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HomeMy WebLinkAboutID-2871 City of Palo Alto (ID # 2871) City Council Staff Report Report Type: Consent Calendar Meeting Date: 6/18/2012 June 18, 2012 Page 1 of 4 (ID # 2871) Council Priority: Environmental Sustainability Summary Title: Water and Wastewater Rates Issues Title: Finance Committee Recommendations Regarding Water and Wastewater Rates Policy Issues From: City Manager Lead Department: Utilities Recommendation The Finance Committee recommends that Council: 1. Direct staff to begin an evaluation of limited, environmentally sound groundwater use; 2. Direct staff to include an evaluation of the costs to serve higher elevation customers when conducting the next Water Fund cost of service study; 3. Retain the position of pursuing conservation pricing to the maximum extent allowed by law; and 4. Direct staff to propose more descriptive names for the Wastewater Collection Utility Rate Schedules. Executive Summary The Finance Committee’s April 18, 2012 motion to recommend that Council approve the proposed water and wastewater rates included several additional requests. The proposed water and wastewater rates are included in the Fiscal Year (FY) 2013 proposed budget and this report describes the additional requests. Staff has plans to address each of the issues raised by the Finance Committee as follows: 1. Development of an updated Water Integrated Resource Plan is part of the FY 2013 work plan. This plan will re-evaluate the use of groundwater for water supply. 2. The cost to serve water customers located in higher elevations will be evaluated again in the next cost of service study for water. However, the next study is not expected to be completed for several years. 3. A resource pricing policy continuing to encourage conservation and efficiency will be discussed in a new Rates Policy, which will be developed in FY 2013. June 18, 2012 Page 2 of 4 (ID # 2871) 4. The current titles of the wastewater collection rate schedules will be addressed the next time adjustments to those rates are proposed. Background On April 18, 2012, the Finance Committee considered the proposed rate adjustments for the Water and Wastewater Collection Funds to be effective on July 1, 2012. The Finance Committee unanimously recommended approval of the proposed rate adjustments, which are included in the FY 2013 budget request. The Finance Committee’s motion to recommend Council approve the proposed Water Utility Rates included three additional requests: 1. Direct staff to begin an evaluation of limited, environmentally sound groundwater pumping; 2. Direct staff to include an evaluation of the cost to serve higher elevation customers when conducting the next Water Fund cost of service study; and 3. Retain the position of pursuing conservation pricing to the maximum extent allowed by law. The Finance Committee’s motion to recommend Council approve the proposed Wastewater Collection Utility Rates included a request for staff to return with a more descriptive name for these rates since these names can be confusing to the public. The minutes from the April 18, 2012 Finance Committee meeting are provided (Attachment A). Discussion Groundwater Evaluation The Water Integrated Resource Plan (WIRP) examines all water resource alternatives, including groundwater. The WIRP was last completed in 2003. Staff plans to update the WIRP in FY 2013, and the 2013 WIRP will include an updated evaluation of the potential for using groundwater sustainably. Water Cost of Service Analysis (COSA) The water storage reservoirs located in the foothills were originally built in anticipation of a level of development in the foothills area that never occurred. Water is pumped up to the reservoirs and allowed to flow back into the water distribution system on a daily basis to keep the water in the reservoirs fresh. Finance Committee members expressed concern that additional costs are being incurred solely to serve the higher elevation customers. The COSA completed this year for the water rates included an evaluation of whether there were additional costs to serve these customers. That study determined that the water reservoirs that are located in the higher elevations are used to maintain fire preparedness and emergency supplies for the entire system, not just the customers located in the higher elevations. The general practice is that a formal COSA and cost of service model is completed every three to five years for each Utilities Fund (typically on a staggered basis so not all funds are going through a COSA review simultaneously) unless there is a compelling reason to undertake a new June 18, 2012 Page 3 of 4 (ID # 2871) COSA in the intervening years. Annually, the existing COSA model is used to determine if there needs to be any cost of service alignment between customer classes. The question of the cost to serve higher elevation water customers will be revisited the next time that a Water COSA is completed, which is expected to happen in three to five years. Conservation Pricing The City’s general support of resource efficiency is realized in the Utilities rate-setting practices. “Conservation pricing” is the concept of encouraging conservation and efficient use of resources through economic incentives such as price signals. Staff is preparing a Rates Policy that will address conservation pricing and other rates-related goals. A Rates Policy will also provide clear direction on Council’s conservation goals, which will be useful when developing and completing future cost of service studies. The current schedule is for the Utilities Advisory Commission to review a draft Rates Policy in September 2012 and to make a recommendation on a Rates Policy in October 2012. After Finance Committee discussion and recommendation, the policy is expected to be ready for Council action in December 2012. Wastewater Collection rates The titles of the Wastewater Collection Fund rate schedules for the collection of wastewater (sanitary sewer) services are currently “Domestic Wastewater Collection and Disposal” for Utility Rate Schedule S-1 and “Commercial Wastewater Collection and Disposal” for Utility Rate Schedule S-2. At its April 18, 2012 meeting, the Finance Committee asked staff to return with a name for the rates that is more descriptive since the current titles may not be well understood by the public. Staff recommends that Utility Rate Schedule S-1 be retitled “Residential Wastewater Service” and Utility Rate Schedule S-2 be retitled “Commercial Wastewater Service” when these rates are next adjusted. These titles are similar to the titles of Utility Rate Schedules E-1 (Residential Electric Service) and G-1 (Residential Gas Service). In addition, new rate schedules proposed for implementation on July 1, 2012 include Utility Rate Schedules S-6 (“Restaurant Wastewater Collection and Disposal”) and S-7 (“Commercial Wastewater Collection and Disposal – Industrial Discharger”). Staff recommends that these rate schedules be retitled “Restaurant Wastewater Service” and “Industrial Discharger Wastewater Service”, respectively, when these rates are next adjusted. Resource Impact Any resource impact from implementation of these recommendations will be identified when the changes are proposed. Policy Implications Any policy implications resulting