HomeMy WebLinkAboutStaff Report 2512-5608CITY OF PALO ALTO
Finance Committee
Regular Meeting
Tuesday, March 17, 2026
Agenda Item
1.Recommendation to the City Council to 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) Staff Presentation
Item No. 4 Page 1 of 19
Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Utilities
Meeting Date: March 17, 2026
Report #: 2512-5608
TITLE
Recommendation to the City Council to 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
The Utilities Advisory Commission and staff request that the Finance Committee 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 Finance Committee 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,
effective July 1, 2026. 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).
Item No. 4 Page 2 of 19
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 compares the rate trajectories reflected in the FY 2026 financial forecast, the FY 2027
preliminary rates report, and the current financial forecast proposal for the Wastewater
Collection Utility.
Table 1: Current Year (FY 2026) and Projected Rate Trajectory (FY 2027 to FY 2031)
During preliminary rate discussions with the UAC on November 5, 20252, 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
The City of Palo Alto Utilities (CPAU) provides electricity, water, wastewater, natural gas, and
fiber optic services to the Palo Alto community. The Public Works Department also provides
refuse collection and processing for recycling, compost and garbage, wastewater treatment and
1 FY 2026 Financial Forecast for the Wastewater Collection utility (approved June 16, 2025) is described in the
Finance Committee meeting on April 1, 2025, Staff Report 2412-3871:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=64772&dbid=0&repo=PaloAlto
2 Utilities Advisory Commission meeting, November 5, 2025, Staff Report 2503-4364:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=84164&dbid=0&repo=PaloAlto
3 Finance Committee meeting, November 18, 2025, Staff Report 2508-5119:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=83887&dbid=0&repo=PaloAlto
Item No. 4 Page 3 of 19
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.
The City is committed to transparency with utilities customers about the reason for rate changes,
including explaining the cost drivers, benefits to customers, what the City is doing to keep costs
low for ratepayers, and the services and programs provided by the City to help customers keep
utility bill costs low. Staff prepare the financial forecast annually as part of the rate-setting cycle.
Attachment A, Exhibit 3 contains a set of Reserves Management Practices describing the
reserves. Attachment A, Exhibit 4 outlines CPAU’s plan for communicating rate changes to
customers. Staff are presenting an overview of the financial forecast and rate change proposal
for each utility service to the Finance Committee prior to City Council review and approval in June
2026.
ANALYSIS
FY 2025 Costs and Revenues
Actual revenues in FY 2025 were approximately $1.9 million (7%) higher than forecasted. This
was driven by an increase in retail sales revenues, higher treatment grant funding, and higher
connection and capacity fees revenues, partially offset by lower interest income. In FY 2025, the
Wastewater Collection Utility received about $2.7 million in grant revenue from Valley Water
that offset the wastewater treatment capital costs and provided a direct benefit to residents and
businesses in Palo Alto.
On the expense side, overall FY 2025 costs were approximately equal to forecasted. Treatment
costs were about $1.6 million (12%) higher than forecasted, primarily due to higher operational
expenses and higher-than-anticipated minor CIP costs. This increase was largely offset by
collection system operating costs that were about $1.5 million (15%) lower than expected, due
to lower labor and vehicle replacement costs. In addition, CIP costs were approximately $0.3
million (8%) below forecast.
Table 22 below summarizes key reasons for the variances from forecast.
Table 23: FY 2025 Actuals vs. Prior Year’s Forecast ($000) Net Cost/
(Benefit)
Variance
Type of
Change
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
Net Cost / (Benefit) of Variances (1,985) Net Cost decrease
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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)4 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 (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 (2%) lower compared to the prior forecast. While treatment costs are
projected to be about $1.7 million (11%) higher due to higher treatment operations expenses,
this increase is largely offset by a projected $1.9 million (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 (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.
Figure 1 illustrates actual revenues and expenses through FY 2025, along with projections
through FY 2031.
4 Reso 10173: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=62043&dbid=0&repo=PaloAlto
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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
The Wastewater Collection revenues are derived from sales revenues and other revenues,
including connection and capacity fees. For sales revenues, residential customers pay a flat fee
per dwelling unit for service. Commercial customers are billed for sewer service based on their
metered winter water usage, while Restaurant customers are billed for sewer service based on
their metered monthly water usage.
Over the FY 2027 to FY 2031 five-year financial planning period, total revenues are projected to
grow by about 9% annually, driven primarily by rate increases and continued growth in customer-
related revenues, which will gradually bring the Operations Reserve back to the reserve target by
the end of FY 2031 and allow the CIP Reserve to also be replenished gradually over time.
Other revenues, including connection and capacity fees revenues, are projected to increase more
rapidly than sales revenues, reflecting higher anticipated development activity and system
expansion. The FY 2026 adopted capital budget5 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
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
5 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
Item No. 4 Page 6 of 19
schedules, and staff will recalibrate revenue assumptions in future financial forecasts
correspondingly.
The rate increases proposed in this financial forecast would allow revenue growth to keep pace
with rising cost pressures, particularly for treatment-related operations and capital investments.
Expenses
Over the FY 2027 to FY 2031 five-year financial planning period, total expenses are expected to
increase by about 7% annually on average. This increase is primarily driven by rising treatment
costs, which are expected to increase by an average of 10% annually, and the deferral of sewer
main replacements to FY 2028, resulting in an average of 4% increase annually in CIP expenses.
In addition, operating costs, including labor, are projected to grow by about 4% annually due to
inflation.
Table 3 below shows the costs for treatment and collection expenses, which will be described in
the sections below.
Table 3: Wastewater Utility Costs ($000)
Fiscal Year Actuals Projection
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
Wastewater Treatment
Treatment expenses represent the Wastewater Collection Utility’s share of the costs associated
with operating the Regional Water Quality Control Plant (RWQCP or Treatment Plant). These
charges are determined using a formula that considers the wastewater volume as well as the
organic material, ammonia levels, and total suspended solids that it contains.
