in tiers is the peaking costs that are passed on to send the
proper signal to encourage conservation of a precious resource.Since residential customers
are a relatively homogeneous customer class,tiers are able to be used equitably.Most
agencies have this inclining tier structure to encourage conservation since residential customers
are the most amenable to this type of rate design.
Commissioner Eglash commented that the comparison of Palo Alto's bills and rates,including
volumetric rates,are all higher than surrounding communities,but all the agencies get their
water from the same source at the same price.Pardiwala said that the cost of water is about
50%of the total costs and the other costs such as CIP and operating costs are the other 50%of
the costs that are recovered by rates.Other differences are type of system,age of the system,
how it was financed,size of agency,number of customers,etc.Ratchye added that the
surrounding agencies do not all get all their water from SFPUC.For example,Santa Clara only
gets a small fraction of their water supplies from the SFPUC and that the majority of the water
is groundwater and treated water from the Santa Clara Valley Water District.Commissioner
Eglash added that,although the costs are not a part,per se,of the cost of service study,CPAU
should be prepared to explain why our water rates are already so high and we are being asked
to raise them even higher.He noted that we may need to remind them that not all entities get
all of their water from the SFPUC and that CPAU has been doing a great job replacing aging
infrastructure.This is an important issue for public communicators to gain support for the
higher rates.
Commissioner Melton stated that the proposed $13.74 fixed meter charge is close to the meter
charge being considered for FY 2013 last year.Connolly confirmed that the charge considered
last year was $14.95.Commissioner Melton asked how much of the fixed cost is covered by the
fixed charge revenues.Pardiwala said that the fixed charges cover about 15%of the total
revenues and fixed costs are about 45%to 50%of the total costs.However,Pardiwala stated
that the California Urban Water Conservation Council guideline is to collect no more than 30%
of the total revenues from fixed charges.
Chair Foster asked about fire meters,which are proposed to increase by an extraordinary
amount,for example from $44.48 to $227.56 for a 10 inch meter.Pardiwala said that the costs
recovered from these accounts were not covering the costs that are put on the system and said
that the charges are not out of line for that size of meter.Chair Foster stated that it sounded
like we are doing a major catch up of revenue to costs and said that these large increases need
to be communicated carefully to the affected customers who will be hit with very large cost
increases.
Commissioner Eglash asked who generally pays for fire meters.Resource Planner Eric Keniston
stated that fire service charges apply to any building with fire sprinklers in the building.The
system must be able to provide water when needed in a fire.Fong stated that this was a small
part of the total revenues.
Commissioner Keller asked if there was a consideration to add more tiers to residential rates or
if additional tiers were considered at all if the goal is to lower demand.Pardiwala said that in
this case there was an effort to tie the costs to the rate structure so there needs to be a
rationale for additional tiers.Since there is no difference in costs for source of supplies,this
cannot be used to justify additional tiers.In Palo Alto’s case,the justification for tiered rates is
to assign peaking costs to the second tier.A third tier could be developed,but some
justification would be needed.If a third tier was added and,for example,the second tier rate
was set equal to the average cost for the customer class,then the third tier rate would be very
high.The study did take a look at that and,if the third usage tier was set at 24 ccf,which
represents about 85%of the usage of the customers,then the third tier rate would be about
$10/ccf.Since the second tier in the proposed rate is already quite high at $7/ccf,a third tier
did not seem to be justifiable.
Chair Foster clarified that a third tier could be justified.Pardiwala stated that it could be
justified and it would send a very strong signal for conservation,however he cautioned that
there could potentially be a large negative customer reaction to that high of a rate.
Commissioner Waldfogel added that the idea of third tiers was rejected by Council last year
based on advice from the City Attorney and didn’t see any point in revisiting the idea of adding
a third tier.Chair Foster noted that in answering the question posed,RFC stated that a third
tier could be justified.Chair Foster asked the consultant to clarify that the cost of service study
is driven by the need to comply with the cost of service requirements of Proposition 218.
Pardiwala confirmed this understanding.Chair Foster asked if also the study was completed
within the understanding of a somewhat conflicting state law requiring conservation pricing for
water.Pardiwala said that his report is based on cost of service and was not focused on
conservation pricing,but that the rates do encourage conservation as they are quite high,
especially for the second tier.
