HomeMy WebLinkAboutStaff Report 2512-5640 Item No. 4 Page 1 of 20
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Utilities Advisory Commission
Staff Report
From: Alan Kurotori, Director of Utilities
Lead Department: Utilities
Meeting Date: March 4, 2026
Report #: 2512-5640
TITLE
Staff Recommends the Utilities Advisory Commission Recommend that the City Council Adopt a
Resolution Approving the Fiscal Year 2027 Wastewater Collection Utility Financial Forecast, and
Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial
Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal), and
S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger); CEQA Status: Not
a project under CEQA Guidelines Section 15378(b)(5)
RECOMMENDATION
Staff recommends that the Utilities Advisory Commission recommend that the City Council adopt
a resolution (Attachment A):
1. Approving the Fiscal Year 2027 Wastewater Collection Utility Financial Forecast shown in
this staff report and attachments; and
2. Amending Rate Schedules (Attachment A, Exhibit 1) effective July 1, 2026 (FY 2027):
a. S-1 (Residential Wastewater Collection and Disposal)
b. S-2 (Commercial Wastewater Collection and Disposal)
c. S-6 (Restaurant Wastewater Collection and Disposal); and
d. S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger)
EXECUTIVE SUMMARY
This staff report provides the UAC with a financial forecast for the Wastewater Collection Utility
and provides an overview of the utility’s operating costs, capital costs, and debt and includes
recommended rate adjustments required to maintain the utility’s financial health.
The Wastewater Collection Utility financial forecast proposes a 16% rate increase for FY 2027.
With this rate increase, Palo Alto’s residential rate will be approximately 2% above the average
of neighboring cities, assuming neighboring utilities’ rates remain at current levels. The additional
revenue is necessary to fund increasing wastewater treatment charges, collection operations,
and collection capital improvement projects (CIP).
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Staff updated cost projections for the FY 2027 to FY 2031 five-year financial planning period using
the most recent cost data and updated escalation assumptions. Relative to the FY 2026 financial
forecast1, total expenses are expected to be about 11% higher over the five-year financial
planning period, driven primarily by increased wastewater treatment operating and capital costs
as well as collection system CIP costs, partially offset by higher projected capacity fee revenues
and lower collection operations costs. Consistent with last year’s forecast, this forecast assumes
deferral of the next sewer main replacement project to FY 2028. This approach limits CIP
spending to the highest priority projects, allowing the Wastewater Collection Operations Reserve
to recover within guideline levels and avoid the need for a higher rate increase.
Table 1: Current Year (FY 2026) and Projected Rate Trajectory (FY 2027 to FY 2031)
2, and the Finance
Committee on November 18, 20253, staff presented a rate trajectory of 16% in FY 2027, 14% in
FY 2028, and 5% annually from FY 2029 through FY 2031. The current forecast maintains the same
increases for FY 2027 and FY 2028 but assumes higher increases of 6% annually from FY 2029
through FY 2031. The key drivers of this change include:
Updated and higher wastewater treatment cost projections from the RWQCP, reflecting
increased labor costs, higher commodity and chemical prices, service contract expenses,
rent, and an updated calculation of Palo Alto’s share of operations costs.
Slightly lower projected operations and CIP expenditures.
BACKGROUND
1 FY 2026 Financial Forecast for the Wastewater Collection utility (approved June 16, 2025) is described in the
Finance Committee Staff Report 2412-3871:
https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment
2 Staff Report 2503-4364: https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=18457643-
b8bd-4c15-b8db-822059719251
3 Staff Report 2508-5119: https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=222f6635-f36a-
42de-bdd2-d27f7ac3f713
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refuse collection and processing for recycling, compost and garbage, wastewater treatment and
stormwater management. The City’s primary goals are to manage these services in a way that
ensures continued safe, reliable, environmentally sustainable, and cost-effective operations.
ANALYSIS
FY 2025 Costs and Revenues
232 below summarizes key reasons for the variances from forecast.