Since the preliminary rates report was presented to the UAC and Finance Committee in
November 2025, staff has updated the Treatment budget and Valley Water grant assumptions
based on the latest projections developed by RWQCP staff. In FY 2026, net treatment costs are
projected to be approximately $1.9 million lower than previously forecast, driven by higher
Valley Water grant funding and partially offset by higher RWQCP operations costs. In FY 2027,
net treatment costs are projected to increase by about $1.8 million relative to the prior forecast,
primarily due to higher operations costs. For FY 2028 through FY 2031, net treatment costs are
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
Item No. 4 Page 7 of 19
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.
In FY 2026, the Wastewater Collection Utility’s flow share of the RWQCP’s revenue requirement
was projected to be 36.66%, based on FY 2024’s actual flow share, which is the most recent
available data. As is standard practice, prior-year flow share data are used for projections and
are subsequently updated as newer data become available. Using FY 2025 actual data, the FY
2025 flow share was recalculated at 36.01%. Going forward, this forecast conservatively
estimates a 37% flow share annually.
The RWQCP is permitted to charge for pay-as-you-go minor capital improvement projects (CIP)
within authorized limits as set forth in the Basic Agreement between City of Palo Alto and
Mountain View and Los Altos for the Acquisition, Construction and Maintenance of a Joint Sewer
System dated October 10, 1968, and in subsequent agreements with Los Altos Hills, East Palo
Alto Sanitary District, and Stanford University (collectively, the "Basic Agreements"). Any unused
amounts are carried over annually. The RWQCP does not charge the Wastewater Collection
Utility for unused amounts each year. These unused amounts remain unencumbered but can be
applied towards future pay-as-you-go capital needs as necessary. These amounts are referred to
in this report as the ‘unencumbered/authorized for pay-as-you-go capital’ (minor CIP). The
Wastewater Collection Utility may retain these amounts but must be prepared to pay them when
needed.
The remaining unencumbered/authorized amount for future pay-as-you-go capital for Palo Alto
is about $3.8 million for FY 2026. Last year, staff recommended collecting the FY 2025 remaining
unencumbered/authorized amount for future pay-as-you-go capital of $3.5 million for FY 2025 in
rates over 4 years starting in FY 2025. However, RWQCP is expected to fully utilize the remaining
amounts in FY 2026, therefore, Wastewater Collection Utility will budget the full amount in FY
2026. And starting FY 2027, this amount will be fully embedded into future pay-as-you-go minor
CIP expenses projections and will not be listed as a separate item.
Lastly, starting in FY 2026, RWQCP will begin adding Section 115 Pension Trust expenses of
around $0.3 million annually to future forecasts. Personnel costs, such as salaries, benefits,
pensions, and other retirement benefits, are a component of treatment costs. The pension trust
expense is a personnel cost intended to cover pension obligations to City of Palo Alto employees
working at the RWQCP. Palo Alto’s share of these operating expenses is estimated at about $1.24
million at the end of FY 2025.
Capital costs for treatment are also increasing because the Treatment Plant requires major
upgrades in the coming years due to aging infrastructure and evolving operational and regulatory
requirements. 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
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
Item No. 4 Page 8 of 19
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.
The Wastewater Collection Utility will begin to pay for debt service for major projects beginning
with the Primary Sedimentation Tank in FY 2026 (financed through a low-interest State Revolving
Fund loan), Outfall Line Construction in FY 2027 (bond financed), Secondary Treatment Upgrades
in FY 2030 and Headworks Facility in FY 2030-34 (financing plan is still preliminary and may be a
combination of bond and State Revolving Fund loans). Palo Alto’s low-interest State Revolving
Fund loans for the Primary Sedimentation Tank and Secondary Treatment Upgrades are at fixed
interest rates. Future financing for other projects may involve bonds or additional loans, with
rates, timing, and availability subject to market conditions, which could affect long-term
treatment costs. These planned investments are necessary to maintain reliable wastewater
treatment, though actual costs may vary depending on financing and market conditions.
Valley Water Grant Funding
Santa Clara Valley Water District is the groundwater manager for Santa Clara County and provides
water to most of the water retailers in the county. Valley Water developed the Guiding Principle
5 grant program or “GP5 Program” for communities and/or organizations, like the City of Palo
Alto, where property taxpayers pay State Water Project property taxes but receive on average
85% of their water supply from sources other than Valley Water-managed supplies. This program
awards grants to each community at a dollar amount up to the State Water Project property
taxes paid by property owners in their respective service areas from FY 2019-24 plus interest.
The grants must fund conservation programs, potable recycled water, non-potable recycled
water (including salinity reductions), options to purchase wastewater, purified water,
wastewater treatment plant environmental upgrades, Advanced Meter Infrastructure (AMI)
updates, or dedicated environmentally focused activities.
On June 3, 2024, the City Council approved the cost-share agreement with Santa Clara Valley
Water District for Valley Water grant funding for future projects at the RWQCP. The Wastewater
Collection Utility’s share of the following upcoming projects is eligible for grant funding:
Joint Intercepting Sewer Rehabilitation
Outfall Line Construction
12kV Loop Electrical Improvements and
Headworks
The estimated funding available to Palo Alto through this grant program is $11.8 million and
projects must be completed by June 30, 2033. In FY 2025, the Wastewater utility received about
$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.
Item No. 4 Page 9 of 19
Collection Operations
Operations costs include the Customer Service, Sewer Operations, Engineering, and Allocated
Charges categories. Debt service, rent, and transfers are also included in this category. The Sewer
Operations category includes preventative and corrective maintenance on sewer mains and
laterals, investigation of sewer overflows, regular cleaning of heavily impacted sections of the
sewer system, and services shared with other utilities. Allocated Charges include the costs of
accounting, human resources, information technology, purchasing, legal, and other
administrative functions provided by the City’s General and Internal Services Funds staff, as well
as shared communications services and Utilities Department administrative overhead and billing
system maintenance costs. A portion of these costs are allocated to operations costs and a
portion to capital costs.