from implementation of these recommendations will be identified when the changes are proposed. June 18, 2012 Page 4 of 4 (ID # 2871) Environmental Reveiw Council’s consideration of these issues does not meet the definition of a “project” under Public Recourses Code Section Sec. 21065, thus, California Environmental Quality Act review is not required. Attachments:  Attachment A: Draft Minutes from April 18 2012 Finance Committee Meeting (PDF) Prepared By: Jane Ratchye, Assistant Director Department Head: Valerie Fong, Director City Manager Approval: ____________________________________ James Keene, City Manager Finance Committee DRAFT MINUTES Page 1 of 26 Special Meeting April 18, 2012 Roll Call Chairperson Shepherd called the meeting to order 6:03 pm in the Council Conference Room, 250 Hamilton Avenue, Palo Alto, California. Present: Burt, Price, Scharff, Shepherd (Chair) Absent: Oral Communications None Agenda Items 1. Staff and Utilities Advisory Commission Recommendations on Proposed Water Utility Rate Adjustments Effective July 1, 2012. Ipek Connolly, Senior Resource Planner recommended the Finance Committee (FC) approve amendment of Utility Rate Schedules W-1, W-2, W-3, W-4, and W-7. Amending these Rate Schedules would result in an overall increase of retail water rates and annual Water Fund revenues by 15 percent or $4.7 million effective July 1, 2012. Because of investments in infrastructure, reliability, and safety the costs of the water supply would increase approximately $2.5 million in Fiscal Year 2013. Water purchase costs would also increase from $15 million in 2012 to $15.9 million in 2013. Capital Improvement Program (CIP) costs would increase from $4.4 million to $6 million in 2013. Along with this, Staff anticipated lower than expected revenue in both Fiscal Year 2012 and Fiscal Year 2013. Combined, these were the main factors driving the need for the rate increase. The cost of water had risen from $1 per ccf in 2006 to approximately $3 per ccf in 2012, with an DRAFT MINUTES Page 2 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 expected increase to $5 per ccf in less than ten years. This cost increase resulted from investments in infrastructure for upgrade of the water delivery system and seismic reinforcements. The Rate Stabilization Reserve Fund balance was slightly above the maximum amount stated in the guidelines; therefore, Staff proposed using some of the excess funds to minimize the rate increase. Staff planned to follow the minimum guidelines without falling below those guidelines in the future. The 15 percent revenue increase was an average increase. A Cost of Service Study, performed by Raftelis Financial Consultants, determined how the increase would be allocated to individual rate classes. The proposed rates were based on the Cost of Service Study as required by Proposition 218. Rates for the residential sector as a whole would increase by 13 percent, the commercial sector by 22 percent, irrigation by 5 percent, and Fire Service by 211 percent. For the residential sector, there was an increase in the fixed charge, a reduction in the Tier 2 price, and an increase in the Tier 1 price. Staff presented these amendments to the Utilities Advisory Commission (UAC), which recommended approval of the proposed rates and the sector-specific alignments. The UAC recommended not reducing Tier 2 rates, and using the increased revenue to decrease the residential Tier 1 rate. This would meet the revenue requirement of the residential sector. Staff recommended changing the Tier 1 price from $3.60 to $4.54, and Tier 2 from $7.34 to $7.06 based on the Cost of Service Study. The UAC recommended retaining the Tier 2 price of $7.34, and decreasing the Tier 1 price to $4.11. For a small user, the Staff recommendation resulted in a monthly bill of $48, which was $9 more than the current amount. The UAC's recommendation resulted in a bill of $45.74, which was an increase of $6.80. The impact would be similar for an average user. For a large user, the Staff recommendation resulted in a decrease of $0.14, and the UAC's recommendation resulted in an increase of $6.80 for all levels. Based on the Cost of Service Study, commercial rates would increase approximately 18.5 percent, and irrigation rates would decrease 7.6 percent. Based on financial projections, Staff did not expect any rate increases for the Electric Utility. Staff proposed a 15.9 percent increase in water rates, a 5 percent increase in wastewater rates, and a 10.8 percent increase in refuse rates. Staff expected an average 10 percent rate decrease in gas rates, but was still working on these numbers. The overall residential customer, who currently paid $235.00 per month, would have an $8.94 monthly bill impact. Because of Proposition 218 requirements, Staff would notify all residential customers of the proposed rate increases by May 1, 2012, and then the Council would hold a public hearing on June 18, 2012. If a majority of DRAFT MINUTES Page 3 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 customers protested the proposed rate increases, the Council could choose not to impose the proposed rates. Sudhir Pardiwala, Vice President of Raftelis Financial Consultants, Incorporated reported the primary purpose of the Study was to review the rates and demonstrate they were fair, equitable, and consistent with industry guidelines from the cost of service perspective. He reviewed the existing customer classifications to ensure the costs were being appropriately assessed to the different customer classes. One of the City's objectives was to ensure environmental sustainability, which meant sending a signal for conservation and providing an incentive to customers. Since this was a financial process, he viewed rates as one mechanism to send that signal. The City also had to meet the requirements of Proposition 218, which required rates to be proportional to the services provided. In the next fiscal year, the City needed a revenue adjustment of 15 percent to meet coverage requirements, to cover the shortfall from the higher cost of purchasing water, to cover operating costs, and to fund Capital Improvements. In the following two fiscal years, revenue adjustments would be 9 percent and 4 percent. Cost of service meant identifying revenue requirements, and allocating those revenue requirements to the different customer classes proportionate to the cost of providing service, with some flexibility in terms of designing the rate structures. The industry standard for cost of service was the American Water Works Association methodology called the base-extra capacity method. This required allocating costs to providing service under average and peaking conditions. The base was the average, and the extra capacity was the peaking. To do this, he had to identify the peaking characteristics of the different customer classes. After identifying revenue requirements, the next step was to perform the cost allocation. The different parameters identified in the cost allocation process were the base and the peaking. The maximum day and maximum hour were the maximum amount of water that could be used on the maximum day of the year on any given day, and the maximum hour was the maximum hour during that maximum day. Those represented the peaking cost. All customers had some