Commissioner Melton observed that the tier 2 residential rate is very similar to the w 7
irrigation rate and this is good signal since it is generally thought that the second tier is for
irrigation usage in single family residential customers.There is a very consistent tie between
these two and it is a good link.
Vice Chair Cook asked why the rate proposed seems to punish smaller users.Pardiwala said
that these were the rates that fell out from the cost of service.Connolly stated that the biggest
change is the increase in the fixed charge and this hits the smallest users hardest in terms of a
percentage increase.Fong reminded the UAC that last year we had a significant discussion on
the issue of fixed charge and last year the decision was made to phase in the increase in fixed
charge increase over two years,rather than take it all the way to cost of service in one year.
This is the second year of the two year phase in so staff is proposing to move to the cost of
service study recommendation for the fixed charge.
Vice Chair Cook asked if the percentage changes would be similar for each customer class in
future years.Pardiwala stated that this should be true.When the base is set at cost of service,
the adjustments in future years should be very similar for each customer class unless there are
changes in the cost structure or different usage patterns for customers classes.Vice Chair Cook
stated that although the changes appear to discourage conservation,we are doing a one time
change to have costs reflected in the rates.Pardiwala said that this was the case.Chair Foster
asked for more clarity on this point and,as an example,asked if the revenue increase needed
was 10%,then would the changes for each rate component be 10%and not disproportionate
on a class or a rate component.Pardiwala stated that this should be true unless the cost
structure changed.
Commissioner noted that the rates still don’t reflect the fact that all fixed costs are recovered
through fixed charges,however,there may be political limits on how much can be recovered
that way.
Commissioner Waldfogel asked how difficult it would be in the billing system to base a W 4 rate
on a per unit basis for master metered multi family residential customers.Fong said that it
would take significant staff time to get the data and change the billing system to do this.We
know the number of units for some multi family complexes,but not for all.Commissioner
Waldfogel asked if there was a large range in the number of units per complex.Fong
responded that there is a large range in the number of meters.Commissioner Waldfogel asked
if we couldn’t establish a first tier at,say 50 ccf,for these customers.Pardiwala said that if this
class were to be treated separately,that each account would have to have an associated
number of dwelling units in the billing system and that the tier 1 rate would likely be lower than
that for single family dwellings since the use is generally less water per dwelling –it could be 4
ccf,instead of 6 ccf for the first tier,for example.The appropriate tiers would be determined
after analysis including a review to ensure that the revenues would be recovered
appropriately.
Commissioner Keller asked if there was a concern that the water system would be strained by
peak water usage and that we would run out of capacity or should we establish rate schedules
to reduce peak usage.Ratchye replied that Engineering would provide the best answer to this
question,but that the City’s overall water use today is 40%less than it was in 1976 so usage is
unlikely to be reaching system capacity.
Commissioner Eglash stated that he supported many of the components of the proposed rates,
but has a great concern about a couple of them.He said it was appropriate to do cost of
service studies and base rate structure changes on those conclusions,but maybe not
appropriate to make the jump in one year if the impact on customer bills would be significantly
impacted.For example,the fire service charges are increased so dramatically that the change
should be phased in over time,rather than so abruptly all at once.The comments on master
metered multi family units are well taken,but he does not think a solution should be proposed
for just one building and the UAC does not have the information to develop a new rate for this
class at this time,but supports staff looking into the problem and making some
recommendation in the future.The biggest issue he has with the proposed changes to
residential rates are not appropriate and it is socially unfair to have the smallest users hit with
the largest percentage increase and while the largest users enjoy a bill and rate reduction.This
is a big mistake and highly inappropriate in terms of water conservation and social fairness.
Commissioner Eglash said he was not focused on the rates themselves,but the changes,which
are what people relate to.Those least able to pay and those doing the best job of conserving
water will see the largest increases with the effect that the incentive to conserve is reduced.