Engineering, operations, and maintenance expenses combined are expected to increase by 4%
annually over the financial planning period, driven by inflationary assumptions. The salaries and
benefits forecast includes preliminary budget numbers for FY 2026 and FY 2027, and this forecast
assumes a 4% increase annually through the remaining financial planning period. Other expense
increases include cross-bore project, tools and equipment upgrades, compliance publishing,
membership fees, construction materials, contract services, training, and certification.
Figure 2: Wastewater Collection Utility Operations Costs
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
Item No. 4 Page 10 of 19
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.
Capital Improvement Program
The Wastewater Utility’s CIP consists of the following types of projects.
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 provides an overview of projected CIP spending from FY 2026 to FY 2031.
Table 4: Projected CIP Spending ($000)
The Wastewater Collection Utility completed SSR 31 in FY 2024 which replaced and rehabilitated
over two miles of sanitary sewer main, sewer laterals and manholes. Most of the original clay
pipes in Palo Alto were installed between 1950 and 1970. 136 miles of sewer mains remain to be
replaced before the end of their useful life. Under the current replacement cycle of 2.5 miles of
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
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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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.
As part of the FY 2024 Financial Plan, the Council approved an accelerated CIP program to
increase the Sanitary Sewer Replacement (SSR) rate from 1 mile to 2.5 miles per year (from 2
miles to 5 miles per project constructed every other year) to fulfil the goal of replacing pipes near
their life expectancy. Due to unforeseen reductions in revenue and increases in operating
expenses, the FY 2025 Financial Plan recommended deferring the first of the 5-mile main
replacement projects that had previously been scheduled for construction in FY 2026. The plan
recommended a reduced main replacement project, covering 1 mile instead of 5 miles, with
construction planned in FY 2026. Due to further increases in operating expenses and treatment
expenses, the FY 2026 Financial Forecast deferred the smaller 1-mile SSR which is proposed to
be included in the first 5-mile main replacement in FY 2028. The current forecast keeps the same
proposal as the FY 2026 forecast.
For one-time projects, the foothills lift station replacement will replace the existing 1960’s lift
station which employs a pump type that will soon no longer be manufactured. Staff who work on
this lift station require Occupational Safety and Health Administration (OSHA) confined space
entry to access and maintain. The new foothills lift station will be a submersible pump station
that is the standard for this type of facility and will not require OSHA confined space entry. Also,
the FY 2026 financial forecast assumed the Wastewater Utility would fund its share of the
Arastradero Creek repair project, estimated at about $0.3 million in FY 2026. The current forecast
deferred this expense and increased it to $0.7 million annually in FY 2027 and FY 2028, and $1
million in FY 2029. Lastly, staff recommended last year to introduce a Closed-Circuit Television
(CCTV) program to perform a sewer collection system condition assessment in critical sections of
the system. This initiative aims to better assess pipe conditions and prioritize necessary sewer
replacements. The program is estimated to cost $0.3 to $0.4 million annually throughout the
financial planning period.
The Customer Connections five-year CIP spending is projected to be about $0.5 million annually
and is funded by connection fee revenue. Customer connection expenses vary each year based
on the level of development and redevelopment, which drives the need for wastewater service
replacements or upgrades. Property owners pay a fee for wastewater collection system
replacement or expansion during redevelopment, so when the number of projects go up
(meaning higher costs for this activity), so does fee revenue.
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.
Item No. 4 Page 12 of 19
The Transfer Out amount represents the wastewater utility’s share of the joint Water–Gas–
Wastewater Utility GIS project. This amount is transferred to the Water utility, which initially
funded the project.
Aside from customer connections, the CIP plan for FY 2026 to FY 2031 is funded by revenue from
utility rates and capacity fees. Attachment A, Exhibit 2: FY27 Wastewater Collection Utility and
CIP Financial Details shows the details of the plan.
Debt Service
The Wastewater Collection Utility paid the only outstanding debt for its share of the 1999 Utility
Revenue Bonds, Series A, at the end of FY 2024. Council approved a short-term loan up to $3
million from the Fiber Optics Fund Reserve to cover the projected shortfall of cash in the
Wastewater Collection Utility to be repaid in FY 2026. The Wastewater Collection Utility
borrowed the full $3 million at the end of FY 2024. The loan also included an interest payment
rate equal to the City’s portfolio rate each quarter plus 0.25%, or about $90K per year, assuming
a portfolio interest rate of 3%. The Wastewater Collection Utility is expected to repay the Fiber
Utility with interest by June 30, 2026, in accord with the loan agreement terms.
Reserves
The Operations Reserve, which is the Wastewater Collection Utility’s primary contingency
reserve, is projected to be between the minimum and target guideline levels at the end of FY
2027 through FY 2030, and gradually return to the target level by FY 2031.
Figure 3 shows the Operations Reserve ending balances alongside the minimum, maximum, and
target guidelines and risk assessment levels.
Figure 3: Operations Reserve Adequacy
Note: Operations Reserve shown with a minimum balance of $0.
Item No. 4 Page 13 of 19
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.
Table 5: Wastewater Collection Risk Assessment ($000)
Fiscal Year 2026 2027 2028 2029 2030 2031
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 - - - - -
Total Risk Assessment Value 3,410 3,161 3,490 3,632 4,330 4,519
Projected Operations Reserve Level 7,258 6,502 6,286 7,212 8,402 10,533
*CIP budget is excluded from FY 2027 onward
Reserve Balances
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
the amount of the rate-funded CIP Reserve contributions under “Expenses” for FY 2027
through FY 2031.
Figure 4 below shows the projected CIP Reserve balances from FY 2025 through FY 2031. The
projected CIP expenditures fluctuate from year to year with the staggered main replacement
schedule.