kind of peaking requirement, because water was not used at a continuous pace throughout the day. Peaking was associated with season as well as a daily basis. Costs were allocated to Fire Service and customers with meters. This included not only the cost of maintaining the meters, but also the capacity involved in servicing those meters. Because a water system was designed to meet peaking requirements, there were costs associated with DRAFT MINUTES Page 4 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 providing that capacity. Those costs were considered in the meter charge. Billing and customer service costs were costs associated with meter reading, billing customers, and collecting payment. Those were constant for all customers irrespective of the meter size. He identified all the costs, separated them into functions, and then allocated it to the cost components to determine the unit cost. The unit cost was based on the units of service. After cost allocation, the next step was the rate structure review. His objective was to ensure the City had rates that were fair and equitable, and was passing on those costs equitably to customers. He examined the tier structure and the fixed variable component. He reviewed fixed charges, charges based on elevation, and master metered customers. After reviewing each of these elements, he recommended the City retain the two-tier structure for the individually metered residential W-1 class. The City had two objectives: 1) provide the cost of service rates, and 2) environmental sustainability. He decided that, based on the objectives, the two- tier structure would best meet those needs. He reviewed the fixed charges, and recommended increasing that fixed revenue component to 15 percent, recognizing that approximately 55 percent of costs were fixed. He did not believe there was any cost justification for having differential rates for customers at higher elevations based on discussions with engineering Staff. For multi-family customers or master metered customers, he recommended continuing the uniform rate. That recommendation was based on peaking characteristics closer to commercial users than single-family residential users; and, because users did not pay their own bill, a tiered structure would not send a signal for conservation. The next step was to review the rates. The meter service charge consisted of two components: 1) the meter charge, which varied with the size of the meter; and, 2) the billing charge, which was constant for all customers. Based on that methodology, he recommended the proposed changes, and recognized the fixed charges would increase from 11 percent to 15 percent. For the smallest meter, there would be a 37 percent increase in the meter charge, and most other meters would have larger percentage increases. The first tier was set at $4.54, an increase from the current rate of $3.60. The second tier rate decreased from $7.34 to $7.06. The average rate was $6.04, increasing from $5.83. The first tier rate did not consider any peaking costs. Many times supply costs and peaking costs were used for rate differentials. Because Palo Alto's supply cost didn't really change with the quantity of water purchased, peaking costs were used as a rate differential. This was the cleanest method to justify the rates under Proposition 218. It showed that the rate for the first tier had to increase to $4.54. Because DRAFT MINUTES Page 5 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 the balance of costs had to be recovered from that customer class, the second tier rate decreased to $7.06. He explained the rationale for the tier rates, because the UAC had a different recommendation. The commercial rate would increase from $4.93 to $5.75; that would also be the same rate for the master metered customers. The irrigation rate would drop slightly, based on the peaking characteristics of irrigation customers. The construction rate would be the same rate as the commercial rate. He recommended Fire Service charges increase significantly due to increased costs. When he performed the cost allocation, he apportioned those charges allocated to Fire Service to public and private Fire Service, and these rates resulted from that process. At the low end of individually metered residential customers, rates would increase by $7.50; at the high end, the change would be smaller. This resulted from the increase in the meter charge and the increase in the rate for the first tier. The biggest impacts would be felt by the lowest users in terms of percentages. These rates met the requirements of Proposition 218 and were consistent with the Cost of Service Study. One benefit of this type of rate structure was greater revenue stability resulting from significant conservation and reduction of usage. As irrigation rates were reduced, irrigation customers would see a net reduction in charges, while multi-family master metered customers would see some increase in charges. He was not a proponent of comparing rates with other agencies, because of the many variations in calculating rates. At the low end of usage, Palo Alto fell in the middle of the scale when compared to neighboring cities. As customers used more water, charges increased and Palo Alto moved to the upper end of the scale in terms of total bill. The proposed rates would tend to moderate that, and bring the City in line with other agencies. Council Member Price asked if the approach used to calculate rates was standard for the industry. Mr. Pardiwala indicated there were two methods used in the industry. The peaking factors for multi-family customers were closer to commercial peaking factors than to residential peaking factors. That resulted from multi-family customers having lower irrigation demands than single-family customers, and all customers in a multi-family dwelling not using water at the same time. That was why the peaking characteristics were lower. This structure would be more representative of the rate the City should be charging multi-family customers in a tiered structure. To have tiers for multi-family customers, the City would need DRAFT MINUTES Page 6 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 additional data to set that rate, and the billing system would have to be modified as well. That would take some time and effort. Council Member Price inquired if he meant multi-family rental units because they were metered separately. Mr. Pardiwala noted separately metered units would fall under the W-1 class, which was residential. Council Member Price asked why the percentage of change increased so greatly as meter size increased in the Fire Service charges. Mr. Pardiwala stated the charges were based on the capacity of those lines. They were strictly proportional to the capacity of those lines. Dhruu Khenna lived on Alistair Avenue and owned a winery in the Morgan Hill area, where he had three wells on 48-acres of property. He was also a member of the agricultural committee of the Santa Clara Valley Water District. He wanted to start a dialog, because some customers had 50 percent rate increases the prior year. Based on information received from Staff about groundwater pumping, he reported existing wells in Palo Alto from 1948 through 1962 pumped approximately 5,000 acre feet per year. Since then the water levels had risen