The idea that we are encouraging water efficiency,but giving the largest users a rate decrease
is not appropriate.Eglash noted that he had not had the opportunity to consult with the City
Attorney on Prop 218,but nevertheless,he stated that it seems that we are behaving with an
overabundance of caution on this issue.Regarding last year’s Palmdale case,the legal reviews
did not relate to tiered prices,but to parity between classes.Eglash remarked that his view is
that we should not use Proposition 218 to back away from the tiered pricing we have now.The
rates being proposed by staff level off the tiers and Commissioner Eglash does not support that
change.Commissioner Eglash stated that he would prefer to increase the tier 2 rate so that the
smallest users see less of an increase and the largest users do not see a rate reduction.He
advised that it's important not to make such a significant change to the relative rates for the
tiers.He said he would support increasing the fixed charge,but not increasing the tier 1 charge
so much and did not support a decrease in the tier 2 charge.He stated that the tier 2 charge
should definitely not go down.
Chair Foster asked if Commissioner Eglash would propose to keep the tier 2 charge the same or
increase it.Commissioner Eglash stated that he did not have the mathematical models to
design the rates,but was stating his policy preferences.He noted that the revenue
requirement must be met,but that there should be a way to do that while increasing the fixed
charge as proposed,but not decreasing the tier 2 charge since that has an unfortunate effect of
reducing the water bill for those most able to pay.
Commissioner Melton suggested that if the W 1 tier 2 rates were kept at the same level,then
the tier 1 rate could be reduced such that the total revenue collected from the customer group
would be the same so that the revenue would be equal to the cost of service for the customer
class as needed for Proposition 218.
Commissioner Waldfogel said that these rates were constructed after legal advice developed
last year and that changing the rates without the mathematical model is hazardous.He
suggested that,perhaps,legal advice is needed and that the proposed rates are the ones
presented as being based on the cost of service.He said that the proposed rates are the ones
that are consistent with advice received and that no changes should be proposed,but that the
UAC could take up a study item for future rate design decisions.Commissioner Eglash agreed
that the UAC did not have the advantage of having advice from the City Attorney,but he wants
to make a recommendation based on what they do have in front of them tonight.He stated
that the Finance Committee and Council will likely have that advice available.Commissioner
Eglash said that he has not heard any information or evidence from the consultant that pulling
back from the City’s current degree of conservation pricing would expose the City to risk of
litigation.
Commissioner Keller said that she is still interested in having a third tier,if that is legal,to
provide a strong message to conserve water.She said that tier 1 seems to be the indoor water
use and tier 2 is for irrigation,but that a third tier could be for wasteful irrigation.Such a
structure would provide a strong motivation to cut back on irrigation.
Commissioner Cook stated that he wants the City’s policy to ensure that Palo Alto’s rates are
fair and that they are structured to encourage conservation.
Chair Foster announced that he had received another card from the public wishing to
comment.
Public Comment:
Mr.Buchanan,stated that,like Mr.Baldwin’s,his homeowner association cannot understand
why their 8 unit condominiums are classified as commercial customers since it is residential in
every respect.Also,he suggested that in this region of geniuses,we should be able to figure
out a way to divide the amount of water by the number of units to develop a rate.The
wastewater rate is already based on the number of units so the number of units must already
be known.
Chair Foster agreed with Commissioner Eglash's suggestion to have staff work with master
metered multi family residents to find an acceptable solution to the problem raised by the
speakers.Chair Foster suggested that perhaps interested customers could request or apply to
be moved to a different rate schedule.Fong stated that resources would be required to do the
research and synch up the billing system and database for this change and that they would not
want to do one offs with specific customers who request different treatment,but would ensure
that all similarly situated customers are treated the same.
Commissioner Eglash said that he could develop a recommendation to Council to ask staff to
find a solution to the problem.He suggested that some study needed to be done since he
didn’t want to see any unintended consequences and wanted to hear what would need to be
done to address the issue.He suggested that it was not an issue that needed to be studied by
the cost of service consultant as it was not that kind of issue.He expects that staff can identify
the problem and find a solution.He is not convinced that a cost of service study needs to be
done to address each customer class.Commissioner Eglash added that a cost of service study
does not need to be done every year or every time rates are changed,but should only be done
once every other year or every five years.Fong said that it would be good to have a third party
to develop what the rate should be,but the data first needs to be collected.