Item No. 4 Page 14 of 19
Figure 4: Projected CIP Reserve Balances
Figure 5 below shows year-end reserve balance levels for each reserve from FY 2020 through FY
2031. Table 6 shows reserve starting and ending balances, revenues, transfers expenses, capital
program contribution and operations reserve guideline levels from FY 2026 to FY 2031. The
Operations Reserve was depleted in FY 2023 and FY 2024 because the schedule for Sanitary
Sewer Replacement 31 was accelerated to complete the replacement prior to Caltrans’ street
improvement project on El Camino Real, to avoid digging into the newly-paved street.
Figure 5: Wastewater Collection Utility Year-End Reserve Levels
Note: Operations Reserve shown with a minimum balance of $0.
Item No. 4 Page 15 of 19
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)
Proposed Rates
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
Collection Utility based on projected revenue and expenses to determine the proposed rates
across customer classes.
Item No. 4 Page 16 of 19
Table 7: Current and Proposed Sewer Rates
Current
(as of 7/1/2025)
Proposed
(effective 7/1/2026)
Change
$ %
Monthly Service Charges ($/Month)
S-1 (Residential) Service Charge $67.11 $77.84 $ 10.73 16%
Water Quantity Rates ($/CCF)
S-2 (Commercial) Quantity Rates 12.52 14.52 2.00 16%
S-6 (Restaurant) Quantity Rates 18.69 21.68 2.99 16%
The proposed rates for the S-7 (Industrial Discharger) rate schedule are also increasing 16% to
the rates shown below:
1) Collection System Operation, Maintenance, and Infiltration Inflow: $7.20 per 100 cubic
feet of metered water use.
2) Advanced Waste Treatment Operations and Maintenance Charge: $2.87 per 100 cubic
feet of metered water use
3) $352.84 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand)
4) $850.74 per 1000 lbs of SS (Suspended Solids)
5) $5,878.53 per 1000 lbs of NH3 (Ammonia)
6) $25,791.37 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc)
Bill Impacts
In FY 2027, residential customers will experience a 16% increase in bills. Commercial and
Restaurant customers bill impacts will vary due to each customer’s utilization of the system. Table
8 below shows the bill impact of the proposed FY 2027 rate changes (effective 7/1/2026) for the
typical customers:
Table 8: Bill Impact of Proposed Sewer Rate Changes ($/Month)
Rate Schedule Current
(as of 7/1/2025)
Proposed
(effective 7/1/2026)
Change
$ %
S-1 (Residential) $ 67 $ 78 $ 11 16%
S-2 (Commercial) - 14 CCF 175 203 28 16%
S-6 (Restaurant) - 38 CCF 710 824 114 16%
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 $67 at current rates, which is about 12% lower than the neighboring community average.
These communities are the same six that Palo Alto compares itself to in the annual budget across
Water, Wastewater, Gas, and Electric industries. In the following tables, “Menlo Park” refers to the
West Bay Sanitary District.
Item No. 4 Page 17 of 19
The cities of Mountain View and Los Altos are RWQCP partners. Sewage from Menlo Park and
Redwood City is treated by Silicon Valley Clean Water where some plant upgrades have been
completed and others are yet to be implemented. Santa Clara customers are served by the San
Jose-Santa Clara Regional Wastewater Facility, which is still working on necessary facility
upgrades. In contrast, plant upgrades at the Hayward Water Pollution Control Facility have not
yet begun. Each of the plants are at different stages of rebuilding.
Table 9: Residential Monthly Equivalent Sewer Bill Comparison, Compared to Neighboring
Communities at Current Rates ($/Month)
Palo Alto
(rates effective
7/1/2025)
Neighboring
Community
Average
Neighboring Communities
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 $175 at current rates, which is about 28% higher than
the neighboring community average, while the average monthly restaurant sewer bill, assuming
38 CCF of monthly water usage, is about 4% higher. Note that other communities often have
specific rates for industrial customers that discharge high intensity wastewater, such as food
processors or chemical or electronics manufacturers, but Palo Alto does not currently have any
customers that require these special rates.
Table 10: Non-Residential Monthly Equivalent Sewer Bill Comparison, Compared to
Neighboring Communities at Current Rates ($/Month)
Palo Alto
(rates effective
7/1/2025)
Neighboring
Community
Average
Neighboring Communities
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
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
Staff plans to include the Finance Committee’s recommendations for wastewater rate changes
in the notification of potential rate increases to customers as required by Article XIIID of the State
Constitution expected in April 2026. Staff will incorporate the Finance Committee’s
recommendations into the draft financial forecast and attachments and bring those to the City
Council in June 2026. Then the City Council will consider the proposed Financial forecasts and
Item No. 4 Page 18 of 19
amended rate schedules concurrent with the FY 2027 budget, expected in June, at which time the
public hearing required by Article XIIID of the State Constitution will be held. If Council approves
the proposed rate changes, the rates will become effective July 1, 2026.
FISCAL/RESOURCE IMPACT
Based on the proposed rate increase as shown, the estimated revenue impacts in FY 2027
would be an increase of $4.9 million in the Wastewater Collection Fund. Utility rate increases
impact the general fund because the City is a utilities customer. The impact to the General Fund
from the proposed rate increases is a $0.02 million expense increase.
POLICY IMPLICATIONS
The proposed Wastewater Collection Utility rate adjustments are consistent with Council-
adopted Reserve Management Practice (Attachment A, Exhibit 3) and were developed using a
cost-of-service study and methodology consistent with the California constitution and industry-
accepted cost of service principles. As noted in the Reserves Management Practices, if reserves
fall below the minimum guidelines, Council approval is required for a rate plan that requires more
than one year to return reserves to within guideline levels. This staff report serves as the required
plan.
STAKEHOLDER ENGAGEMENT
On November 5, 20256, 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.
On November 18, 20257, 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
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.