on average more than 150 feet. As of 2003 Palo Alto water levels were at elevations comparable to the 1910s. In wet winters, wells in the Palo Alto, if not controlled, flowed at the ground surface. These studies were based solely on five or six wells in Palo Alto. On his property, he had three wells, and his neighbors had more than 15 or 20 wells in the area. Contamination was easily addressed by testing the water at least once a year at a cost of $3,000. Council Member Burt confirmed the amount of groundwater pumped was 5,000 acre feet per year in the time period stated. Mr. Khenna answered yes, based on the report he received. Council Member Burt inquired whether he had received information on the amount of water currently being pumped. DRAFT MINUTES Page 7 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Mr. Khenna believed the current amount to be zero, because the wells served as a standby water source. Groundwater pumping came to a halt in 1962, except in drought years or on a specific basis. Council Member Burt asked if he was referring to City-owned wells rather than private wells. Mr. Khenna responded correct. His information concerned City wells. The discussions shouldn't be limited to the existing wells. Herb Borock said the Staff Report showed the average usage as 14 units, while the consultant report showed it as 12 units. The monthly bill comparison used the median usage of 9 units, rather than the average usage of 14 units. Historically when that monthly bill comparison had been shown to the Council, it had been the average number. He felt it should be consistent with what had been done in the past. In regard to the pressure zone charges, historically there were eight pressure zones. P. Srinagesh understood consultants had performed a Cost of Service Study the prior year, and afterwards the various committees and the City Council had changed the rates from those recommended in the Study. He asked if it would take another Study to get another set of rates. Chair Shepherd stated his questions were the same questions the FC would be asking, and asked Staff to respond. Mr. Pardiwala indicated Proposition 218 required the agency to ensure that rates were consistent with the cost of service. The Council could change rates in its discretion; however, that opened the Council to a legal challenge. Council Member Burt stated water was pumped to the highest reservoir. He asked if all water was pumped to the highest reservoir. Tomm Marshall, Assistant Director Utilities Engineering reported water was pumped to fill the reservoirs in the Foothills for fire protection, but it had to be turned over on a regular basis, because of the chloramine in the water. Staff turned over some portion of water daily. DRAFT MINUTES Page 8 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Council Member Burt stated the reason for pumping water to the reservoirs was not for fire protection; rather residential uses were driving the high volume at the reservoirs. Mr. Marshall reported the City could not store undrinkable water in the potable water system; therefore, the water had to be turned over. Council Member Burt felt the cost of that service could be argued either way. He didn't understand where that was a clear distinction. Ms. Connolly stated it was a function of the system design that water was pumped up there, and then it flowed down; therefore, it benefited everyone. Council Member Burt didn't dispute that. He asked who benefited from that loop. The loop was there for the benefit of residential customers, not fire prevention. Mr. Pardiwala stated that didn't change the cost of service perspective. In terms of setting elevation charges, the same loop would be in place if there were no customers there. Council Member Burt asked whether there could be a reservoir dedicated to fire suppression to eliminate the loop. Mr. Marshall reported that was not possible, because they were connected through the same pipelines. Council Member Burt inquired why water needed to flow through the same pipeline if it wasn't being consumed. Mr. Marshall indicated water from the reservoirs was used for fire suppression in the lowlands. In an emergency, water would come from the reservoirs in the Foothills for fire protection, especially if the City were cut off from Hetch Hetchy. Council Member Burt asked if the lowlands were benefiting from the upland reservoirs. DRAFT MINUTES Page 9 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Mr. Marshall answered yes. Council Member Burt inquired whether the cost should be divided proportionately between the lowlands for fire suppression and emergency and Foothills residents for consumption. Mr. Pardiwala understood all of the water went there and then flowed down for consumption. Mr. Marshall stated there was only enough water in the tanks for fire suppression, and it was turned over on a regular basis. Council Member Burt asked if there was a comparison of dollars per cubic foot for a small residential dwelling versus a small residence in a multi-family dwelling, which was charged at the commercial rate. Valerie Fong, Utilities Director stated the multi-family owner-occupied units would be upset if they had to pay a residential rate. They were satisfied with Staff's explanation and understood they benefited from paying the commercial rate. Council Member Burt inquired if they were paying less at the commercial rate. Ms. Fong replied yes. Ms. Connolly reported a multi-family building with ten units and using 4.1 ccf per month paid, under W-4 rates, total monthly charges of $229 for the ten units, or $23 per unit. The comparable rate for a W-1 customer with its own dedicated meter would be $248 for ten units, or $25 per unit. Multi-family dwellings were charged a higher volumetric rate, but the service charge was lower on a per-unit basis. Council Member Burt inquired if the cost of service to the multi-family residence was lower than to a single-family home because of the single meter to multiple consumers. DRAFT MINUTES Page 10 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Ms. Connolly stated it was lower because of the low profile. The commercial sector had a lower or flatter load shape than residential sector. Council Member Burt asked why irrigation customers had a smaller percentage increase than others. Ms. Fong reported the City had missed the summer usage for irrigation when rates were applied the prior year; therefore, there was a larger rate increase for irrigation. Because summer usage was captured in the current year, the rate increase would not be as large. Ms. Connolly stated the City had to collect the same annual revenue from that rate class over nine months of lower usage in the prior year. Council Member Burt noted the percentage of supply costs was currently less than 50 percent, and by 2017 it would be approximately 50 percent. He asked what portion of the Hetch Hetchy supply cost was due to CIP and the 100-year rebuilding of the Hetch Hetchy system. Ms. Connolly did not know how their rates broke down. Mr. Pardiwala believed they started their CIP a couple of years ago. Council Member Burt asked if the City started paying immediately. Ms. Connolly stated the CIP started in approximately 2007. Council Member Burt felt Staff needed to convey clearly to the community that