Chair Foster made a motion,seconded by Commissioner Melton,to recommend Council:
1.increase revenues by 15%as recommended by staff;
2.accept staff's recommendation for commercial W 2 rates;
3.not change specific rates in such a way that violates the requirement of California
law that water utilities pursue conservation pricing and,therefore,change the W 1
rate as follows:
a.do not change the tier 2 rate from the current rate of $7.34/ccf;
b.decrease the tier 1 rate in order to collect the revenue requirement for the W 1
class;and
4.direct staff to find a solution to the treatment of master metered multi family
residential customers as commercial customers;
5.increase the W 7 rate from the proposed rate of $7.19/ccf to be at least the same
rate as the W 1 tier 2 rate ($7.34/ccf);and
6.phase in the fire service increases over four years.
Commissioner Cook seconded the motion.
Commissioner Cook made a friendly amendment to the motion to remove the part to phase in
the fire service increases.He said that this change was least important and that they were
already recommending a number of more important changes that should be the focus of their
direction.Commissioner Eglash agreed that their recommendation should be focused on the
most important issue at hand.Chair Foster accepted the amendment to the motion.
Commissioner Waldfogel stated that he was very strongly opposed to the motion as it exposes
the city to too much legal risk.He recommended recommending the rates staff proposed.He
said that the UAC could take up the issues raised in the future,but should not do that now as
the cost of service study has concluded that the proposed rates achieve the cost of service
requirement of the law.He said that making these changes on the fly is rash.He said that we
the UAC has no information that the rates in the motion will be based on the cost of service.
He also said that raising the irrigation rate (W 7)is also counter to legal advice.
Commissioner Eglash said that the changes recommended in the motion are modest changes as
they only change by a small amount and keep the cost of service by customer class objective
met.Commissioner Melton said that the W 1 tier 2 rate of $7.34 is an established rate so there
is little risk under Proposition 218 if it is simply maintained.Chair Foster said that rather than
drop the W 7 rate from the current $7.86/ccf to $7.19/ccf as proposed,it could be made the
same as the W 1 tier 2 rate of $7.34 since this rate is really for irrigation.
Commissioner Eglash cautioned against changing the W 7 rate at all as it gets to the heart of
the cost of service study and changes allocations between customer classes and serves to
undermine the changes that they are really trying to do.Commissioner Eglash,therefore,
proposed a friendly amendment to remove the recommendation to change the W 7 rate.
Commissioner Melton agreed with Commissioner Eglash that the UAC should stay away from
moving costs between customer classes.He said that the UAC should stay with the cost of
service study recommendations for the average volumetric rates for each customer class,
including the $6.04/ccf for W 1,$5.75/ccf for W 2,$7.19/ccf for W 7,since those do comply
with Proposition 218.Commissioner Melton said that they can tinker around with the tier rates
for W 1,but should ensure that the average rate stays $6.04 for W 1.Chair Foster agreed to
take that part out of the motion.Commissioner Cook also accepted the amendment.
Commissioner Eglash proposed another friendly amendment to change the wording in the
motion from:“not change specific rates in such a way that violates the requirement of
California law that water utilities pursue conservation pricing”to “not change specific rates in
such a way that undermines conservation pricing”.Chair Foster accepted that change,but
reminded that the focus is always on Proposition 218,but the state’s constitution also requires
conservation pricing.Commissioner Eglash said that it was Article 10,Section 2 that states that
rates shall encourage conservation and efficiency.
Director Fong said that a cost of service study was completed and it is a legitimate analysis and
that you may want to phase in the results that are in the cost of service.Commissioner Eglash
stated that the proposal in the motion is aligned with the cost of service study and there are no
recommendations to shift cost from one customer class to another.The only suggestion is to
make an adjustment in the tier pricing for the W 1 rates.Commissioner Eglash stated that the
changes recommended are small and that the cost of service study results are still valid,but the
development of the rate is misaligned by putting too much weight on peak usage instead of the
need to conserve water.Further,because,water is a scarce resource and conserving it is of
paramount importance the cost of service analysis is lagging behind what is needed in the
current world in which we live.In addition,basing everything on peak demand is not realistic as
we are not near the peak capacity of the system so to put so much weight on that factor is not
reasonable.
Chair Foster said that the requirement for conservation pricing is the driver of the motion and
that the cost of service
Commissioner Keller asked if the recommendation to address the master metered multi family
customers could be taken up in a separate motion.Chair Foster agreed with that suggestion to
remove that part of the original motion and offered to make a second motion with that
recommendation.