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Table 23: FY 2025 Actuals vs. Prior Year’s Forecast ($000)
Higher retail sales, higher treatment grant funding, higher
connection and capacity fees revenues, lower interest income
(1,878)Revenue increase
Treatment expenses higher than expected 1,612 Cost increase
Lower collection system operations and maintenance salaries
and benefits
(1,468)Cost decrease
Lower collection system CIP (250)Cost decrease
At the end of FY 2025, the Wastewater Operations Reserve was about $0.7 million higher than
expected, while a portion of the remaining net revenues of about $1.2 million were allocated to
the CIP Reappropriations and Commitments Reserve. The utility’s overall cash balance remained
positive at $0.9 million at the end of FY 2025, supported by the Council-approved $3 million short-
term loan (Reso 10173)7 from the Fiber Utility to the Wastewater Collection Utility, planned to
be repaid in FY 2026.
Projections
Overview
Compared to the prior forecast, FY 2026 revenues are projected to be about $3.4 million, or 10%,
higher, driven by higher projected Valley Water grant funding for treatment expenses, and higher
revenues from the commercial sector. On the expense side, FY 2026 costs are projected to be
about $0.7 million, or 2% lower compared to the prior forecast. While treatment costs are
projected to be about $1.7 million, or 11% higher due to higher treatment operations expenses,
this increase is largely offset by a projected $1.9 million, or 17% lower in collection operations
expenses, primarily due to lower labor costs. For FY 2026, staff used the adopted budget as the
baseline rather than projecting from actuals with an escalation factor, which has slightly reduced
the projected labor costs. Budgeted CIP expenses are also projected to be slightly lower by about
$0.5 million, or 10%.
Over the FY 2027 to FY 2031 five-year financial planning period, total revenues are projected to
be about 7% higher than the prior forecast, primarily due to rate increases and higher connection
and capacity fees revenues. Total expenses are projected to be about 11% higher than the prior
forecast, primarily driven by higher treatment costs, which are projected to be about 24% higher
due to increased treatment operating and capital-related costs. In contrast, collection operations
costs are projected to be approximately 7% lower than the prior forecast, while CIP costs are
projected to be about 8% higher.
7 Reso 10173: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?
id=62043&dbid=0&repo=PaloAlto&searchid=7e03c0d2-1eae-45d1-b63e-96c615efee19&cr=1
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Figure 1 illustrates actual revenues and expenses through FY 2025, along with projections
through FY 2031.
Figure 1: Wastewater Collection Utility Expenses, Revenues and Rate Changes
Note: FY25 Commitments and Reappropriations reserves balances for Operations and Capital Investment are anticipated to be
utilized in FY26 and FY27; Collection Capital represents CIP reserve contribution for FY27 and beyond
Revenues
9 estimated that about $9.4 million of capacity fee
revenues will be received in FY 2026 and FY 2027, this forecast conservatively projects 80% of
this revenue will be received evenly over a five-year period starting in FY 2028. This additional
9 FY 2026 Adopted Capital Budget, Wastewater Collection Fund, WC-80020, Sewer System, Customer Connection
(pg. 566): https://www.paloalto.gov/files/assets/public/v/1/administrative-services/city-budgets/fy-2026-city-
budget/adopted/fy-2026-adopted-capital-budget_final_online.pdf
7%0%3%3%
9%15%
20%16%
14%6%6%6%
7%0%3%3%
9%
15%
20%16%
14%5%5%
5%
0
10
20
30
40
50
60
70
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Actuals Projection
$
M
i
l
l
i
o
n
s
Fiscal Year
Collection Capital
Collection Operations
Treatment Capital & Debt
Treatment Operations
Revenue
Current Rate Projection %
Preliminary Rate Projection %
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projected revenue is crucial in supporting the overall financial position of the utility. A sewer
capacity fee study is planned for FY 2027 to evaluate existing connection and capacity fees
schedules, and staff will recalibrate revenue assumptions in future financial forecasts
correspondingly.