the increase was caused mainly by the rebuilding of the Hetch Hetchy system. He asked if the combined residential impact on Slide No. 11 was for an average size household. Ms. Connolly responded yes. The slide showed the median usage for all delivery services. Council Member Burt inquired how much of the $8.50 increase in water rates was attributable to the rebuild of the Hetch Hetchy system. DRAFT MINUTES Page 11 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Ms. Connolly stated it had been increasing over time, so she didn't have that information. Ms. Fong reported two big components behind the current proposed rate increases were the Hetch Hetchy water system improvement project and the City's own CIP costs. Council Member Burt noted the proposed $8.50 increase in water rates for a median residence between 2012 and 2013. He inquired whether Staff had a sense of how much of that increase was attributable to the Hetch Hetchy system increase and the City's improvements to withstand emergencies. Ms. Connolly suggested the best way to provide that information was to review the percentage of costs due to operation of the system and CIPs. Council Member Burt noted for 2013 in the chart on page 4 approximately 60 percent was due to water supply and CIP. Water supply costs without that would be closer to the amount in 2006. Approximately 80 percent of the cost of the water supply was attributable to the increase in the Hetch Hetchy rebuild. The City had its own CIP, and was in a period of around double the normal CIP. Ms. Connolly suggested taking that 2011 amount back to 2006, and looking at the breakdown to determine how much the cost increased relative to others. Council Member Burt asked if the $8.50 increase for a median residence was all attributable to Hetch Hetchy and the City rebuilds of the water system. That was almost the same number as the entire increase in the residential utility bill for the year. He suspected, absent the rebuild of the Hetch Hetchy system, there would be no increase in the utility bill. That communication was not supplied to the public clearly. It was very important for the public to understand what was happening. Lalo Perez, Administrative Services Director didn't have all the historical numbers. The actual utility purchases and charges for water in 2010 were $9 million. The adopted 2011 charges were $12 million, and adopted 2012 were $15.8 million. DRAFT MINUTES Page 12 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Obviously, other components needed to be discussed, but it demonstrated the increase over time. Council Member Burt stated this would be reported in the press the following day, and if this part of the story didn't lead, it would be misunderstood. The City had a sound rationale for increasing rates, and had to ensure it was understood accurately. Vice Mayor Scharff asked if the second tier was justified through the Cost of Service Study by considering peaking. Mr. Pardiwala reported once the costs allocated to each customer class were identified, and then the amount of revenue to be collected from the class was determined based on the overall peaking factors. Because the first tier did not collect any peaking costs, the second tier had to pick up all peaking costs associated with that class of customers. Vice Mayor Scharff asked how the first tier was set. Mr. Pardiwala indicated the first tier was the cost of providing water under average conditions. Vice Mayor Scharff asked if there was no second tier for multi-family commercial because there was no peaking. Mr. Pardiwala explained the peaking characteristics of commercial and multi- family were similar. Because they were non-homogenous, they could not be grouped. Creating tiers would require considering customers by individual dwellings. Chair Shepherd stated there was an anticipation that water rates would increase by approximately 300 percent over the life of the Hetch Hetchy project. She shared Council Member Burt's concerns about explaining rate increases to the public. The City's rental rates and their analysis were different from other communities. She wanted to understand how rental rates were determined throughout all Enterprise Funds. DRAFT MINUTES Page 13 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Mr. Perez explained the City had an appraisal performed then, depending on the type and location of the land site, used market rates. Staff could present a listing of the sites and the rents from the various Enterprise Funds. Chair Shepherd asked if that was reviewed each budget year. Mr. Perez answered yes. Chair Shepherd inquired if the methodology or actual charges were reviewed. Mr. Perez replied the actual charges. Staff was determining whether to perform an appraisal yearly, or having an incremental increase yearly with an appraisal every few years. Chair Shepherd asked if that would be presented in May. Mr. Perez responded yes. That went across the majority of Enterprise Funds. Chair Shepherd noted other communities were also discussing water rate increases. She recalled the new regulation that required fire sprinklers for houses of a certain size. She asked if those residences had a 2-inch meter, or if that was determined by the size of the residence. Dean Batchelor Assistant Director Operations reported those would be mostly the 1-inch meters. A 2,000 square foot home would be required to have fire services. Chair Shepherd noted a 2-inch meter was the smallest size. Mr. Batchelor believed the services were based on commercial fire services. Ms. Connolly stated there was no separate meter for residences. Mr. Batchelor said it was all one meter. Chair Shepherd confirmed residences would not be charged for water unless there was a fire in the residence. DRAFT MINUTES Page 14 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 James Cook, Utilities Advisory Commission reported the UAC felt it was unusual to have large percentage increases for the smallest volume users on the residential side, while decreasing costs for large volume users. This didn't seem to encourage conservation and discourage high use. The UAC voted 5-1 based on the concept of altering the rate so this did not happen in this way. He understood there was some flexibility in setting rates, and wanted to have a discussion and adjustments based on that. Chair Shepherd stated Item No. 4 on the Motion approved by the UAC had been resolved. Council Member Burt noted the constraints of conservation being embedded in the California Constitution and Proposition 218 requiring a cost of use basis for charges. The City was required to have a strong, supportable rationale for the rate structure. He asked if that was an accurate portrayal of the City's circumstances and, if so, how much latitude the FC had in this discussion. Molly Stump, City Attorney said conservation and the requirements of Proposition 218 were both Constitutional requirements. The Court of Appeal addressed the two together and provided some guidance about how they worked together. The policy for conservation was broad and general, didn't provide methods for conservation, and made no reference to rate making or pricing structures. Proposition 218 had specific requirements, which were accurately described by the City's consultant. The FC was reviewing the requirement