ACTION:
Chair Foster?s amended motion,seconded by Commissioner Melton,is that the UAC
recommends that the City Council:
1.Increase overall retail water rates and annual revenues for the Water Fund by 15%
2.Not change specific rates in such a way that undermines conservation pricing.
3.Amend the water utility rate schedules as recommended by staff except as follows:
a.The volumetric charge for residential (W1 rates)tier 2 would remain at the
current rate of $7.34 per ccf,not decrease to $7.06 per ccf as recommended by
CPAU staff;and
b.The amount of the increase in the volumetric charge for residential tier 1 would
be recalculated and reduced so that the overall increase in volumetric charges
for residential customers would increase by the amount recommended by staff,
which is to the average rate of $6.04 per ccf.
The motion passed by a vote of 5 1 with Commissioner Waldfogel opposed.
Chair Foster made a motion to direct staff to investigate and make a recommendation on the
apparent anomaly of charging master metered multi family buildings commercial rates for
water.Commissioner Cook seconded the motion.The motion passed unanimously (6 0).
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FINANCE COMMITTEE
Excerpt
Special Meeting
March 6, 2012
Water Fund Financial Projections (FY 2013-FY 2017).
Valerie Fong, Utilities Director, reported the water supply rates from the San Francisco
Public Utilities Commission (SFPUC) were lower than originally thought.
Ipek Connolly, Senior Resource Planner, indicated the Staff Report used an earlier rate
projection and, based on that, the revenue adjustment was 20 percent for the Budget
Year, followed by 24 percent. She reported the revision in the SFPUC rate projections
would create a 15 percent rate increase for Fiscal Year 2013 rather than 20 percent.
Council Member Burt asked if that also affected 2014.
Ms. Connolly answered yes.
Council Member Price inquired if that would also be 20 percent.
Ms. Connolly stated 15 percent in 2013, followed by 15 percent in 2014, followed by 9
percent, 3 percent and 2 percent.
Chair Shepherd asked where that was located.
Ms. Connolly indicated it was in the presentation material.
Ms. Fong stated it was in Slide 9.
Ms. Connolly noted the information had been revised with the updated SFPUC
wholesale price.
Chair Shepherd asked if the increase would be 15 percent rather than 20 percent in
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2013.
Ms. Connolly responded that was correct.
Chair Shepherd inquired if the other percent increases held.
Ms. Fong replied the increase was 15 percent in 2014 rather than 24 percent.
Ms. Connolly reported this was a five-year view, providing updated demand projections
and updated cost projections. She noted these amounts could change next year;
however, using today's information, these were Staff's projections.
Ms. Fong stated projections changed yearly, due to different water years and different
conditions. She stated these were the projections using information available today.
Council Member Burt asked to see slide 11, a table version.
Ms. Connolly indicated this was the base case, with results of the revised update in the
second section. She noted the first section contained the rate adjustment differences,
resulting average system rates with those adjustments and ending water rate
stabilization reserve balances. She reported Staff was managing the reserves within
the Council's approved guidelines in both cases. She explained Staff could utilize some
of the excess in the reserves to request only a 15 percent increase. She stated the
City was expected to reach the minimum reserves over the five-year forecast horizon.
Chair Shepherd referenced the monthly residential water bill comparison, Packet page
12 of 13. She noted Palo Alto basically dominated the large user category for expense,
and asked if that was because of the tier system.
Ms. Connolly answered correct, and explained the second tier price was higher than
other utilities' price for second tier. She noted as quantity increased, the difference
became larger. She explained the large user category was at 29 CCF and covered
up to 85 percent of customers in the summer, leaving only 15 percent of customers
who used more than 29 CCF in the summer.
Ms. Fong reported Staff's rate proposal presentation would include total revenues
needed for the Utility and incorporate the cost of service analysis. She stated the
difference between the classes would be reflected in the cost of service analysis.
Chair Shepherd asked if it had been declared a drought year and when that information
would be provided.
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Jane Ratchye, Assistant Director Utilities, stated it wasn’t going to be declared a
drought year, because last year was wet and the amount of water in storage.
Council Member Price asked Staff to clarify conservation pricing.
Ms. Connolly explained conservation pricing involved pricing quantities of water
consumed at increasingly higher rates.