Expenses
Table 3: Wastewater Utility Costs ($000)
Actuals ProjectionFiscal Year 2025 2026 2027 2028 2029 2030 2031
Treatment 15,486 17,295 16,881 18,088 18,456 24,357 25,117
Treatment Operations 11,239 11,921 13,507 14,196 14,695 15,213 15,910
Treatment Capital * 4,247 5,374 3,374 3,893 3,760 9,145 9,207
Collection 10,902 13,604 22,231 27,099 28,266 24,820 26,012
Collection Operations 8,153 9,186 9,231 10,099 10,266 10,820 11,012
Collection Capital 2,749 4,418 13,000 17,000 18,000 14,000 15,000
TOTAL 26,388 30,899 39,112 45,188 46,721 49,177 51,129
* Includes unencumbered/authorized amount for pay-as-you-go capital; excludes Valley Water funding
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projected to increase by approximately $3.1 million to $6.7 million annually, representing an
average increase of roughly 30% above the previous forecast. These increases are primarily
driven by higher labor costs, including the addition of three new staff positions, lower projected
Valley Water grant funding, and higher commodity prices, chemical costs, service contract
expenses, training and professional development costs, and rent associated with the new
laboratory space. RWQCP also updated the projection to more accurately reflect Palo Alto’s share
of treatment operations costs. Additional key cost increases are described below.
The Treatment Plant is currently undergoing a long-range facility plan update,
which will guide capital improvements and prioritize projects over the next several decades to
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ensure continued operational reliability and regulatory compliance. Rehabilitation and
replacement of plant equipment that has been in use for over 40 years is necessary to ensure the
City can provide wastewater treatment operation safely and in compliance with regulatory
requirements for the discharge of treated wastewater 24 hours a day. The costs of the Treatment
Plant are shared among member agencies. The biggest increase in Treatment costs is the addition
of debt service (loan repayment) for the Secondary Treatment Upgrades in FY 2030, which is a
$193 million capital project funded through a low-interest State Revolving Fund loan. Palo Alto’s
share of this loan repayment is included in this financial forecast.
Joint Intercepting Sewer Rehabilitation
Outfall Line Construction
12kV Loop Electrical Improvements and
Headworks
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$2.76 million of grant funding from Valley Water to offset capital expenses. It is projected that
Palo Alto will receive about $3.91 million of Valley Water grant funding in FY 2026.
Figure 2: Wastewater Collection Utility Operations Costs
0
2
4
6
8
10
12
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Actuals Projection
$
M
i
l
l
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n
Fiscal Year
Debt Service
Transfers
Customer Service
Allocated Charges
Collection Operations
and Engineering
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Collection operations and engineering included one-time labor and vehicle replacement costs in
FY 2024. Transfers include transfers to other City funds for services or share of costs. The
transfers in FY 2026 and every other subsequent year are anticipated for leasing space in the
laydown yard from the Electric Utility for materials related to the Sanitary Sewer Replacement
projects. Vehicle replacement cost increases for replacing aging fleet vehicles are forecasted to
be about $0.35 million annually starting in FY 2028. There may be a need to electrify vehicles in
the future, however, these costs are unknown and are not included in the forecast.
The Sanitary Sewer Replacement/Rehabilitation (SSR) Program funds the replacement of
deteriorating sewer mains to increase capacity or improve pipe condition in various parts of
the sewer system.
Non-recurring construction projects (One Time Projects) of large system assets, such as the
pump station replacement projects.
Ongoing projects include sewer and manhole rehabilitation, equipment and tool
replacement, and wastewater collection system improvements focused on improving the
reliability and operations of the wastewater distribution system. These projects include, but
are not limited to, engineering studies and hydraulic modeling.
New Development Improvements (customer connections) are new services projects funded
or constructed by private developers and property owners.