6 Utilities Advisory Commission meeting, November 5, 2025, Staff Report 2503-4364:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=84164&dbid=0&repo=PaloAlto
7 Finance Committee meeting, November 18, 2025, Staff Report 2508-5119:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=83887&dbid=0&repo=PaloAlto
Item No. 4 Page 19 of 19
On March 4, 20268, staff presented the Wastewater Collection Utility rate proposal to the UAC.
The UAC voted 6-1 (Commissioner Gupta voted no) to recommend that the City Council adopt a
resolution approving the 16% rate increase. Commissioners requested additional detail on the
components of the wastewater treatment costs, the underlying drivers, their impact on
Wastewater Collection utility rates, and potential cost-saving opportunities at the treatment
plant. One Commissioner asked about the assumptions underlying projected capacity fee
revenues and the risks associated with those projections. Commissioners also inquired about
rainwater infiltration and its potential impact on Collection system costs. In addition, one
Commissioner asked about the findings of the sewer master plan and recommended improving
the staff report narrative, particularly the discussion of FY 2025 actuals and neighborhood bill
comparisons.
Additional feedback from the Finance Committee meetings in 2026 will be incorporated in the
financial forecast and included in the proposal presented to City Council in June 2026 concurrent
with the budget adoption process.
Attachment A, Exhibit 4 contains examples of CPAU’s communication and outreach methods
including the use of the Utilities website, utility bill inserts, messaging on utility bills, and MyCPAU
online account management platform, email newsletters, print and digital ads in local
publications, social media, and community messaging platforms.
ENVIRONMENTAL REVIEW
The Finance Committee’s review and recommendation to the City Council on the FY 2027
Wastewater Collection Utility financial forecast and rate adjustments does not meet the
California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code
Section 21065, thus no environmental review is required.
ATTACHMENTS:
Attachment A: FY27 Wastewater Collection Resolution
Attachment A: Exhibit 1: FY27 Wastewater Collection Utility Rate Schedules
Attachment A: Exhibit 2: FY27 Wastewater Collection Utility Financial Forecast Details
Attachment A: Exhibit 3: FY27 Wastewater Collection Reserve Management Practices
Attachment A: Exhibit 4: FY27 Wastewater Collection Utility Communications Plan
APPROVED BY:
Alan Kurotori, Director of Utilities
Staff: Eric Wong, Resource Planner
8 Utilities Advisory Commission meeting, March 4, 2026, Staff Report 2512-5640:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86546&dbid=0&repo=PaloAlto&cr=1
Attachment A *NOT YET APPROVED*
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Resolution No.
Resolution of the Council of the City of Palo Alto Approving the
FY 2027 Wastewater Collection Utility Financial Forecast and Reserve Management Practices,
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), and
Repealing Rate Schedules S-3 (Industrial Waste Laboratory and Analysis Charges) and S-4
(Hauled Liquid Waste Charges)
R E C I T A L S
A. Each year the City of Palo Alto (“City”) assesses the financial position of its utilities
with the goal of ensuring adequate revenue to fund operations. This includes making long-term
projections of market conditions, the physical condition of the system, and other factors that
could affect utility costs, and setting rates adequate to recover these costs. The City does this
with the goal of providing safe, reliable, and sustainable utility services at competitive rates. The
City adopts Financial Forecasts or Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices and Financial Forecast
(Exhibit 4 and Exhibit 1) attached to this resolution and made a part of the staff report presented
to the City Council.
C. 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.
D. On June 15, 2026, the City Council held a full and fair public hearing regarding the
proposed rate increase and considered all protests against the proposals.
E. As required by Article XIII D, Section 6 of the California Constitution and
applicable law, notice of the June 15, 2026 public hearing was mailed to all City of Palo Alto
Utilities wastewater customers by May 1, 2026.
F. The City Clerk has tabulated the total number of written protests presented by
the close of the public hearing, and determined that it was less than fifty percent (50%) of the
total number of customers and property owners subject to the proposed wastewater rate
amendments, therefore a majority protest does not exist against the proposal.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby approves the Reserves Management Practices (Exhibit
Attachment A *NOT YET APPROVED*
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31) and FY 2027 Financial Forecast presented to the Finance Committee on March 17, 20262
and updated by the June 15, 2026 Council report, (Exhibit 23), which is attached to this
resolution and made a part of the staff report presented to the City Council.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule S-1 (Residential Wastewater Collection and Disposal) is hereby amended to
read as shown in Exhibit 14. Utility Rate Schedule S-1, as amended, shall become effective
July 1, 2026.
SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule S-2 (Commercial Wastewater Collection and Disposal) is hereby amended to read as
shown in Exhibit 1. Utility Rate Schedule S-2, as amended, shall become effective July 1, 2026.
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule S-6 (Restaurant Wastewater Collection and Disposal) is hereby amended to read as
shown in Exhibit 1. Utility Rate Schedule S-6, as amended, shall become effective July 1, 2026.
SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) is
hereby amended to read as shown in Exhibit 1. Utility Rate Schedule S-7, as amended, shall
become effective July 1, 2026.
SECTION 6. The Council finds that the revenue derived from the wastewater rates
approved by this resolution do not exceed the funds required to provide wastewater service,
and the revenue derived from the adoption of this resolution shall be used only for the
purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto.
SECTION 7. The Council finds that the fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
SECTION 8. The Council finds that the adoption of this resolution approving the FY
2027 Wastewater Collection Utility Financial Forecast and Reserve Management Practices does
not meet the California Environmental Quality Act’s definition of a project under Public
Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an
administrative governmental activity which will not cause a direct or indirect physical change in
the environment, and therefore, no environmental review is required. The Council finds that the
adoption of this resolution changing Wastewater collection 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
1 Exhibit 3: “_____”
2 Meeting Agenda Item 2: “_____”
3 Exhibit 2: “_____”
4 Exhibit 1: “_____”
Attachment A *NOT YET APPROVED*
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Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of
the California Code of Regulations Sec. 15273(a). After reviewing the staff report and all
attachments presented to Council, the Council incorporates these documents herein and finds
that sufficient evidence has been presented setting forth with specificity the basis for this claim
of CEQA exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
RESIDENTIAL WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-1-1 Effective 07-01-20265
dated 07-01-20245 Sheet No S-1-1
A. APPLICABILITY:
This schedule applies to each Occupied Domestic Dwelling unit.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Per Month
Each Occupied Domestic Dwelling unit ................................................................................ $
67.1177.84
D. SPECIAL NOTES:
1.Any dwelling unit being individually served by a Water, Gas, or Electric Meter will be
considered continuously occupied.