that the property- based rate charges were proportional to the cost of providing service to the parcel. The Court of Appeal stated, in theory, it was permissible to have a tiered rate structure, so long as the tiers were proportional to the cost of providing service to the parcel. The City had to follow Proposition 218 requirements and could promote conservation goals to the extent they were consistent with Proposition 218. The Constitutional policy of conservation was not a defense to ignoring the Proposition 218 requirement. The Courts were looking for the analytical work performed by the consultant. When the City set rates consistent with the third-party methodology, it established compliance with the proportionality requirement. If the City did not follow the third-party methodology, then there was a question of whether the proportionality requirement was met. There was no suggestion that rate setting occurred without people inputs. Multi-member bodies played an important role in DRAFT MINUTES Page 15 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 evaluating the process, watching it over time, expressing policy preferences, and ultimately making decisions. Council Member Burt lacked clarity as to whether the Council was obliged to follow any and all of the consultant's determinations without deviation. Given the context of consultants disagreeing on procedure, he asked if the Council was highly constrained from deviating from the consultant's recommendations. Ms. Stump stated as a procedural matter, it was the Council's determination to set the rates consistent with the procedural requirements of Proposition 218. She thought he was asking what would happen next if the Council did this versus that. That type of question moved into the area of potential degree of risk, and there were a lot of factors that went into that. This body would take the vote and have the authority ultimately to make the decision appropriate for Palo Alto. Council Member Burt stated when the Council made land use decisions it was a quasi-judicial matter. Even though they were legal findings, there were subjective interpretations. He understood this had a lot less gray area than when making findings on compliance of a project proposal with a quasi-judicial component. Molly Stump indicated if the Council set the rates consistent with the methodology and the recommendations prepared by the consultant, Staff would have a high degree of confidence that those rates could be defended if someone challenged them. If the Council did something else, then that evaluation would be different. She needed to help him understand that depending on what he was thinking, and she probably needed to do that in a different forum. Ms. Fong reported Staff heard and shared the Council's concerns with the consultant, and he kept them in mind as he worked on this. He understood there were a number of guiding policies. Vice Mayor Scharff noted rates were reaching the limits of conservation pricing. The consultant included conservation pricing as much as possible within the rate structure. He asked the consultant to comment on that. Mr. Pardiwala indicated there had been a reduction in usage as a result of various factors. The significant difference in rates between the first and second tiers sent DRAFT MINUTES Page 16 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 a strong conservation message. If rates increased and usage continued to decrease, then rates would have to increase more. At some point, it became a self-fulfilling prophecy and spiraled down. The current $7 rate was a high rate for a second tier. He wasn't sure the FC wanted to send a strong signal to further reduce usage. Vice Mayor Scharff felt the Council could do several things within a rate structure like that. It could set the second tier at 5 ccfs or 8 ccfs. The Council had decided the strong decision to focus on conservation pricing. That was why rates were hitting the limits of conservation pricing. He was surprised and pleased the consultant could justify a second tier. He was glad the UAC had reviewed it. He felt the Council had quite a bit of discretion still. Chair Shepherd felt the debates concerning conservation were important. She had heard the community question water bills remaining level when consumption decreased. This was an important incremental step in addition to the vetting by the UAC. She would consider Staff's recommendations for the rate increases. Council Member Burt heard the consultant say the City still had a strong conservation pricing structure. He didn't hear him say the proposals were the maximum possible. Mr. Pardiwala wouldn't say it was the maximum. He determined a reasonable method for setting the first tier, and the second tier resulted from that. Ms. Fong indicated the method was used throughout the industry. Council Member Burt believed the community felt there was no point in conserving water, because their bills continued to increase. He noted in 2013 about 40 percent of costs was supply. He asked if everyone conserved water, bills would decrease along with those supply costs. Mr. Pardiwala answered yes. With conservation, the cost of purchasing water decreased; therefore, the water revenue requirement would also decrease. DRAFT MINUTES Page 17 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Council Member Burt stated the comparison to surrounding communities wasn't accurate, because it compared trailing rates. He inquired if there were any transfers to the General Fund from the Water Utility. Ms. Connolly answered no. Council Member Burt suggested Staff emphasize that point to the community. He asked why Palo Alto's rates were that much higher than other communities also using Hetch Hetchy water. Ms. Connolly reported there were more CIP expenditures currently, and the City typically paid those as they occurred. Council Member Burt stated the increase was primarily due to rebuilding the emergency water supply system, which had more than doubled the City's CIP costs. He asked if the City had higher CIP costs on an ongoing basis from maintaining a better system. Ms. Connolly explained general the City had higher CIP expenditures, and higher debt service payments because of the bond issued in 2010. Council Member Burt noted other communities had also created an emergency water supply system. He asked what the community was receiving for those extra costs. If rates were higher due to increased CIP spending, then presumably residents were getting something for that. Mr. Pardiwala reported not all agencies purchased water from Hetch Hetchy. Council Member Burt didn't include Santa Clara in that comparison. Mountain View purchased approximately 90 percent of their water from Hetch Hetchy, so they were close to the same. Mr. Pardiwala indicated there was a large difference in price between local water and purchased water. The size of the community was also important. DRAFT MINUTES Page 18 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Council Member Burt noted there were other cities that had lower costs and used either entirely or predominantly Hetch Hetchy water, but Palo Alto was still compared to Redwood City and was approximately 15 percent higher. Ms. Connolly stated a section in the report, on page 10 under the comparison of Palo Alto water rates and surrounding cities, discussed the benchmark study in 2010. The summary of the findings in terms of explaining the differences were spending more on the replacement of aging infrastructure; lack of access to lower-cost water supply; more expensive service terrain to serve; and higher quality of services. This came from customer surveys performed consistently for other cities, and Palo Alto customers indicated a higher quality of service in those surveys. The City also had higher rent payment for use of real estate in the service territory. Rents were priced at the commercial prevailing real estate rates. Other cities either didn't have these large areas to rent or their charges were much lower. Council Member Burt felt most of those elements had a higher value to the ratepayer. Those were sound explanations for increasing rates and rates higher than neighboring cities, but Staff needed to bring that portion of the report to the front. Ratepayers needed to see those explanations. He was moderately familiar with groundwater pumping, and stated there were reasons not to over pump groundwater. There were areas where Staff might reasonably consider a modest amount of groundwater pumping, that would not degrade the quality of drinking water, would reduce costs, and would not damage the environment or the existing groundwater reservoir. He suggested having groundwater pumping as part of water analysis in the future. Mr. Pardiwala reported establishing a second source of water which was not a potable source would reduce total sales of potable water, and cause rates to increase. Council Member Burt asked if projections of revenue included additional conservation. Ms. Connolly indicated Staff built in a response to the rate increases in terms of demand reduction. DRAFT MINUTES Page 19 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Council Member Burt stated a low-cost water source wouldn't provide a 1:1 reduction in costs. That needed to be explained to the public. MOTION: Council Member Price moved, seconded by Vice Mayor Scharff, that the Finance Committee recommend the City Council approve the Staff recommendation 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 indicated in the Staff Report. Council Member Price felt the need for a detailed and clearly stated rationale for changes in the rates given the concerns about Proposition 218. She was comfortable with the quality of the work, which made her comfortable in reviewing and agreeing with the Staff recommendation. The Cost of Service Study was critical to this debate. The results of the Study and the quality of community input and Staff work made the rationale defensible, and less risky to accept Staff's recommendation. She concurred with earlier comments regarding the need to inform the public of cost factors. Vice Mayor Scharff agreed with Council Member Burt's comments regarding the message to the public. Water rates were increasing primarily because of Hetch Hetchy water costs. He also agreed with Council Member Burt's comments regarding groundwater pumping. Pumping groundwater was a form of recycling if done in the correct amount. This could be an interim measure until the salt problems in recycling were solved. Chair Shepherd stated it was a privilege to be on the Hetch Hetchy system, yet there was a ballot initiative that might change the scenario. Council Member Burt agreed with the Motion in broad terms. The Santa Clara County Water District purchased water to pump into underground reservoirs, and Palo Alto residents paid a portion of that cost. Other cities in the Valley were pumping water from the reservoirs and using it. In Palo Alto residents paid to pump water into reservoirs, but didn't get any back. DRAFT MINUTES Page 20 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 INCORPORATED INTO THE MOTION WITH THE CONSENT OF THE MAKER AND SECONDER to request that Staff begin an evaluation of limited, environmentally sound, groundwater pumping. Council Member Price agreed in concept, but was concerned about adding this project to Staff's workload. Council Member Burt asked how the Council had sound actions if it didn't do them. Council Member Price indicated she would agree if it was kept in that statement. Council Member Burt stated that was the Motion. Council Member Price wanted it made clear that it didn't have to be done within the next three months. Council Member Burt said the Amendment was to initiate, not complete, the project over the next year. Council Member Price would accept the Amendment with her previously stated cautionary note. INCORPORATED INTO THE MOTION WITH THE CONSENT OF THE MAKER AND THE SECONDER that the next Cost of Service Study include a revaluation of the higher elevation customers. Vice Mayor Scharff asked if the Motion was to do that in the next Cost of Service Study, rather than to revisit the current Study. Ms. Fong reported Cost of Service Studies were not usually performed yearly. Council Member Burt stated it would be next Cost of Service Study. It didn't need immediate attention, because the dollar amounts weren't high. DRAFT MINUTES Page 21 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 INCORPORATED INTO THE MOTION WITH THE CONSENT OF THE MAKER AND THE SECONDER to retain the position of pursuing conservation pricing to the extent it is reasonable by law. Council Member Price asked if that was an existing policy, and did it need to be stated again. Ms. Fong wasn't sure it was an existing policy. Council Member Burt felt it was an important principle. Vice Mayor Scharff asked where it would be stated. Ms. Fong suggested it could be stated in the Water Integration and Usage Plan or the Strategic Plan. Council Member Burt confirmed the City had a Water Resource Plan, a Strategic Plan, and a Comprehensive Plan. Ms. Fong indicated Staff would determine which plan it should be included in. It would be official if the majority of the Council approved it. Council Member Price supported the Amendment. Vice Mayor Scharff asked Staff if there were any issues with the proposed policy. Ms. Fong reported Staff assumed this was a policy, but couldn't find it in writing as a guiding policy. Council Member Burt said it was the role of the Council to establish policy. There was a practice, but not a policy. Vice Mayor Scharff accepted the Amendment. MOTION AS AMENDED PASSED: 4-0 2. Utilities Advisory Commission Recommendation on Proposed Wastewater DRAFT MINUTES Page 22 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Collection Utility Rate Adjustments Effective July 1, 2012. Ipek Connolly Senior Resource Planner reported Staff recommended approval of amendments to Rate Schedules S-1 and S-2 and the addition of new Rate Schedules S-6 and S-7. The amendments would increase overall retail wastewater collection rates and annual revenues for the Wastewater Collection Utility by 5 percent, or $715,000, effective July 1, 2012. The need for the rate increase resulted from the rising cost of treatment due to required capital expenditures for the treatment plant ($600,000 for 2013); and the rising cost of collection system operations due to increased workload ($400,000). Half of the costs in the Wastewater Collection Fund were from the treatment plant, 25 percent from the Capital Improvement Program (CIP), and 25 percent from operations. Revenues had been less than costs. The City had used excess funding in the Reserves to subsidize the revenue requirements. The residential fixed monthly charge under Rate Schedule S-1 would increase by 5 percent, from $27.91 to $29.31. Commercial, restaurant and special customers were part of Rate Schedule S-2. Staff proposed segregating commercial customers into S-2, restaurants into S6, and special customers requiring special discharge monitoring in S-7. Those Rate Schedules would have a minimum charge of $29.71, an increase consistent with the 5 percent rate increase. Volumetric charges would be adjusted by the required increase. Staff performed a Cost of Service Study for this Fund in the previous year, and reviewed the changes in customer usage patterns and costs in the current year to determine that alignment was adequate. Most commercial customers' current billing was based on monthly water consumption. Some large commercial customers with significant irrigation were exempt from this, and their rates were based on winter water consumption. Staff proposed basing charges on winter water consumption, because that established proportionality with respect to the amount of water doing down the drain as opposed to irrigation. Residential customers would have a bill impact of $1.40 per month. Restaurants were a special customer class, and rates were based on specific discharges. Their increase was 5 percent of the applicable rate. For business customers, the bill impact would depend on how these customers used water. A small commercial customer with steady year-round water usage would have a 5 percent increase. A medium commercial customer with steady year-round water usage would have an increase of 19 percent. A commercial customer with high summer water usage would have a decrease of 5 percent. Depending on customer usage profile, the change could be different. Staff reviewed actual customers and actual usage DRAFT MINUTES Page 23 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 levels, and determined some customers would have decreases greater than $600 on their monthly bill. 40 percent of customers would have a bill decrease, 63.1 percent would have no change, and some customers would see increases. The proposed change would apply rates more equitably to all customers. When comparing Palo Alto rates to neighboring cities, Menlo Park and Redwood City residential customers paid more than Palo Alto customers, and Alameda customers paid less than Palo Alto customers. The next steps would be notifying customers about the proposed rate changes, and the City Council holding a public hearing before the adoption of the proposed rates. James Cook, Utilities Advisory Commission reported the Utilities Advisory Commission (UAC) had no discussion on this topic, and passed it as is. Council Member Burt asked if commercial accounts were currently being charged winter-based rates and residential accounts were using year round. Ms. Connolly stated most commercial customers were currently using year-round rates. Council Member Burt inquired if Staff was recommending commercial customers' rates be based on winter usage. Ms. Connolly answered yes. Council Member Burt asked what the basis was for residential customers. Ms. Connolly indicated residential customers' charge was based on average winter usage. Because there was not much variation in the average, it was a fixed charge. Council Member Burt noted the title was Wastewater Collection Utility, and asked whether it also covered water treatment and recycling. Valerie Fong, Utilities Director indicated it didn't cover treatment, and there wasn't recycling at the current time. DRAFT MINUTES Page 24 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Ms. Connolly stated treatment costs were collected, but were passed to the Water Quality Control Plant partners. The Utilities Department did not manage the treatment operation. Council Member Burt inquired if dollars in the Fund went to the treatment plant. Ms. Connolly answered yes, for Palo Alto's share of treatment. Council Member Burt confirmed these dollars were collected through Wastewater Collection as a method of measurement, but their purpose was for treatment. He asked if the City recycled some water. Ms. Fong indicated the treatment plant did recycle some water. Council Member Burt stated it would be Palo Alto's proportionate share of the water. Ms. Fong agreed. Council Member Burt suggested the City was underselling itself and the services it provided by not indicating all the services provided and charged for. Ms. Fong stated Staff would be happy to rename the Utility. Council Member Burt suggested including treatment and possibly recycling. Herb Borock understood large commercial customers would have a separate Rate Schedule for irrigation use. He asked how Staff was handling that. Ms. Fong (INAUDIBLE) irrigation was built into the Wastewater Collection System. Irrigation water didn't go into the Wastewater Collection System. The City recovered only the cost of the water that passed through the Wastewater Collection System. Herb Borock believed the large customers would have two different Rate Schedules, so that rates were determined by Rate Schedules rather than seasonally. DRAFT MINUTES Page 25 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 MOTION: Vice Mayor Scharff moved, seconded by Chair Shepherd, that the Finance Committee recommend the City Council approve Staff Recommendations to 1) increase overall retail wastewater collection rates and annual revenues for Wastewater Collection Utility by 5.0 percent or $715,000, effective July 1, 2012, 2) effect a change to utilize winter-based water usage rates for commercial customers under Rate Schedule S-2 Section C.3, and 3) amend Wastewater Collection Utility Rate Schedules S-1 and S-2, and add new Wastewater Collection Utility Rate Schedules S-6 and S-7 as indicated in the Staff Report. . Chair Shepherd noted the Staff Report was thorough, and she attended the UAC meetings. Council Member Burt suggested changing the title to Wastewater Collection, Treatment and Recycling to allow the community to better understand and appreciate what they were paying for. Chair Shepherd suggested having Staff return with suggested titles. INCORPORATED INTO THE MOTION WITH CONSENT OF THE MAKER AND SECONDER request Staff return with language for the title. Ms. Fong stated the title was confusing. If the name was changed to Wastewater Collection, Treatment and Recycling Utility, it would merge many of the different functions. Vice Mayor Scharff agreed this was confusing to the public. Council Member Burt stated the Motion was asking Staff to determine a more descriptive title if possible. Vice Mayor Scharff thought everyone knew what wastewater was. He asked what other cities called it. Ms. Fong stated sewer, wastewater collection or sanitary sewer. Vice Mayor Scharff was not okay with changing the title. DRAFT MINUTES Page 26 of 26 Finance Committee Special Meeting Draft Minutes 4/18/12 Council Member Burt was concerned with the title indicating merely collection. Ms. Fong suggested changing the title to Wastewater Utility, and eliminating references to collection. Council Member Burt preferred Staff determine a more descriptive name. MOTION PASSED AS AMENDED: 4-0