Table 4: Projected CIP Spending ($000)
2026* 2027* 2028 2029 2030 2031
Sewer Rehab/Augmentation (665) 2,225 11,250 2,470 12,490 2,750
One-Time Projects 333 1,050 1,530 4,740 620 650
Ongoing Projects 407 1,090 1,160 1,200 1,390 1,450
Customer Connections 120 460 480 490 510 540
CIP Salaries and Benefits 4,041 4,185 4,306 4,401 4,506 4,608
Transfers (In)/Out 181 217 173 133 210 220
Total CIP Expenses 4,418 9,227 18,900 13,435 19,726 10,218
CIP Reserve Contribution - 13,000 17,000 18,000 14,000 15,000
Project Category
Fiscal Year
*Includes spending that will be funded by reappropriated or committeed fund balanaces that
have been carried forward from the previous year
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main replaced each year on average beginning in FY 2028, replacement of the remaining mains
would take approximately 60 years and the last main would be approximately 111 years old
before replacement. This rate of main replacement is based on Staff’s experience, other nearby
communities’ experience, and the National Clay Pipe Institute Engineering Manual, which
suggests that clay pipe can last around 100 years in Palo Alto’s underground conditions. Staff re-
evaluates and prioritizes future projects based on a structural rating system, feedback from
Wastewater Operations and available budget. In addition, in November 2025 the City updated
the Sewer Master Plan. Results from this plan will assist in identifying and prioritizing future SSR
projects. The Sewer Master Plan is on a five-year update schedule with the next update beginning
in FY 2030. The estimated cost of the plan is $0.2 million annually in FY 2030 and FY 2031.
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The CIP budget assumes inflation of 5.4%, which is derived from a linear trend of historical CIP
cost increases. Allocated overhead and unallocated salaries and benefits are added to the capital
budget and are assumed to escalate at the same rate annually.
Reserves
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Figure 3: Operations Reserve Adequacy
Note: Operations Reserve shown with a minimum balance of $0.
Table 5 summarizes the risk assessment calculation for the Wastewater Utility through FY 2031.
The risk assessment includes the revenue shortfall that could occur due to:
1. Lower than forecasted sales revenue; and
2. A 10% increase in treatment costs for the budget year; and
3. A 10% increase in planned system improvement CIP expenditures for the budget year. CIP
Contingency for FY 2027 and after is not needed due to resuming the use of the CIP
reserve.
Sales Revenue 31,751 36,876 42,065 44,713 47,396 50,239
Budget-to-Actual Risk @ 4% 1,268 1,473 1,681 1,787 1,894 2,008
Treatment Budget 17,295 16,881 18,088 18,456 24,357 25,117
Treatment Cost Contingency @ 10% 1,730 1,688 1,809 1,846 2,436 2,512
CIP Budget * 4,116 - - - - -
CIP Cost Contingency @ 10% * 412 - - - - -
3,410 3,161 3,490 3,632 4,330 4,519
7,258 6,502 6,286 7,212 8,402 10,533
*CIP budget is excluded from FY 2027 onward
The CIP Reserve has a zero balance due to insufficient wastewater collection revenues to
maintain the annual Capital Program Contribution to the CIP Reserve. However, starting in FY
2027, staff anticipates the wastewater utility can resume contribution to the CIP reserve. The
FY27 Wastewater Collection Utility and CIP Financial Details (Attachment A, Exhibit 2) shows
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the amount of the rate-funded CIP Reserve contributions under “Expenses” for FY 2027
through FY 2031.
Figure 4: Projected CIP Reserve Balances
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Figure 5: Wastewater Collection Utility Year-End Reserve Levels
Note: Operations Reserve shown with a minimum balance of $0.
0
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4
6
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18
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Actuals Projection
$
M
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s
Fiscal Year
Rate Stabilization
CIP Reappropriations &
Commitments
CIP Reserve
Operations Reserve
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Table 6: Operations, Rate Stabilization and CIP Reserves Starting and Ending Balances,
Revenues, Transfers To/(From) Reserves, Expenses, Capital Program Contribution To/(From)
Reserves, Total Reserve Changes, and Operations Reserve Guideline Levels ($000)
The current rates were effective July 1, 2025, when the City increased sewer rates by 20%. To
continue to move toward full cost recovery, CPAU proposes to increase overall rates by 16% in
FY 2027, and projects rate increases by 14% in FY 2028, and 6% annually in FY 2029 through FY
2031.
CPAU has three sewer rate schedules applicable to current customers: one for residential
customers (S-1), one for non-residential customers (other than restaurants) (S-2), and one for
restaurants (S-6). Table 7 below summarizes the current and proposed rates for all customer
classes.
Raftelis Financial Consultants, Inc. completed a cost of service (COS) study for the Wastewater
Collection Utility in 2021. Staff calculated the revenue increases needed for the Wastewater
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Collection Utility based on projected revenue and expenses to determine the proposed rates
across customer classes.