2.For two or more Occupied Domestic Dwelling units served by one Water Meter, the
monthly Wastewater charge will be calculated by multiplying the current Wastewater rate
by the number of dwelling units.
3.Each developed separate lot shall have a separate Sservice lateral to a sanitary main or
manhole.
{End}
Attachment A, Exhibit 1
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-2-1 Effective 07-01-20265
dated 07-01-20254 Sheet No S-2-1
A. APPLICABILITY:
This schedule applies to all commercial establishments other than those served under Utility Rate
Schedule S-1 (Residential Wastewater Collection and Disposal), Rate Schedule S-6 (Restaurant
Wastewater Collection and Disposal) or Rate Schedule S-7 (Commercial Establishments
Wastewater Disposal – Industrial Discharger).
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Quantity Rate, per 100 cubic feet (See Section D.1) .......................................................... $ 12.5214.52
D. SPECIAL NOTES:
1. The monthly charge for the quantity rate set forth in Section C of this rate schedule will be
based upon the average Water usage for the months of January, February and March, and
applied in the following July. If a Water Meter is identified as exclusively serving
irrigation landscaping, such Meter will be exempted from Wastewater charge calculations.
Customers without an applicable usage history will be rebuttably presumed to have usage
of 4.8 ccf per month until such time as such usage may reasonably be established by the
City of Palo Alto Utilities Department.
2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in
which case Service will be governed by terms of a special agreement between the City and
the Customer.
{End}
Attachment A, Exhibit 1
RESTAURANT WASTEWATER COLLECTION AND DISPOSAL
UTILITY RATE SCHEDULE S-6
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-6-1 Effective 07-01-20265
dated 07-01-20254 Sheet No S-6-1
A. APPLICABILITY:
This schedule applies to all restaurants.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
Quantity Rates, per 100 cubic feet of monthly metered Water usage ...................................$
18.6921.68
D. SPECIAL NOTES:
1. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in
which case Service will be governed by terms of a special agreement between the City and
the Customer.
{End}
Attachment A, Exhibit 1
COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL
– INDUSTRIAL DISCHARGER
UTILITY RATE SCHEDULE S-7
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No S-7-1 Effective 07-01-20265
dated 07-01-20254 Sheet No S-7-1
A. APPLICABILITY:
This schedule applies to any establishment requiring sampling of industrial discharges in excess
of 25,000 gallons per day, or special discharge monitoring, as defined in Rule 23, Section C.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Wastewater Service.
C. RATES:
1. Collection System Operation, Maintenance, and Infiltration Inflow:
$ 7.206.21 per 100 cubic feet of metered water use.
2. Advanced Waste Treatment Operations and Maintenance Charge:
$ 2.872.48 per 100 cubic feet of metered water use
3. $352.84304.18 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand)
4. $ 850.74733.40 per 1000 lbs of SS (Suspended Solids)
5. $ 5,878.535,067.70 per 1000 lbs of NHRR3RR (Ammonia)
6. $ 25,791.3722,233.94 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver,
and zinc)
D. SPECIAL NOTES:
1. Water usage will be determined as defined in Rule 23, Section C. If a Water Meter is
identified as exclusively serving irrigation landscaping, such Meter will be exempted from
Wastewater charge calculations.
2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in
which case Service will be governed by terms of a special agreement between the City of
Palo Alto and the Customer.
3. Charges for large discharges will be determined on the basis of sampling as outlined in
Utilities Rule 23, Section C. However, for purposes of arriving at an accurate flow
estimate, discharge Meters, if installed, can be utilized to measure outflow for billing
purposes. Annual charges will be determined and allocated monthly for billing purposes.
{End}
Attachment A, Exhibit 1
Attachment A, Exhibit 2
Table 1: Wastewater Collection Utility Financial Forecast
Fiscal Year 2023 2024 2025 2026 2027 2028 2029 2030 2031
1 % Change in Retail Rate 3% 9% 15% 20% 16% 14% 6% 6% 6%
2 Retail Sales Revenue 20,694 22,337 26,517 31,711 36,834 42,022 44,668 47,350 50,192
3 Connection & Capacity Fees 219 492 458 257 660 2,069 2,079 2,099 2,129
4 Treatment Revenue - - 2,760 3,908 256 256 256 256 256
5 Other Revenues & Transfers In 387 1,315 655 486 507 522 538 554 570
6 Interest 168 89 23 97 100 103 106 109 113
7 REVENUES 21,468 24,233 30,413 36,459 38,356 44,971 47,646 50,367 53,259
8 Treatment 10,784 13,803 15,486 17,295 16,881 18,088 18,456 24,357 25,117
9 Allocated Charges (Operating) 2,158 2,175 2,106 2,457 2,539 2,626 2,717 2,810 2,907
10 Customer Service 414 463 570 563 600 622 645 669 695
11 Collection Operations 4,054 5,299 4,553 5,103 5,142 5,682 5,890 6,106 6,330
12 Engineering (Operating) 273 338 423 487 502 522 542 563 585
13 Debt Service 129 129 - - - - - - -
14 Rent 268 281 289 297 383 395 407 419 431
15 Other/ Transfers Out 526 209 213 280 65 252 65 252 65
16 Capital * 6,446 10,494 2,749 4,418 13,000 17,000 18,000 14,000 15,000
17 EXPENSES 25,052 33,191 26,388 30,899 39,112 45,188 46,721 49,177 51,129
18 INTO / (OUT OF) RESERVES (3,584) (8,959) 4,025 5,560 (756) (216) 925 1,190 2,131
19 Ending Operations Reserve (673) (1,012) 1,698 7,258 6,502 6,286 7,212 8,402 10,533
20 Ending Commitments & Reappropriations 9,582 682 1,941 25 - - - - -
21 Ending CIP Reserve - - - - 3,773 1,873 6,439 712 5,495
22 Ending Rate Stabilization Reserve - - - - - - - - -
23 Unassigned Reserves - - - - - - - - -
24 Operations Reserve Guidelines
25 Max (150 Days Treatment/O&M Exp) 7,646 9,328 9,715 10,883 10,731 11,584 11,803 14,456 14,847
26 Target (105 Days Treatment/O&M Exp) 5,353 6,529 6,800 7,618 7,512 8,109 8,262 10,119 10,393
27 Min (60 Days Treatment/O&M Exp) 3,059 3,731 3,886 4,353 4,292 4,634 4,721 5,782 5,939
28 Short Term Risk Assessment Value 2,515 3,285 2,835 3,410 3,161 3,490 3,632 4,330 4,519
* CIP Expenses for FY 2022-26. FY 2027-31 represents CIP funding from the Operations Reserve to the CIP Reserve.
Wastewater Collection Utility Financial Forecast
($'000)
Actual Projection
Attachment A, Exhibit 2
Wastewater Collection Utility Capital Improvement Program (CIP) Details
WASTEWATER COLLECTION UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Wastewater
Collection Utility Financial Plan:
Section 1. Definitions
a)“Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015
to FY 2019 would be the Financial Planning Period.
b)“Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c)“Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets
as the difference between its assets and liabilities.
d)“Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Wastewater Collection Utility’s Fund Balance is reserved for the following purposes:
a)For existing contracts, as described in Section 3 (Reserve for Commitments)
b)For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c)For cash flow management and contingencies related to the Wastewater Collection
Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d)For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e)For operating contingencies, as described in Section 7 (Operations Reserve)
f)Any funds not included in the other reserves will be considered Unassigned Reserves and
shall be returned to ratepayers or assigned a specific purpose as described in Section 8
(Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all contracts in force for the Wastewater
Collection Utility at that time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
Attachment A, Exhibit 3
Section 5. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a)The following guideline levels are set forth for the CIP Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period and approved by Council
Resolution.
2
b)Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added or removed from to that reserve as
a result of a change in contractual commitments related to CIP projects. Any other
additions to or withdrawals from the CIP reserve require Council action.
c)Minimum Level:
i)If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve reaching
its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is
below its minimum level at the end of FY 2017, staff must present a plan by June 30,
2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff
may present, and the Council may adopt, an alternative plan that takes longer than
one year to replenish the reserve, or that does so in a shorter period of time.
d)Maximum Level: If there are funds in this reserve in excess of the maximum level staff
must propose in the next Financial Plan to transfer these funds to another reserve, return
the funds to ratepayers, or designate a specific use of the funds for CIP investments that
will be made by the end of the next Financial Planning Period. Staff may also seek City
Council to approve holding funds in this reserve in excess of the maximum level if they
are held for a specific future purpose related to the CIP.
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held
to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate
Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization
Reserve at the end of any fiscal year, any subsequent Wastewater Collection Utility
Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the
Financial Planning Period.
1 Each month is calculated based upon 1/12 of the annual budget.
2 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the
annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period
to use to derive the annual average would be FY 2023 through FY 2026 etc.
Attachment A, Exhibit 3
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Wastewater Collection Utility’s Fund Balance not included
in the reserves described in Section 3-Section 6 above will be included in the Operations
Reserve unless this reserve has reached its maximum level as set forth in Section 7(d)
below. Staff will manage the Operations Reserve according to the following practices:
a)The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for that
year in the Financial Plan.
b)Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months of
the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c)Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Wastewater Collection Utility shall
be designed to return the Operations Reserve to its target level within four years.
d)Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Wastewater Collection
Utility’s Fund Balance shall be automatically included in the Unassigned Reserve
described in Section 8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the
Wastewater Collection Utility’s Fund Balance will be held in the Unassigned Reserve. If there
are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan
presented to the City Council must include a plan to assign them to a specific purpose or
return them to the Wastewater Collection Utility ratepayers by the end of the first fiscal year
of the next Financial Planning Period. For example, if there were funds in the Unassigned
Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY
2020, the Financial Plan shall include a plan to return or assign any funds in the Unassigned
Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds
or returns them over a longer period of time.
Attachment A, Exhibit 3
Attachment A, Exhibit 4
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0
4
1
1
WASTEWATER COLLECTION UTILITY COMMUNICATIONS PLAN/SAMPLES
A structured and transparent communication strategy will accompany the proposed wastewater
rate adjustment to inform ratepayers, community stakeholders, and decision-makers of the
factors driving the increase and the importance of maintaining the financial sustainability of the
wastewater utility. The communication effort will emphasize accountability, clarity, and
engagement with the community throughout the rate-setting process.
The proposed rate adjustment is primarily driven by higher-than-anticipated costs for
wastewater treatment processes, necessary upgrades to aging operational equipment, and
ongoing operations and maintenance expenditures that ensure regulatory compliance and
reliable service delivery. Messaging will highlight the important infrastructure upgrades that are
occurring at the Regional Water Quality Control Plant (RWQCP) as well as increased capital
improvement projects (CIP) to improve our wastewater collection utility services. These
infrastructure upgrades are necessary to replace aging wastewater collection mains and sanitary
sewer treatment equipment at the RWQCP. Operations reserves are also below minimum
guidelines due to higher capital improvement program costs and increasing treatment costs.
The communication plan will focus on articulating these cost drivers in a clear and accessible
manner, linking them directly to the continued provision of safe and efficient wastewater service.
Public outreach will be implemented through both required and supplementary communication
channels. Consistent with Proposition 218 requirements, notice of the proposed adjustment will
be mailed to all affected property owners and customers in advance of the public hearing.
Additional communication tools will include informational postings on the City’s website
(www.paloalto.gov/ratesoverview), blogs or news releases, social media updates, and inclusion
in customer newsletters and billing inserts to provide consistent and accessible information to
the community.
Staff will provide public presentations to discuss the financial plan, outline the wastewater
system’s infrastructure and equipment needs, and explain how the proposed rate adjustments
support long-term operational sustainability. Materials will include visual summaries, cost
breakdowns, and explanations of how revenues will be utilized to maintain treatment
performance, environmental protection, and regulatory compliance. All outreach will underscore
the City’s commitment to transparency, fiscal stewardship, and maintaining the community’s
essential wastewater infrastructure in a safe, reliable, and environmentally responsible manner.
Attachment A, Exhibit 4
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March 17, 2026 PaloAlto.gov
FY 2027 Wastewater Collection Utility Financial Forecast and Proposed Rate Changes
Finance Committee
2
Wastewater Collection Rate Projections
FY 2027 Financial Forecast Projection
•16% rate increase in FY 2027, approximately $10.70/month increase for residential customers
•14% rate increase in FY 2028 and 6% annually in FY 2029-31
Drivers of 5-Year Rate Trajectory
•Treatment cost increases due to rebuild of regional treatment plant and increased operating costs
•Larger main replacements have already been deferred, construction of first 5-mile main replacement
scheduled for FY 2028; CIP Reserve replenishment and one-time projects
Compared with Preliminary Rates (November 2025)
•Higher Valley Water grant funding in FY 2026
•Higher treatment plant costs from updated budget for FY 2026-31
•Lower operating and CIP expenses from budget refinements
Uncertainties
•Timing of Valley Water Grant
•Treatment Plant Reserve
Policy (Under Development)
•Capacity Fee Revenues
Loan Repayment
•The Wastewater Collection
Utility will repay the $3
million loan plus interest to
the Fiber Utility in FY 2026
3
FY 2027 Proposed Budget Deductions (Wastewater)
Reduction in operating expenses due to Utilities Department-wide budget refinements
and improved efficiencies
•Outsource utility bill printing and mailing: $20K
•Implement credit card processing fee: $120K
•Transfer from pension trust: $80K
Sources of additional potential budget reductions
•Leverage internal resources between departments: $15K
•Citywide Hiring Review Committee evaluates recruitments
$-
$50
$100
$150
$200
$250
$300
$350
$400
Monthly Single Family Residential Sewer Rate Survey (July 2025)
Based on flat rate or 8 hcf of monthly winter water use
4
Wastewater Bill Comparisons ($/Month)
From Silicon Valley Clean Water
5
Wastewater Bill Comparisons ($/Month) January 2026
Residential
General Commercial
Palo Alto is 28% higher than
comparison city average for
commercial and 4% higher for
restaurants
Palo Alto is 12% below comparison
city average
Note: All neighboring city bills are
calculated using currently effective rates
9.6%
3.6%
2.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Total 16% rate increase
Replenish CIP Reserves: $3.8 million
Collection CIP: $1.4 million
$1.1M Arastradero Creek Repair & CCTV
$0.3M Personnel Cost Allocation
Treatment: $1.1 million
$0.5M Treatment O&M
$0.6M Capital and Debt
6
Note: % changes calculated based on FY27 revenues at
current rates apportioned into cost categories based on the
average actual costs from FY22 to FY25.
FY 2027 Rate Increase Drivers
Drivers
•Treatment: Cost increases due to rebuild
of regional treatment plant and
increased operating costs
•Collection: One-time CIP projects
•CIP Reserve Replenishment: Contributing
about $3.8 million to meet the minimum
reserve guideline of $3.1 million
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 %
7
Wastewater Cost and Revenue Projections
Note: Collection Capital reflects capital
contributions from the Operations Reserve to
the Capital Reserve beginning in FY 2027
0
2
4
6
8
10
12
14
16
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Actuals Projection
$
M
i
l
l
i
o
n
s
Fiscal Year
Reserve (Year-End)
8
Wastewater Operations Reserve Projections
Risk Assessment: Based on the maximum
annual non-commodity revenue variance
observed over the past five years and 10%
of the Treatment budget. It also includes
10% of the CIP budget for years when the
CIP reserve is depleted
Reserve Maximum: 150 days of O&M
and commodity expense
Reserve Target:105 days of O&M and
commodity expense
Reserve Minimum:60 days of O&M and
commodity expense
Note: Operations Reserve shown with a
minimum balance of $0.
0
2
4
6
8
10
12
14
16
18
2025 2026 2027 2028 2029 2030 2031
Actuals Projection
$
M
i
l
l
i
o
n
s
Fiscal Year
CIP Reserve (Year-End)
9
Wastewater CIP Reserve Projections
Reserve Minimum: 20% of the
maximum CIP Reserve guideline level
Reserve Maximum: Average annual
CIP budget for 48 months of budgeted
CIP expense
10
Communication and Outreach
Key Messages
•Reasons for rate increases and benefits to customers
•Competitive rates to other neighboring cities
•What the city is doing to keep costs down
•City programs and services to help customers keep utility bill costs low
Outreach
•Public Meetings: UAC,Finance, City Council
•Digital Communication: website, social media,
email newsletters, city blog, videos
•Direct Mail: utility bill inserts, Proposition 218
notice
•Local Media Engagement: articles, interviews
Wastewater staff clean
out massive root, hair,
and grease ball from a
sewer lateral
11
Recommendation
The Utilities Advisory Commission and Staff Recommends the
Finance Committee Recommend that the City Council Adopt a
Resolution:
•Approving the Fiscal Year 2027 Wastewater Collection Utility
Financial Forecast; and
•Amending Rate Schedules (Attachment A, Exhibit 1) effective
July 1, 2026:
•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)