Ms. Fong stated the more you use, the more you pay.
Ms. Connolly indicated the first 6 CCF was priced at $3.90 per CCF, and anything over
that amount was priced at a higher rate. She noted progressively higher prices
signaled customers to conserve water.
Vice Mayor Scharff noted the Capital Improvement Budget as well as San Francisco's
water rates were cost drivers. He asked if the increases were necessary, given the
huge rate increases from San Francisco at the same time. He also asked if rates
needed to be increased in these timeframes.
Ms. Fong answered yes, in order to stay on track with infrastructure programs. She
stated it would be better for the Committee to see the impact of all utilities in order to
understand the bill impact. She indicated the gas and electric funds didn't add to the
bills at this point, making this a good year to increase rates.
Vice Mayor Scharff asked if Staff felt the FC should raise rates because of a bill impact
perspective.
Ms. Fong responded correct and because increases were needed for infrastructure
upgrades. She stated projects could be deferred, but there were risks.
Vice Mayor Scharff asked whether increases were necessary now.
Ms. Fong replied yes.
Council Member Burt appreciated the accuracy concerning the other utility
contributions to the bill impact. He asked whether gas prices would decrease.
Ms. Fong answered yes, based on preliminary analysis.
Council Member Burt reiterated that the two larger components of utility bills would
remain relatively stable or decrease, while water rates would increase. He indicated
the good news was water rates were increasing less than projected, but still increasing
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quite a bit. He felt the Community would not look objectively at the entire bill, rather it
would focus on the one utility increase. He stated rate increases produced a strong
Community reaction. He explained the FC could say the Community was not viewing
an increase from the correct perspective; however, the FC could not dictate Community
perspective. He wanted to make sure there weren't items within the capital or rate
stabilizations sides that could even out the increase. He agreed with Staff's
assessment, but thought the FC should search for ways to level out the increase. He
was willing to accept Staff's opinion that infrastructure projects should not be deferred.
Ms. Connolly thanked Council Member Burt for his input. She pointed out that rates
would need to increase to prepare for the cost increase for the City's water supply.
She indicated the City could manage without rate increases for one year, but
eventually the rates would have to increase.
Council Member Burt thought customers were sensitive to the rate of increase. He
preferred finding ways to moderate the rate of increase for these two years. If
moderating rates was not feasible, he indicated the FC would accept that and explain it
to the Community to the best of its ability.
Ms. Fong did not recommend delaying seismic upgrades to water reservoirs.
Council Member Burt stated the FC could convey to the public that increases were due
to important capital projects or pass-alongs from the Hetch-Hetchy System and hoped
they would appreciate that.
Ms. Connolly reported Staff was evaluating bond financing for Capital Improvement
Projects (CIP) expenditures and could return next year with that proposal. She
explained financing CIP expenditures would reduce rate increases in the short term;
however, rate increases would be greater in subsequent years in order to pay for debt
service. She noted costs for bond financing might not be economical; therefore, Staff
was reviewing alternatives.
Council Member Burt noted rates for bond financing were exceptionally low. He asked
Staff for a range of rates.
Lalo Perez, Director Administrative Services, thought it would be in the 4 percent
range.
Joe Saccio, Assistant Director Administrative Services, said the Utility bonds were
currently AAA rated which would drive down the interest rate.
Mr. Perez reported the City negotiated 2.28 percent in the September refunding for
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water and gas. He said that would provide an idea of the interest rate the City could
receive.
Council Member Burt wanted to move that the FC ask Staff to provide an alternative to
include bond financing. He asked if bond financing would cover only the seismic water
system.
Ms. Fong stated that would be for the increase in 2014, not necessarily the current rate
increase.
Council Member Burt inquired about Project 25.
Ms. Fong replied it was a water main replacement, but she could not remember the
exact location. She stated each of those was comparably priced out. She reported 26,
27 and 28 were the ongoing water main replacement projects throughout the City.
Ms. Connolly noted an analysis of the bond financing was Attachment D to the Report.
She reported the base case in Attachment D reflected the 20 percent rate increase in
2013, followed by 24 percent.
Council Member Burt noted the FC's Packet attachments were not lettered. He
suggested someone review this issue.
Ms. Fong agreed.
Council Member Burt asked if this would come back to the Committee.
Ms. Connolly stated Staff planned to come back to the FC with proposed rate
adjustments and include financials, revenue requirements and expected cost revenues.
Ms. Fong indicated this was not an Action Item tonight, rather it was setting the stage
for rate proposals.
Council Member Burt thought colleagues were interested in the alternative of bonds.
Vice Mayor Scharff was interested in a bond scenario; however, the analysis in the
Packet indicated it wasn't feasible because it would cost more money without a
substantial rate decrease.
Council Member Burt asked Staff to explain the analysis.
Ms. Fong noted these were not in the presentation.
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Vice Mayor Scharff repeated these were not in the presentation.
Ms. Connolly explained the scenario called bond financing was in the Packet, and the
FC needed to look at the outcome of that scenario. She stated she was only showing
the final results in terms of expected rate adjustments, system average rates, and
ending reserve balance. She reported the trajectory of price increase had to be
compared to the base case. She indicated a larger rate increase would be necessary to
prepare for the 2016 level of costs if rate increases were lower than projected. She
noted in the other scenario the rates were already adequate to meet costs. She stated
one way to compare these scenarios was to look at the system average rates. She
reported customers' rates would be $10.83 per CCF with the bond financing after five
years; whereas, customers' rates would be lower in the other scenario. She said the
trade-off for lower rates in the short term was higher rates in the long term with
additional bond financing costs. She noted the projections were all based on the earlier
San Francisco numbers. She stated the rate increase was now at the 15 percent level,
leading to lower cost expectations.
Council Member Burt asked if both those figures in 2013 and 2014 would decrease
approximately 5 percent, and if the system average rate would be reduced by about
$1.20 on both figures.
Ms. Connolly answered correct.
Council Member Burt stated they kept their proportionality.
Ms. Fong stated the bond interest rate was assumed to be 2.2 percent.
Ms. Connolly indicated it was the same interest rate achieved in the water and gas
deal.
Mr. Perez noted a higher interest rate would cause greater rate increases.
Council Member Burt said with the bond, rate increases would be approximately 10
percent, 14 percent and then higher than projected in 2015.
Vice Mayor Scharff agreed. He thought 2015 flipped for 2013.
Ms. Connolly reported Staff was expecting high costs, and the choices were a high
increase in one year or gradually rate increases. She indicated an objective was to
smooth out the annual rate increase as much as possible.
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Council Member Burt thought 15 percent each of the next two years would be viewed
as significant bumps rather than gradual.
Ms. Connolly stated it was better than the numbers they were looking at.
Council Member Burt agreed.
Ms. Connolly understood it was a high rate increase.
Ms. Fong agreed, but the Staff's recommendation was to increase rates now in order to
be positioned better for the future.
Mr. Perez agreed with Council Member Burt's earlier comment to review the overall
utility rates. He thought this would be a good view for the FC.
Chair Shepherd inquired how reduced consumption affected the projections.
Vice Mayor Scharff stated that made it worse.
Chair Shepherd asked what was the message.
Council Member Burt felt this was part of the discussion of the difference between rates
and average bills. He stated if residents reduced consumption, the average bill didn't
increase but rates did.
Vice Mayor Scharff disagreed. He thought that happened in the short term. He
explained if everyone reduced consumption, then system costs were fixed, which led to
increased rates for a smaller quantity of water.
Council Member Burt thought he said rates increased.
Vice Mayor Scharff indicated the bills increased.
Council Member Burt explained with reduced consumption, residents would have a
higher rate and a lower consumption and those two canceled themselves out with a
fixed cost.
Ms. Fong thought reduced consumption resulted in a lower bill. She stated
conservation would be in the consumer's favor even though the system average rate
would have to rise with fewer units sold.
Chair Shepherd thought the FC should plan for residents to use less water.
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Ms. Fong indicated Staff probably would propose moving slightly more costs into the
fixed component in order to alleviate concerns about recovery of those costs.
Council Member Price expressed concerns about marketing increased rates to the
public, and thought this was an important issue. She suggested the message needed
to provide residents with a clear context.
Ms. Fong reported Staff was focused on that and would continue to improve its
message. She indicated a major component of the rate increase was the SFPUC's cost
increase.
Chair Shepherd appreciated SFPUC's work in bringing the system up to standards.