Table 7: Current and Proposed Sewer Rates
Current Proposed
Monthly Service Charges ($/Month)
Water Quantity Rates ($/CCF)
Bill Impacts
Table 8: Bill Impact of Proposed Sewer Rate Changes ($/Month)
Rate Schedule Current Proposed
$ 67
175
710
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Bill Comparisons/Competitiveness
Table 9 shows the monthly sewer bills for residential customers compared to what they would
be in surrounding communities. The average monthly sewer bill for a Palo Alto single family
residential customer is $67 at current rates, which is about 12% lower than the neighboring
community average. These communities are the same six that Palo Alto compares itself to in the
annual budget across Water, Wastewater, Gas, and Electric industries. In the following tables,
“Menlo Park” refers to the West Bay Sanitary District.
The cities of Mountain View and Los Altos are RWQCP partners. Sewage from Menlo Park and
Redwood City is treated by Silicon Valley Clean Water where some plant upgrades have been
completed and others are yet to be implemented. Santa Clara customers are served by the San
Jose-Santa Clara Regional Wastewater Facility, which is still working on necessary facility
upgrades. In contrast, plant upgrades at the Hayward Water Pollution Control Facility have not
yet begun. Each of the plants are at different stages of rebuilding.
Neighboring CommunitiesPalo Alto
(rates effective
7/1/2025)
Neighboring
Community
Average
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View
Los
Altos Hayward
67 76 120 105 58 58 68 48
Table 10 compares the sewer bills for two classes of non-residential customers to what they
would be under surrounding communities’ rate schedules. The average monthly commercial
sewer bill, assuming 14 CCF of water usage, is about $175 at current rates, which is about 28%
higher than the neighboring community average, while the average monthly restaurant sewer
bill, assuming 38 CCF of monthly water usage, is about 4% higher. Note that other communities
often have specific rates for industrial customers that discharge high intensity wastewater, such
as food processors or chemical or electronics manufacturers, but Palo Alto does not currently
have any customers that require these special rates.
Neighboring CommunitiesPalo Alto
(rates effective
7/1/2025)
Neighboring
Community
Average
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View
Los
Altos Hayward
General
Commercial 175 137 162 169 96 174 118 100
Restaurant 710 681 928 1,140 679 574 322 443
As of January 2026, Menlo Park (West Bay Sanitary District) is projecting an average of 4.5%
rate increase annually from FY 2027 through FY 2030, Redwood City is projecting a 7% rate
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increase for FY 2027, Los Altos is projecting 15% rate increase annually in FY 2027 and FY 2028,
while Hayward is projecting 12% rate increases annually from FY 2027 through FY 2030.
Next Steps
If
Council approves the proposed rate changes, the rates will become effective July 1, 2026.
FISCAL/RESOURCE IMPACT
POLICY IMPLICATIONS
STAKEHOLDER ENGAGEMENT
11, staff presented the preliminary rate proposals at the UAC meeting. Some
Commissioners raised affordability concerns and expressed interest in exploring innovative
operating cost reductions rather than relying on the traditional approach of deferring capital
investments. One Commissioner also requested examples of multi-year rate plans from peer
agencies for comparison.
12, staff presented the same preliminary rate proposals to the Finance
Committee. Committee members focused on benchmarking rates against comparable utilities.
They also inquired about cost-containment strategies. Regarding the $3 million loan from the
Fiber utility to the Wastewater utility, one Councilmember asked whether inter-utility borrowing
is a common practice and staff explained that it is not common; few cities have so many utilities
available to fund such loans. Additional discussion centered on reserve guidelines and the
11 Staff Report 2503-4364: https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=18457643-
b8bd-4c15-b8db-822059719251
12 Staff Report 2508-5119: https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=222f6635-
f36a-42de-bdd2-d27f7ac3f713
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associated risk assessment. Members emphasized that the absence of rate increases during the
pandemic created a catch-up scenario that should be avoided in the future.
ENVIRONMENTAL REVIEW
ATTACHMENTS:
APPROVED BY: