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Home My WebLink AboutStaff Report 2512-5604CITY OF PALO ALTO Finance Committee Regular Meeting Tuesday, March 17, 2026 Agenda Item 2.Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2027 Water Utility Financial Forecast and Reserve Transfers, and Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service From Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service). CEQA Status: Not a project. Staff Presentation Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Utilities Meeting Date: March 17, 2026 Report #:2512-5604 TITLE Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2027 Water Utility Financial Forecast and Reserve Transfers, and Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service From Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service). CEQA Status: Not a project. RECOMMENDATION Staff requests that the Finance Committee recommend that the City Council adopt a resolution (Attachment A): 1. Approving the Fiscal Year 2027 Water Utility Financial Forecast shown in this staff report and attachments and approving a reserve transfer of up to $5,500,000 from the Operations Reserve to the CIP Reserve in FY 2026; and 2. Increasing Water Utility Rates for FY 2027 by Amending Rate Schedules (Attachment A Exhibit 1) to reflect increases effective July 1, 2026 (FY 2027): a. W-1 (General Residential Water service) b. W-2 (Water Service from Fire Hydrants) c. W-3 (Fire Service Connections) d. W-4 (Residential Master-Metered and General Non-Residential Water Service), and e. W-7 (Non-Residential Irrigation Water Service) On March 4, 2026 the Utilities Advisory Commission (UAC) met and discussed this item and made the following recommendations to the City Council: 1.Not approving the FY 2027 Water Utility Financial Forecast shown in this staff report and attachments; 2.Approving a reserve transfer up to $5,500,000 from the Operations Reserve to the CIP Reserve in FY 2026; and 3.Increasing Water Utility rates for FY 2027 by 8 percent to reflect increases effective July 1, 2026 (FY 2027): by reducing the amount going to the operation reserves by 1.2 million from the proposed amount by amending rate schedules: a. W-1 (General Residential Water service) b. W-2 (Water Service from Fire Hydrants) c. W-3 (Fire Service Connections) d. W-4 (Residential Master-Metered and General Non-Residential Water Service), and e. W-7 (Non-Residential Irrigation Water Service) A UAC Commissioner will attend the Finance Committee to aid in the Committee’s deliberations. EXECUTIVE SUMMARY This staff report provides the Finance Committee with a financial forecast for the Water 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. This work is done annually as part of the budget and rate-setting cycle. Due to timing, this staff report was written reflecting staff’s proposal reviewed by the UAC on March 4th. The assumptions and discussion withing results in a 10 percent overall average utility bill increase for a median residential customer, however the UAC did recommend an 8 percent increase. Additional information about the UAC’s discussion and reasoning are in the Stakeholder Engagement section below. The FY 2027 rate projection in the Water Utility Financial Forecast reflects a 12% distribution rate increase and an 8% commodity rate increase, which is equivalent to a 10% overall system average increase. The projected 10% overall system increase is unchanged from the FY 2026 Financial Forecast presented to the Council on June 16, 20251. It is also unchanged from the FY 2027 Preliminary Financial Forecast presented to the Utilities Advisory Commission on November 4, 20252 and to the Finance Committee on November 18, 20253. However, the underlying distribution rate and commodity rate projections have been revised based on updated wholesale rate projections from SFPUC as well as updates to the water fund’s operating and capital forecasts. The FY 2027 Financial Forecast’s five-year rate trajectories reflect overall average system rate increases of up to 10% (see Table 1) and distribution rate increase of up to 14% (see Table 1). These rate increases are at or below the projected rate increases presented in the FY 2026 Financial Forecast and the FY 2027 Preliminary Financial Forecast. 1 FY 2026 Financial Forecast for the Water Utility (approved June 16, 2025) is described in the Finance Committee Staff Report 2412-3869: Staff Report 2412-3869 2 Staff Report 2503-4364: Staff Report 2503-4364 3 Staff Report 2508-5119: Staff Report 2508-5119 Table 1: Current Year (FY 2026) and Projected Rate Trajectory (FY 2027 to FY 2031) Fiscal Year 2026 2027 2028 2029 2030 2031 Overall System Average Rate Trajectory FY 2027 Proposal 10%10%10%10%7%6% FY 2027 Preliminary 10%10%10%10%10%9% FY 2026 Forecast 10%10%10%10%10% Distribution Rate Trajectory FY 2027 Proposal 17%12%12%14%9%7% FY 2027 Preliminary 17%16%16%12%11%12% FY 2026 Forecast 17%16%15%12%11% Commodity Rate Trajectory FY 2027 Proposal 2%8%7%3%2%4% FY 2027 Preliminary 2%1%1%5%8%3% FY 2026 Forecast 2%1%1%5%8% On January 14, 2026, the SFPUC provided the January 2026 Rate Range Memo to the Bay Area Water Supply & Conservation Agency (BAWSCA) reflecting an estimated FY 2027 wholesale rate increase range between 5.9% to 9.1%. As shown in Table 1, this range is higher than the previously estimated 1.0% rate increase, which was provided in the May 2025 rate notice from SFPUC and assumed in the Water Fund’s FY 2026 Financial Forecast. Table 1 also shows the commodity rate trajectory through FY 2031, which staff updated based on SFPUC’s Proposed 10- Year Financial Plan7 as of January 2026. SFPUC will hold a public meeting in May 2026 to set the final FY 2027 price for wholesale water and will provide Palo Alto with a 30-day notice prior to that meeting. See the Wholesale Water Purchases section for more details about SFPUC wholesale rates. During the FY 2026 water rate discussions, staff received feedback from the UAC8 and Finance Committee9 to limit overall water system rate increases in Palo Alto to no more than 10% annually. Staff applied this guidance to the FY 2027 Water Fund Financial Forecast, and adjusted distribution rate increases in response to updated SFPUC wholesale rate projections. Other significant updates to the financial forecast include changes to the Water Fund’s Capital Improvement Program (CIP) and higher than projected reserve balances as of June 30, 2025, 7 January 12, 2026 SFPUC Special Meeting, Agenda Item 3(d): https://www.sfpuc.gov/sites/default/files/about- us/commission/1.12.2026_SpcMtg_A.pdf 8 December 4, 2024 Utilities Advisory Commission, Staff Report https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86548&dbid=0&repo=PaloAlto, Minutes 2024-12- 04 Utilities Advisory Commission Summary Minutes 9 December 3, 2024 Finance Committee, Staff Report Staff Report 2411-3822, Minutes 2024-12-03 Finance Committee Summary Minutes which help to offset the impacts of the revised commodity rate trajectory. The 5-year CIP budget for fiscal years 2027 through 2031 totals $71.7 million, $5.0 million lower than the prior year’s 5- year budget, and some projects have been deferred to later years within the 5-year period. Moreover, as of June 30, 2025, the Operations Reserve balance was $16.5 million, approximately $10.2 million higher than projected levels, and the Rate Stabilization Reserve balance of $4.0 million was unutilized. The positive variance is primarily attributed to salary and benefits expenses and capital expenses in FY 2025 that were lower than forecasted by $3.8 million and $5.4 million, respectively. This positive fiscal year-end result contributes to higher reserve balances over the five-year planning period compared to the FY 2026 Financial Forecast. These updates also contribute to the City’s updated rate projections moderating in fiscal years 2030 and 2031 (see Table 1). BACKGROUND ANALYSIS Attachment A, Exhibit 2: Water Utility Financial Forecast Detail shows how costs have changed during the last five years as well as how staff projects they will change over the next five years. FY 2025 Costs and Revenues Table 2: FY 2025 Actual Results vs. Prior Year’s Forecast Net Cost/ (Benefit) ($000) Type of change Net Cost / (Benefit) of Variances Projections Overview FY 2026 is the starting point for the FY 2027 Financial Forecast. FY 2026 projected revenues are 4% lower than the prior forecast based on monthly actuals-to-date through November 2025. The relatively cool summer at the start of fiscal year drove purchases to be lower than projected. FY 2026 operating expenses are projected to be 4% lower than the previous forecast. This revision is largely informed by FY 2025 actual operating expenses (which were 13% lower than previously forecasted). Transfers out are also projected to increase due to planned leasing costs for a construction laydown yard. This forecast anticipates that water supply costs will increase 5% annually on average over the forecast period FY 2027 – FY 2031, based on SFPUC’s Proposed 10-Year Financial Plan as of January 202613. Staff projects operating costs other than debt service to increase by 3.4% annually on average, which is largely driven by inflationary assumptions. Debt service costs decline during the FY 2026 – FY 2031 time period because the 2011 Utility Revenue Refunding Bond, Series A, is scheduled to be retired in 2026. The FY 2027 Financial Forecast includes a 5-year capital project budget of $71.7 million for FY 2027 – FY 2031, which include water main replacement projects and seismic improvements to two reservoirs. See the CIP section for a description of the 5-year CIP budget. The rise in capital contributions reflect the higher construction costs seen in recent projects, funding for tank rehabilitations, and transfers to restore the CIP Reserve. Figure 1 illustrates actual revenues and expenses through FY 2025, along with projections through FY 2031. 13 January 12, 2026 SFPUC Special Meeting, Agenda Item 3(d): https://www.sfpuc.gov/sites/default/files/about- us/commission/1.12.2026_SpcMtg_A.pdf Figure 1: Water Utility Expenses, Revenues, and Rate Changes: Actual Expenses through FY 2025 and Projections through FY 2031 Load Forecast In FY 2025, actual water supply purchases totaled 4,543,561 CCF, about 0.3% higher than projected in the FY 2026 Financial Forecast. The FY 2027 Financial Forecast estimates supply purchases at 4,427,313 CCF (2.6% year-over-year decline) in FY 2026 and 4,510,198 CCF (1.9% year-over-year increase) in FY 2027. The decline in demand for FY 2026 reflects lower purchases to-date based on actuals through November 2025. Previous projections for FY 2026 assumed continued drought recovery and a slight increase in purchases of about 1.1%. For FY 2027, the forecast reflects a 1.9% rebound from FY 2026 followed by a return to the pre-drought long-term decline trend. Figure 2 below shows water purchase actuals through FY 2025 and the current forecast through 2031. This forecast is used for financial planning, and it applies conservative assumptions which may differ from forecasts produced for resource planning purposes. It begins with the most recent water purchases from FY 2025 (a year with close to average precipitation). The forecast utilizes the econometric model developed by consultant Hazen and Sawyer, in coordination with BAWSCA, for the 2025 Regional Demand Study’s15 demand and conservation projections. The financial forecast assumes no population or account growth, annual rate increases of 10% through FY 2030, and active and passive conservation savings. When applying these assumptions to the model, this results in year-over-year declines of about 2% through FY 2030. 15 2025 Demand Study: https://bawsca.org/water/use/2025_Demand_Study Figure 2: Water Purchases Forecast Revenues Staff based the sales revenue projections on the load forecast and the projected rate changes shown in Table 1. Precipitation can vary substantially, and this can significantly affect revenues. In dry, non-drought years customers use more water, increasing revenues, and in wet years they use less. It is difficult to predict customer usage recovery from drought together with impacts from weather year to year. Staff will continue to monitor these patterns and adjust projections accordingly in subsequent forecasts. The Water Utility receives most of its revenues from sales of water. In FY 2025 the Water Utility received approximately 7% of total revenue from a combination of other sources including service connection fee and capacity fee revenue, interest income, and grants (interest subsidy on Build America Bonds). Capacity fee revenue is expected to increase while other sources of revenue are projected to remain stable during the forecast period. The FY 2026 adopted capital budget estimated that about $9.4 million of capacity fees revenues will be received in FY 2026 and FY 2027. This forecast conservatively projects that 80% of this revenue will be received over a 5-year period starting in FY 2028 to account for potential projects delays or cancelations. This estimated increase in revenues is based on large new housing developments that are currently in the permitting process. Expenses 17, which was assumed in the City’s FY 2026 Financial Forecast and the FY 2027 Preliminary Financial Forecast (see Table 1). The primary driver for the revision to the FY 2027 projected wholesale rate increase is that FY 2026 purchases to-date are lower than projected due to the effects of the relatively cool weather experienced this past summer, in addition to less Balancing Account funds available for rate smoothing. Based on this update, the City’s FY 2027 Financial Forecast assumes a wholesale rate increase of 7.6% for FY 2027. If the final adopted wholesale rate increase is higher or lower than 17 San Francisco Public Utilities Commission Fiscal Year 2025-2026 Wholesale Water Rates, May 13, 2025, 7.6%, the FY 27 Financial Forecast proposes passing through the rate increase without any further adjustment to the current proposed distribution rate of 12%. This would result in an overall system rate increase range of 9.4% to 10.8%. 19, which included its updated long-term wholesale rate projections. For FY 2027 through FY2031, the wholesale rate increases average 5% per year. These projections are included in the Water Fund’s FY 27 Financial Forecast but are highly uncertain and subject to change. When comparing the FY 27 Financial Forecast’s commodity rate trajectory to that of the FY 26 Financial Forecast (see Table 1), commodity rate increases are higher than previously projected in the near term and lower than previously projected in later years. In response to this, City staff revised distribution rate increases to be lower in the near-term and higher in later years of the forecast period. Administration, a category that includes charges allocated to the Water Utility for administrative services provided by the General Fund and for Utilities Department administration, as well as debt service and other potential transfers. Customer Service Engineering work for maintenance activities (as opposed to capital activities) Operations and Maintenance of the distribution system; and Resource Management 20 This plan anticipates operations costs to increase by 3.4% per year, on average, over the forecast period. In FY 2026, operation expenses are projected to increase due to citywide enterprise system upgrades and anticipated hiring of vacant positions from previous year. For salary and benefit assumptions, this Financial Forecast applies an annual percentage increase of 4% to FY 2027 budgeted salaries and benefits, after making adjustments based on anticipated budget updates and recent actuals. These percentage estimates may change as the budget is refined and finalized this fiscal year. This forecast adjusts adopted numbers if there is a pattern of under or over-spending by category. 19 January 12, 2026 SFPUC Special Meeting, Agenda Item 3(d): https://www.sfpuc.gov/sites/default/files/about- us/commission/1.12.2026_SpcMtg_A.pdf 20 Revised Report #:2511-5473: Staff Report 2511-5474, Staff Report 2511-5473 Figure 3: Historical and Projected Operational Costs Capital Improvement Program The Water Utility’s CIP consists of the following types of projects. Non-recurring construction projects (One Time Projects) of large system assets, such as the tank rehabilitation projects. Currently there are no alternative water supply projects included in the budget but if Council decides to move forward with any such project in the future, it would fall within this project type. The Water Main Replacement Program, which represents the ongoing replacement of aging water mains and main appurtenances. Ongoing projects: o Water distribution system improvements are projects improving the reliability and operations of the water distribution system. The projects include but are not limited to engineering studies, hydraulic modeling, leak survey, hydrant maintenance, and updates to engineering standards. o Water supply improvements are projects maintaining and improving the water supply within the City’s distribution network and to individual pressure zones. The projects include but are not limited to emergency diesel generators, power supply projects, communications and controls, water quality engineering, site security, and engineering studies. o Water metering improvements are projects replacing water meters, testing, and improving accuracy of the City’s water metering. New Development Improvements (customer connections) are projects funded or constructed by private developers and property owners. The projects may include new services, hydrants, and other water system improvements necessary to support new development and new water demand. Table 3 shows the FY 2026 current year projection and the five-year CIP spending plan, although these figures are preliminary pending ongoing budget discussions. Table 3. Projected CIP Spending, FY 2026 to FY 2031 ($,000) *Excludes spending that will be funded by reappropriated or committed fund balances that have been carried forward from the previous year. The One Time Projects five-year plan totals $20.8 million, of which $0.1 million is expected to be funded by reappropriation or committed fund balances in FY 2027. The largest one-time projects are the water tank seismic upgrade and rehabilitation of two water distribution storage reservoirs located in the Palo Alto Foothills. The tanks’ construction work has been deferred to FY30 and FY31 to further evaluate a rehabilitation approach to the tanks. One-time projects also include the Arastradero Creek Relocation project. A one-time project will be created to develop a new Water System Master Plan, and the plan will be maintained and updated on an on-going basis from the recurring water supply and distribution projects. The current Water System Master Plan was completed in 2015, and the plan included an analysis of the City’s piping distribution system and presented a recommendation for the City’s water main replacement program. The new water system master plan will evaluate the entire drinking water system, identify deficiencies, identify needed improvements, and recommend an adequate CIP plan. 2026* 2027* 2028 2029 2030 2031 One Time Projects - 833 1,950 10,177 - 7,776 Water Main Replacement - - 5,450 525 11,057 583 Ongoing Projects 570 1,883 4,476 2,291 2,672 2,814 Customer Connections 942 1,185 1,265 1,294 1,257 1,325 CIP Salaries and Benefits 1,581 1,597 1,634 1,681 1,711 1,803 Allocated Charges 787 821 846 872 898 925 Unallocated CIP Salaries and Benefits 717 748 771 794 818 842 CIP Total Spending 4,598 7,069 16,392 17,633 18,412 16,068 CIP Transfers (In)/Out to other Enterprise Funds 717 492 265 344 188 166 Total Spending 5,314 7,561 16,657 17,978 18,601 16,234 Fiscal Year Project Category The water tank seismic and rehabilitation work will repair and maintenance failing tank coatings and corroded steel members. The City contracted an engineering specialist and investigated and analyzed the structural integrity and condition of the Park Tank Reservoir. The engineering specialist recommended a full roof replacement of the Park Tank Reservoir. The City contracted with another firm to perform a condition assessment of Dahl Tank and evaluate the seismic resiliency of both Park Tank and Dahl Tank and results are expected by summer 2026. If full tank replacement is needed for either Dahl or Park Tank, staff estimates the cost for design and construction of Dahl and Park reservoirs is approximately $8-9 million each, which is currently assumed in the five-year plan. Staff estimates the cost to replace tank roofs and seismically retrofit the tanks is approximately $4 million per tank. Staff is evaluating the replacement or rehabilitation needs of these two tanks. Construction costs in the San Francisco Bay Area have increased substantially, outpacing the consumer price index for all urban consumers. Material, fuel, and labor costs have escalated due to inflation, leading to higher bids. More stringent traffic control requirements have driven cost increases: requirements for engineered traffic control plans, restricted working hours, maintaining pedestrian right of ways, bike lanes during construction, and special street plating requirements. Street cut fees. CPAU has switched to high-density polyethylene (HDPE) for its water mains for leak reduction and seismic performance. and most susceptible pipe to corrosion, leakage, and failure. In 2000 the program was expanded to include other pipe materials. In 2015, CPAU completed a pipe replacement master planning process identifying and prioritizing seismically vulnerable pipe. A new prioritization for the water main replacement program will be recommended in the Water System Master Plan. Master plans should be updated every 5 years to ensure that water system changes and new developments are accurately captured in watermain replacement programs. The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8 million. Table 4: Water Utility Debt Service ($000) 23; however, these funds were not 23 City Council June 16, 2025, Attachment B – Resolution for the FY 2026 Water Utility https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=fb89843a-2af7-4656-ba32-8713bbd327cf transferred at year-end because the Operations Reserve balance was already within the reserve policy guideline range. As of the end of FY 2025, $4 million remains in the Rate Stabilization Reserve. Staff proposes drawing on the Rate Stabilization Reserve by $1 million annually for fiscal years 2027 through 2030. This is consistent with the Water Utility Reserve Management Practices25, which state that if there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the next Financial Planning Period. Figure 4: Operations Reserve Adequacy 25 Water Utility Reserve Management Practices; Section 5 (CIP Reserve), Section 7 (Operations Reserve): Attachment A, Exhibit 3 Water Reserve Management Practices FY27 Figure 5: Projected CIP Reserve Balances FY 2026 to FY 2031 Figure 7: Water Utility Reserves FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Starting Balance 1 Operations/Unassigned 16,351 12,175 13,546 12,171 13,963 15,419 2 Rate Stabilization 4,000 4,000 3,000 2,000 1,000 0 3 CIP 3,500 9,000 11,000 11,000 11,000 13,000 Total Starting Reserve Balances 23,852 25,176 27,546 25,171 25,963 28,420 Revenues 4 Total Revenue 60,552 66,823 73,391 78,763 82,317 86,328 5 Transfers In 345 266 422 444 455 467 Total Revenues 60,897 67,089 73,813 79,208 82,772 86,794 Transfers 6 Operations/Unassigned (5,500) (1,000) 1,000 1,000 (1,000) (6,300) 7 Operating Commitments - - - - - - 8 Rate Stabilization - (1,000) (1,000) (1,000) (1,000) - 9 CIP 5,500 2,000 - - 2,000 6,300 Capital Program Contribution 10 Operations/Unassigned (4,598) (7,069) (16,392) (17,633) (18,412) (16,068) 11 CIP 4,598 7,069 16,392 17,633 18,412 16,068 Expenses 12 Total Expenses other than CIP (53,642) (56,165) (58,648) (59,746) (60,732) (62,621) 13 Planned CIP (4,598) (7,069) (16,392) (17,633) (18,412) (16,068) 14 Transfers Out (1,333) (1,485) (1,148) (1,036) (1,172) (1,123) Total Expenses (59,573) (64,718) (76,188) (78,416) (80,316) (79,812) Ending Balance 1+4+5+6+10+12+14 Operations/Unassigned 12,175 13,546 12,171 13,963 15,419 16,102 2+8 Rate Stabilization 4,000 3,000 2,000 1,000 0 0 3+9+11+13 CIP 9,000 11,000 11,000 11,000 13,000 19,300 Total Ending Reserve Balances 25,176 27,546 25,171 25,963 28,420 35,402 Total Reserve Changes Total Reserve Changes 1,324 2,370 (2,375) 792 2,457 6,982 Operations Reserve Guideline Levels 15 Minimum Guideline Level 9,037 9,477 9,829 9,992 10,176 10,478 16 Maximum Guideline Level 18,074 18,953 19,659 19,983 20,352 20,957 * Planned CIP (item 13) is reflected as an expense in the CIP Reserve and does not include CIP funded through Reappropriations or Commitments reserves. This will be funded with the $4.6 million Capital Program Contribution (item 11). Table 6 summarizes the risk assessment calculation for the Water Utility through FY 2031. The risk assessment includes the revenue shortfall of 14% that could occur due to lower than forecasted sales revenue. Table 6: Water Risk Assessment ($000) FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 Total non-commodity revenue $37,569 $41,571 $46,638 $49,976 $52,416 Max. revenue variance, previous ten years 14%14%14%14%14% Risk of revenue loss $3,599 $3,982 $4,467 $4,787 $5,021 Total Risk Assessment value $3,599 $3,982 $4,467 $4,787 $5,021 The City’s external auditor, Baker Tilly, is completing a review of the Utility Funds’ reserve management policies and is expected to report its findings and recommendations to the Policy and Services Committee in Spring 2026. The preliminary results reflect that reserve guidelines are generally in line or below recommended levels. Proposed Rates The Water Utility’s rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in Article XIII D of the California Constitution (Proposition 218) and applicable statutory law. The City structured current rates based on staff’s assessment of the financial position of the Water Utility, and updated current rates using the methodology and rate structures developed by Raftelis Financial Consultants, Inc. (RFC).27 The Water Utility’s rates are based on RFC’s 2019 update to the 2015 cost of service study, which reviewed the City’s most recent cost of service methodologies and rate structures and declared both fundamentally sound. Staff plans to update the cost of service study in 1 to 2 years, unless any major changes occur to the utility’s operations or customer base that would necessitate an earlier study. Before conducting any new cost of service study, staff will review current water rates and the scope of the study with the Utilities Advisory Commission (UAC) and Council to determine the City’s policy priorities. 27 RFC has developed 3 cost studies for the City: the March 2012 Palo Alto Water Cost of Service & Rate Study Staff Report 2676, a 2015 study reviewing the 2012 methodology and analyzing drought rates entitled, Memorandum: Proposed Water Rates, Staff Report 5951 and a 2019 Memorandum analyzing the 2015 methodology and rate structure, titled Proposed FY 2020 Water Rates Staff Report 10295 The current rates and surcharges became effective on July 1, 2025. CPAU has five water rate schedules: separately metered residential customers (W-1), commercial and master-metered multi-family residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire hydrant rental meters used for construction (W-2). All customers pay a monthly service charge based on the size of their inlet meter. This charge represents meter reading, billing, and other customer service costs, and also the cost of maintaining the capability to deliver a peak flow for that customer based on their meter size. 29. The separate commodity charge passed-through SFPUC rate increases to customers. All customers pay this separate commodity rate, currently $5.80 per CCF, for each unit of water in addition to the volumetric rate that is applicable for their customer class. The rates shown below are in addition to the pass-through commodity rate charged to Palo Alto’s customers based on SFPUC supply charges. For further information and details about the proposed commodity rate, see Water Purchase Cost section above. 29 Resolution 10231: RESO 10231 CIP expenditures (money spent on actual projects in a given year). Previously, CIP expenditures were reflected in the Operations Reserve. Table 7: Current and Proposed Water Distribution Charges Current (7/1/2025) Proposed (7/1/2026) Change ($/CCF)Change (%) 4.92 5.51 0.59 12% 7.49 8.38 0.89 12% Table 8 and Table 9 show the current monthly service charges for rate schedules W-1, W-4 and W-7. These monthly service charges are also considered distribution rates. Table 8: Current and Proposed Monthly Service Charges for Residential W-1 Monthly Service Charge ($/month based on meter size)ChangeMeter Size Current (7/1/2025) Proposed (7/1/2026)$% Table 9: Current and Proposed Monthly Service Charges for W-4 and W-7 Monthly Service Charge ($/month based on meter size)ChangeMeter Size Current (7/1/2025) Proposed (7/1/2026)$% Table 10 shows the current and proposed monthly service charges for rate schedule W-3. Table 10: Current and Proposed Monthly Service Charges for Fire Services (W-3) Monthly Service Charge ($/month based on meter size)ChangeMeter Size Current (7/1/2025) Proposed (7/1/2026)$% Error! Reference source not found. shows the impact of the proposed July 1, 2026 rate changes on the median residential bill. The system average increase is projected to be 10 percent, but some customers will see higher or lower increases due to changes in the composition of the customer’s utilization of the system over time, as well as changes in the utility’s costs. Table 11: Impact of Proposed Water Rate Changes on Residential Bills Change Usage (CCF/mo.) Bill under Current Rates (7/1/2025) Bill under Proposed Rates (7/1/2026)$/mo.% $65 $72 $7 10% $97 $107 $10 10% $125 $138 $13 10% $195 $215 $20 10% $348 $383 $35 10% Table 12 shows the impact of the proposed July 1, 2026 rate changes on the median commercial bill. Table 12: Impact of Proposed Water Rate Changes on Commercial Bills Change Usage (CCF/mo.)Bill under Current Rates (7/1/2025) Bill under Proposed Rates (7/1/2026)$/mo.% Commercial (W-4) (5/8” meters) $153 $168 $15 10% $710 $779 $69 10% Irrigation (W-7) (1 ½” meters) Table 13: Single-Family Residential Monthly Water Bill Comparison Usage Residential monthly bill comparison ($/month)* (CCF/month)As of January 2026 Redwood Palo Alto Average of Surrounding Communities Menlo Park Mountain View Hayward City Santa Clara Los Altos 4 $64.79 $59.39 $61.65 $54.69 $55.91 $82.91 $39.56 $61.62 (Winter median) 7 $97.31 $84.65 $79.43 $82.56 $86.09 $110.45 $69.23 $80.17 (Annual median) 9 $125.19 $105.62 $102.57 $101.14 $106.21 $128.81 $89.01 $105.99 (Summer median) 14 $194.89 $159.96 $160.44 $147.59 $168.01 $174.71 $138.46 $170.54 25 $348.23 $292.62 $297.15 $301.78 $303.97 $275.69 $247.25 $329.88 * Based on the FY 2013 BAWSCA survey, the percentage of SFPUC as the source of potable water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for Santa Clara and 100% for Hayward. Los Altos does not receive water supply from SFPUC. Next Steps The City Council will consider adopting the Financial Forecast and rate adjustments as part of the FY 2027 budget review and adoption process in June 2026. If Council approves the proposed rate changes, the rates will become effective July 1, 2026. FISCAL/RESOURCE IMPACT Based on the rate increases as shown, the estimated revenue impacts in FY 2027 would be an increase of $6.2 million in the Water Fund. Utility rate increases impact the General Fund because the City is a utilities customer. The impact to the General Fund of these rate increases is a $0.15 million expense increase. POLICY IMPLICATIONS The proposed water rate adjustments are consistent with Council-adopted Reserve Management Practices that are part of the Financial Forecast and were developed using a cost- of-service study and methodology consistent with the California Constitution and industry- accepted cost-of-service principles. STAKEHOLDER ENGAGEMENT On November 5, 2025, staff presented the preliminary rate proposals at the UAC meeting. Commissioners raised affordability concerns. There was interest in exploring more 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, 2025, 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. 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. On March 4, 2026, staff presented substantially the same proposal in this staff report to the UAC. UAC Commissioners expressed concern about the SFPUC wholesale rate projection change from 1% last year to 7.4% now and expressed a concern that the wholesale rate projections in the outer years were likely to increase as well. Staff explained that this is a pass- through and no Council action is needed to pass this rate through to customers. One Commissioner recommended completing a cost-of-service study and examining different rates for different pressure zones as well as understanding legal guidance on tiered rates. Staff suggested to agendize an item to discuss the cost-of-service study prior to beginning the study to hear UAC input. Commissioners asked about staff’s proposal to transfer $5.5 million to the CIP reserve and then increase rates to replenish the Operations Reserve. In response to this feedback, staff refined the reserve transfers forecast in this report, increasing the amount transferred from the Operations Reserve to the CIP Reserve in FY 2027 and clarifying that the reason for the increase is to restore total reserves. Commissioners questioned reserve guidelines and whether they were appropriate. Staff explained that Baker Tilly is completing a Reserve Advisory Report to address this question and that the report is scheduled to go to the Policy and Services Committee in April. Commissioners also questioned when the next water master plan would be available and noted that the existing water master plan is 20 years old and requested that the plan be completed within 18 months. Some Commissioners expressed lack of confidence in the forecast during the outer years because the water master plan was unavailable to inform the capital project forecasts. e)W-7 (Non-Residential Irrigation Water Service) (approved 5-2, Commissioners Tucher and Gupta voting no) ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: *NOT YET APPROVED* Attachment A 027021726 1 Resolution No. _____ Resolution of the Council of the City of Palo Alto Approving the FY 2027 Water Utility Financial Forecast, Reserve Management Practices, and Reserve Transfers, and Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non- Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) 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 Plans or Forecasts 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 attached to and made part of the Financial Forecasts or Plans. 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 water 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 water 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: *NOT YET APPROVED* Attachment A 027021726 2 SECTION 1. The Council hereby approves the Water Utility Reserves Management Practices and the FY 2027 Financial Forecast presented to the Finance Committee on March 17, 2026 and updated by the June 15, 2026 Council report, which is attached to this resolution and made a part of the staff report presented to the City Council. SECTION 2. The Council hereby approves a transfer from the Operations Reserve to the CIP Reserve of up to $5,500,000 in FY 2026 as described in the FY 2027 Water Utility Financial Forecast. SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-1 (General Residential Water Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-1, 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 W-2 (Water Service from Fire Hydrants) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-2, 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 W-3 (Fire Service Connections) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-3, as amended, shall become effective July 1, 2026. SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-4 (Residential Master-Metered and General Non-Residential Water Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule W- 4, as amended, shall become effective July 1, 2026. SECTION 7. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-7 (Non-Residential Irrigation Water Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-7, as amended, shall become effective July 1, 2026. SECTION 8. The City Council finds as follows: a. Revenues derived from the water rates approved by this resolution do not exceed the funds required to provide water service. b. Revenues derived from the water rates approved by this resolution shall not be used for any purpose other than providing water service, and the purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. c. The amount of the water rates imposed upon any parcel or person as an incident of *NOT YET APPROVED* Attachment A 027021726 3 property ownership shall not exceed the proportional cost of the water service attributable to the parcel. SECTION 9. 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. // // // // // // // // // // // // // // // // *NOT YET APPROVED* Attachment A 027021726 4 SECTION 10. The Council finds that the adoption of this resolution approving the FY 2027 Water Financial Forecast and Reserve transfers does not meet the California Environmental Quality Act’s (CEQA) 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 water rates to meet operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital improvements necessary to maintain service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the 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 GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-1-1 Effective 7-1-20252026 dated 7-1-20242025 Sheet No W-1-1 A. APPLICABILITY: This schedule applies to separately metered single-family residential dwellings receiving Water Service from the City of Palo Alto Utilities. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Water Service. C. RATES: Per Meter Monthly Service Charge: Per Month For meters 5/8-inch to 1 inch .................................................................................... $ 27.6330.94 For 1 1/2 inch meter .................................................................................................. 89.2899.99 For 2-inch meter ........................................................................................................ 138.11154.68 For 3-inch meter ........................................................................................................ 292.75327.88 For 4-inch meter ........................................................................................................ 520.66583.13 For 6-inch meter ........................................................................................................1,065.971,193.88 For 8-inch meter ........................................................................................................1,961.282,196.63 For 10-inch meter ......................................................................................................3,100.743,472.82 For 12-inch meter .......................................................................................................4,077.454,566.74 Per Hundred Cubic Feet Volumetric Rates: (To be added to Service Charge, applicable to all pressure zones.) Per Month Commodity Rate: Water Delivery Charge from SFPUC ......................................................................... $ 5.806.24 Distribution Rate: Tier 1 usage ........................................................................................................................$ 3.493.90 Tier 2 usage (All usage over 100% of Tier 1) .......................................................................8.149.11 Attachment A, Exhibit 1 GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-1-2 Effective 7-1-20252026 dated 7-1-20242025 Sheet No W-1-2 Drought Surcharges (deactivated): A drought surcharge will be added to the Customer’s applicable commodity rate for Tier 1 and Tier 2 Water usage when the City Council has determined that a Water reduction level is in effect for the City as described in Section D.4. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%) Tier 1 0.20 0.43 0.64 Tier 2 0.58 1.21 1.85 Temporary Service – Developers Temporary unmetered service to residential subdivision developers, per connection ........................................................................ $ 6.00 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Commodity Rate The Commodity Charge is based on the water delivery rate per the San Francisco Public Utility Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Term Contract. The Commodity Charge will be passed through automatically via periodic rate adjustments to account for increases in wholesale water charges, as well as inflation. The pass-through period will be effective for fiscal years 2025 through 2029, inclusive. Customers will be provided notice of any adjustments via their billing statements or by any other mailing by CPAU to the customer’s regular billing address. Attachment A, Exhibit 1 GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-1-3 Effective 7-1-20252026 dated 7-1-20242025 Sheet No W-1-3 3. Calculation of Usage Tiers Tier 1 Water usage shall be calculated and billed based upon a level of 0.2 ccf per day rounded to the nearest whole ccf, based on Meter reading days of Service. As an example, for a 30-day bill, the Tier 1 level would be 0 through 6 ccf. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 4. Drought Surcharge During period of Water shortage or restrictions on local Water use, the City Council may, by resolution, declare the need for citywide Water conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the drought surcharge is to recover revenues lost as a result of reduced consumption. {End} Attachment A, Exhibit 1 WATER SERVICE FROM FIRE HYDRANTS UTILITY RATE SCHEDULE W-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-2-1 Effective 7-1-20252026 dated 7-1-20242025 Sheet No W-2-1 A. APPLICABILITY: This schedule applies to all Water taken from fire hydrants for construction, maintenance, and other uses in conformance with provisions of a Hydrant Meter Permit. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Water Service. C. RATES: 1. Monthly Service Charge. METER SIZE 5/8 inch ........................................................................................................................... $ 50.00 3 inch ........................................................................................................................... 125.00 2. Volumetric Rate: (per hundred cubic feet) Commodity Rate: Water Delivery Charge from SFPUC ................................................................ $ 5.806.24 Distribution Rate: .................................................................................................................$ 4.925.51 4. Drought Surcharges (deactivated): A drought surcharge will be added to the Customer’s applicable Commodity rate when the City Council has determined that a Water reduction level is in effect for the City as described in Section D.6. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%) Surchar e 0.26 0.53 0.77 Attachment A, Exhibit 1 WATER SERVICE FROM FIRE HYDRANTS UTILITY RATE SCHEDULE W-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-2-2 Effective 7-1-20252026 dated 7-1-20242025 Sheet No W-2-2 D. SPECIAL NOTES: 1. Monthly charges shall include the applicable monthly Service Charge in addition to usage billed at the commodity rate. 2. The Commodity Charge is based on the water delivery rate per the San Francisco Public Utility Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Term Contract. The Commodity Charge will be passed through automatically via periodic rate adjustments to account for increases in wholesale water charges, as well as inflation. The pass-through period will be effective for fiscal years 2025 through 2029, inclusive. Customers will be provided notice of any adjustments via their billing statements or by any other mailing by CPAU to the customer’s regular billing address. 3. Any person or company using a hydrant without first obtaining a valid Hydrant Meter Permit shall pay a fee of $50.00 for each day of such use in addition to all other costs and fees provided in this schedule. A hydrant permit may be denied or revoked for failure to pay such fee. 4. A Meter deposit of $750.00 may be charged any applicant for a Hydrant Meter Permit as a prerequisite to the issuance of a permit and Meter(s). A charge of $50.00 per day will be added for delinquent return of hydrant Meters. A fee will be charged for any Meter returned with missing or damaged parts. 5. Any person or company using a fire hydrant improperly or without a permit, or who draws Water from a hydrant without a Meter installed and properly recording usage shall, in addition to all other applicable charges be subject to criminal prosecution pursuant to the Palo Alto Municipal Code. 6. During period of Water shortage or restrictions on local Water use, the City Council may, by resolution, declare the need for citywide Water conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the drought surcharge is to recover revenues lost as a result of reduced consumption. {End} Attachment A, Exhibit 1 FIRE SERVICE CONNECTIONS UTILITY RATE SCHEDULE W-3 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-3-1 Effective 7-1-20252026 dated 7-1-2024 2025 Sheet No W-3-1 A. APPLICABILITY: This schedule applies to all public fire hydrants and private fire Service connections. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Water Service. C. RATES: 1. Monthly Service Charges Public Fire Hydrant .................................................................................................... $ 5.00 Private Fire Service: 2-inch connection .......................................................................................................$ 5.686.36 4-inch connection .......................................................................................................35.2239.44 6-inch connection ....................................................................................................... 102.32114.59 8-inch connection .......................................................................................................218.07244.23 10-inch connection .....................................................................................................392.19439.25 12-inch connection .....................................................................................................633.50709.52 2. Commodity (To be added to Service Charge unless Water is used for fire extinguishing or testing purposes.) Per Hundred Cubic Feet All water usage ..........................................................................................................$ 10.00 D. SPECIAL NOTES: 1. Service under this schedule may be discontinued if Water is used for any purpose other than fire extinguishing or testing and repairing the fire extinguishing facilities. Using hydrants and fire Services for other purposes is illegal and will be subject to the commodity charge as noted above, fines, and criminal prosecution pursuant to the Palo Alto Municipal Code. 2. For a combination Water and fire Service, the Water Service schedule shall apply. Attachment A, Exhibit 1 FIRE SERVICE CONNECTIONS UTILITY RATE SCHEDULE W-3 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-3-2 Effective 7-1-20252026 dated 7-1-2024 2025 Sheet No W-3-2 3. Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire Services. 4. Repairs and testing of fire extinguishing facilities are not considered unauthorized use of Water if records and documentation are supplied by the Customer. {End} Attachment A, Exhibit 1 RESIDENTIAL MASTER-METERED AND GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-4 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-4-1 Effective 7-1-20265 dated 7-1-20254 Sheet No W-4-1 A. APPLICABILITY: This schedule applies to Water Services to non-residential buildings, and multi-family residential dwellings served through a Master-Meter. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Water Service. C. RATES: Per Meter Monthly Service Charge Per Month For 5/8-inch meter .................................................................................... $ 24.1627.05 For 3/4-inch meter .................................................................................... 32.3136.18 For 1-inch meter .................................................................................... 48.5954.42 For 1 ½-inch meter .................................................................................... 89.2899.99 For 2-inch meter .................................................................................... 138.11154.68 For 3-inch meter .................................................................................... 292.75327.88 For 4-inch meter .................................................................................... 520.66583.13 For 6-inch meter ....................................................................................1,065.971,193.88 For 8-inch meter ....................................................................................1,961.282,196.63 For 10-inch meter ....................................................................................3,100.743,472.82 For 12-inch meter ....................................................................................4,077.454,566.74 Per Hundred Cubic Feet Volumetric Rates: (to be added to Service Charge, applicable to all pressure zones) Per Month Commodity Rate: Water Delivery Charge from SFPUC ...................................................... $ 5.806.24 Distribution Rate: ........................................................................................... 4.925.51 Attachment A, Exhibit 1 RESIDENTIAL MASTER-METERED AND GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-4 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-4-2 Effective 7-1-20265 dated 7-1-20254 Sheet No W-4-2 Drought Surcharges (deactivated): A drought surcharge will be added to the Customer’s applicable commodity rate when the City Council has determined that a Water reduction level is in effect for the City as described in Section D.3. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%) Surchar e 0.26 0.53 0.77 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Commodity Rate The Commodity Charge is based on the water delivery rate per the San Francisco Public Utility Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Term Contract. The Commodity Charge will be passed through automatically via periodic rate adjustments to account for increases in wholesale water charges, as well as inflation. The pass-through period will be effective for fiscal years 2025 through 2029, inclusive. Customers will be provided notice of any adjustments via their billing statements or by any other mailing by CPAU to the customer’s regular billing address. 3. Drought Surcharge During period of Water shortage or restrictions on local Water use, the City Council may, by resolution, declare the need for citywide Water conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the drought surcharge is to recover revenues lost as a result of reduced Attachment A, Exhibit 1 RESIDENTIAL MASTER-METERED AND GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-4 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-4-3 Effective 7-1-20265 dated 7-1-20254 Sheet No W-4-3 consumption. {End} Attachment A, Exhibit 1 NON-RESIDENTIAL IRRIGATION WATER SERVICE UTILITY RATE SCHEDULE W-7 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-7-1 Effective 7-1-20252026 dated 7-1-20254 Sheet No W-7-1 A. APPLICABILITY: This schedule applies to non-residential Water Service supplying dedicated irrigation Meters. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Water Services. C. RATES: Per Meter Monthly Service Charge Per Month For 5/8-inch meter .................................................................................... $ 24.1627.05 For 3/4-inch meter .................................................................................... 32.3136.18 For 1-inch meter .................................................................................... 48.5954.42 For 1 1/2 inch meter .................................................................................... 89.2899.99 For 2-inch meter .................................................................................... 138.11154.68 For 3-inch meter .................................................................................... 292.75327.88 For 4-inch meter .................................................................................... 520.66583.13 For 6-inch meter ....................................................................................1,065.971,193.88 For 8-inch meter ....................................................................................1,961.282,196.63 For 10-inch meter ....................................................................................3,100.743,472.82 For 12-inch meter ....................................................................................4,077.454.566.74 Per Hundred Cubic Feet Volumetric Rates: (to be added to Service Charge, applicable to all pressure zones) Per Month Commodity Rate: Water Delivery Charge from SFPUC ........................................................... $ 5.806.24 Distribution Rate: ..................................................................................................... 7.498.38 Attachment A, Exhibit 1 NON-RESIDENTIAL IRRIGATION WATER SERVICE UTILITY RATE SCHEDULE W-7 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-7-2 Effective 7-1-20252026 dated 7-1-20254 Sheet No W-7-2 Drought Surcharges (deactivated): A drought surcharge will be added to the Customer’s applicable commodity rate when the City Council has determined that a Water reduction level is in effect for the City as described in Section D.3. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Reduction level Level 1 (10/15%) Level 2 (20%) Level 3 (25%) Surchar e 0.53 1.25 2.02 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Commodity Rate The Commodity Charge is based on the water delivery rate per the San Francisco Public Utility Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Term Contract. The Commodity Charge will be passed through automatically via periodic rate adjustments to account for increases in wholesale water charges, as well as inflation. The pass-through period will be effective for fiscal years 2025 through 2029, inclusive. Customers will be provided notice of any adjustments via their billing statements or by any other mailing by CPAU to the customer’s regular billing address. 3. Drought Surcharge During period of Water shortage or restrictions on local Water use, the City Council may, by resolution, declare the need for citywide Water conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the drought surcharge is to recover revenues lost as a result of reduced consumption. {End} Attachment A, Exhibit 1 Attachment A, Exhibit 2 1 FISCAL YEAR FY 2020 Actual FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Projected FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 2 WATER SUPPLY 4 Purchases (CCF)4,757,199 4,785,384 4,709,184 4,210,399 4,419,628 4,543,561 4,427,313 4,510,198 4,433,345 4,343,393 4,266,317 4,235,350 BILL AND RATE CHANGES 8 Variable Charge (Supply)0%0%0%16%10%9%2%8%7%3%2%4% Residential Variable Charge (Distribution)1%0%0%10%17%12%12%14%9%7% 10 System Average Rate 5%5% 13 STARTING RESERVES 14 Reappropriations (Non-CIP)258,000 70,000 796,000 41,000 444,000 - 1,766,000 2,906,000 - - 2,737,000 2,813,000 - - 2,663,000 2,678,000 - - 776,447 2,552,181 - ----- 442,000 3,260,000 - - 2,552,181 - - 2,552,181 - 3,260,000 2,906,000 2,552,181 2,552,181 2,552,181 -- 15,090,505 11,036,000 10,147,000 12,168,000 16,066,000 12,245,000 6,026,222 3,500,000 4,000,437 16,351,229 - 4,452,820 9,000,000 4,000,437 12,175,184 - --- 13,000,000 437 11,000,000 11,000,000 11,000,000 20 Rate Stabilization Reserve 15,419,123 23 TOTAL STARTING RESERVES 49,448,720 42,603,000 32,162,000 33,206,517 32,180,623 30,098,236 27,723,375 28,515,164 30,971,742 25 REVENUES 26 Net Sales 47,136,524 47,434,047 44,058,867 42,570,047 48,085,282 54,456,483 57,398,178 63,650,463 69,063,693 74,409,802 77,937,940 81,923,898 28 TOTAL REVENUES 51,063,831 50,728,489 47,009,457 45,190,422 51,962,056 58,575,091 60,897,213 67,088,894 73,812,958 79,207,682 82,772,341 86,794,493 30 EXPENSES 31 Water Purchases 21,773,295 21,935,250 21,248,651 21,744,025 24,651,258 27,856,127 27,610,334 29,983,842 31,506,321 31,869,610 32,092,636 33,202,220 32 Operating Expenses 33 Administration Allocated Charges 3,751,618 9,351,279 1,159,106 7,010,251 401,902 3,848,781 9,564,641 1,215,567 7,400,625 662,832 2,053,820 - 4,181,415 9,809,311 1,261,514 7,195,632 492,438 2,058,662 - 4,176,701 2,365,000 3,222,938 945,092 10,709,731 1,590,945 7,531,468 508,307 5,236,342 2,483,250 3,220,173 1,822,487 12,762,252 1,427,567 9,121,406 637,696 4,456,214 9,986,370 1,105,116 8,616,998 652,361 2,663,930 - 4,991,285 2,310,800 3,219,331 1,333,007 11,854,422 1,383,954 10,077,228 1,051,982 2,997,389 - 5,165,275 2,410,164 2,563,683 1,484,566 11,623,689 1,432,654 10,279,613 1,333,790 2,995,953 - 5,320,233 2,482,469 2,565,598 1,147,680 11,515,981 1,475,633 10,838,002 1,373,803 3,085,832 - 5,479,840 2,556,943 2,563,503 1,036,122 11,636,409 1,519,902 11,163,142 1,415,017 3,178,406 - 5,644,236 2,633,652 2,566,323 1,171,775 12,015,986 1,565,499 11,498,036 1,457,468 3,273,759 - 5,813,563 2,712,661 2,563,493 1,123,320 12,213,037 1,612,464 11,842,977 1,501,192 3,371,971 - Rent Debt Service Transfers and Other Adjustments Subtotal, Administration Resource Management Operations and Mtc Engineering (Operating) Customer Service 1,865,571 2,272,586 2,541,599 Allowance for Unspent Budget 43 Subtotal, Operating Expenses (Excluding Purchases)19,788,109 20,897,485 20,817,557 22,613,037 26,490,520 23,024,776 27,364,976 27,665,698 28,289,251 28,912,877 29,810,747 30,541,641 44 TOTAL OPERATING EXPENSES 46 Capital Contributions^6,737,917 4,356,249 10,015,866 12,432,100 4,766,278 6,245,118 10,097,948 9,068,921 16,392,247 17,633,407 20,412,380 22,368,203 47 TOTAL EXPENSES 48,299,320 47,188,984 55,908,056 57,126,022 66,718,461 49 ENDING RESERVES 50 Reappropriations (Non-CIP)70,000 41,000 ---------- Attachment A, Exhibit 2 51 Commitments (Non-CIP)796,000 3,260,000 - 444,000 2,906,000 - 1,766,000 2,737,000 2,663,000 776,447 2,552,181 - - 2,552,181 - - 2,552,181 - - 2,552,181 - - 2,552,181 - - 2,552,181 - - 2,552,181 - 11,036,000 10,147,000 12,168,000 16,066,000 12,245,000 6,026,222 3,500,000 4,000,437 16,351,229 - 4,452,820 9,000,000 4,000,437 12,175,184 - 4,000,000 11,000,000 3,000,437 13,545,617 - 3,000,000 11,000,000 2,000,437 12,170,757 - 3,000,000 11,000,000 1,000,437 13,962,545 - 3,000,000 13,000,000 437 3,000,000 19,300,000 43756 Rate Stabilization Reserve 15,419,123 16,101,552 58 Unassigned 59 TOTAL ENDING RESERVES 49,448,720 42,603,000 32,162,000 33,206,517 32,180,623 34,098,236 30,723,375 31,515,164 33,971,742 40,954,171 60 ^ Capital Program Contribution represents CIP funding transferred from the Operations Reserve to the CIP Reserve beginning in FY 2021 61 OPERATIONS RESERVE 62 Min (60 days of non-capital expenses)6,832,012 10,248,017 13,664,023 7,040,997 10,561,496 14,081,995 6,914,993 10,372,490 13,829,986 7,291,572 10,937,358 14,583,144 8,406,868 12,610,301 16,813,735 8,363,984 12,545,976 16,727,968 9,037,037 13,555,556 18,074,075 9,476,637 14,214,955 18,953,273 9,829,409 14,744,113 19,658,818 9,991,642 14,987,462 19,983,283 10,175,899 10,478,443 66 Bond Covenants 67 Available Reserves (5x Maximum Annual Debt Service)*15.9 14.5 8.1 5.8 6.7 7.4 *Available Reserves consist of the Rate Stabilization Reserves of the Water, Gas, and Electric Funds and the Electric Special Projects Reserve (Calaveras). Maximum Annual Debt Service is on outstanding debt of the Water, Reappropriated & Carried Forward from Previous Years & Accruals (A) Current Year Current Year Current Year Reappropriation at Transfer to CIP Reserve FY26 YE FY 2027 (Budget) 1 Project # 2 ONE TIME PROJECTS Project Name FY27 Funding FY 2028 FY 2029 FY 2030 FY 2031 21 27 3 WS-09000 4 WS-27001 5 WS-27000 Seismic Water System 1,560,518 2,691,092 300,000 - - 100,000 2,391,092 100,000 933,186 -550,000 8,776,512 - - 7,776,412 -----683,186 833,186 - 6 Subtotal, One-time Projects 1,560,518 2,691,092 300,000 100,000 2,391,092 1,950,000 10,176,512 7,776,412 7 WATER MAIN REPLACEMENT PROGRAM 8 WS-14001 9 WS-15002 10 WS-16001 11 WS-19001 12 WS-20000 13 WS-20001 WMR - Project 28 -- 5,700 4,366,839 411,030 - -- - ---- - ---- 5,700 746,279 5,700 - 862,207 411,030 - 3,500,000 3,500,000 ---5,450,000 - 524,507 - -11,056,610 11,056,610 --582,683 582,68314 Subtotal, Water Main Replacement Prog.751,979 4,783,569 10,332 3,500,000 1,273,237 3,500,000 5,450,000 524,507 Reappropriated / Carried Forward from Previous Years (Budget) Estimate Current Year Current Year Current Year Reappropriation Transfer to CIP FY 2027 (Budget) 15 Project #Project Name FY27 Funding FY 2028 FY 2029 FY 2030 FY 2031 16 ONGOING PROJECTS 17 WS-02014 18 WS-11003 19 WS-11004 20 WS-13002 21 WS-80014 22 WS-80015 23 WS-26000 W-G-W Utility GIS Da 18,180 150,002 3,417,984 50,000 - 62,643 - 3,698,809 517,340 438,122 3,753,814 96,300 389,050 376,734 1,581,140 7,152,500 340,000 321,820 177,340 - 189,883 2,444,083 - 139,050 177,104 - 701,860 370,000 694,000 50,000 420,290 500,000 1,597,122 4,333,272 524,520 273,700 319,450 50,000 370,290 345,370 1,597,122 3,480,452 517,280 520,000 2,489,000 50,000 399,270 500,000 1,634,390 6,109,940 398,620 250,000 1,000,000 50,000 308,270 284,550 1,681,088 3,972,528 632,400 250,000 800,000 50,000 489,056 450,722 1,710,551 4,382,729 666,550 263,500 843,200 50,000 515,465 475,061 1,802,921 4,616,696 151,939 335,181 96,300 200,000 45,000 1,581,140 2,749,560 - 46,300 200,000 - 1,581,140 2,151,197 Water Fund S&B 24 Subtotal, Ongoing Projects 852,820 2,950,120 25 CUSTOMER CONNECTIONS (FEE FUNDED) 26 WS-80013 Water System Extensions 27 Subtotal, Customer Connections 28 GRAND TOTAL 14,917 14,917 6,026,223 956,908 956,908 941,991 --1,185,308 1,185,308 9,951,766 8,354,644 1,185,308 1,185,308 5,498,946 3,901,824 1,265,232 1,265,232 14,775,173 13,140,782 1,294,274 1,294,274 15,967,821 14,286,733 1,257,487 1,257,487 16,696,825 14,986,275 1,325,391 1,325,391 14,301,182 12,498,262 956,908 15,584,069 14,002,929 956,908 4,016,801 2,435,660 941,991 3,093,189 1,512,048 4,452,820 6,614,449 29 Total w/o S&B 30 Funding Sources 31 Connection/Capacity Fees 32 Other Utility Funds (Asset Mgmt, GIS Systems) 33 Utility Rates 923,612 226,667 1,942,910 1,185,308 1,185,308 1,265,232 344,853 13,165,087 1,294,274 265,747 14,407,800 1,257,487 421,600 15,017,739 1,325,391 444,366 12,531,425 35 Enterprise Transfers In/Out for CIP Projects 36 WS-02014 37 38 39 GS-25001 40 EL-11014 41 W-G-W Utility GIS Data Gas utility transfer in (1/3 cost) Total transfers in 113,333 226,667 943,186 233,953 467,907 960,000 172,427 344,853 132,873 265,747 210,800 421,600 222,183 444,366 Design and Repair at Arastradero Creek 610,000 610,000 610,000 610,000 610,000 610,000 610,000 610,000Total transfers out Attachment A, Exhibit 3 WATER UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Water 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, for the Water Utility Financial Plan delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is 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 Water 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 Water 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 Water 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. 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. Attachment A, Exhibit 3 Minimum Level 20% of the maximum CIP Reserve guideline level Maximum Level Average annual (12 month)1 CIP budget, for 48 months of budgeted CIP expenses2 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: 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 Water Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the next Financial Planning Period. The Council may approve exceptions to this requirement, when proposed by staff to provide greater rate stabilization to customers. 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 Water 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. Minimum Level 60 days of O&M and commodity expense Target Level 90 days of O&M and commodity expense Maximum Level 120 days of O&M and commodity expense 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 1 Each month is calculated based upon 1/12 of the annual budget. 2 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use to derive the annual average would be FY 2022 through FY 2025 etc. Attachment A, Exhibit 3 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 Water 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 Water 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 Water 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 Water 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 2021, 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. COMMUNICATIONS PLAN/SAMPLES The Fiscal Year (FY) 2027 water utility communications strategy covers these primary areas: recently implemented cost containment measures, cost drivers for rate increases, including operations and capital improvement, commodity costs, reserve balances, utility bill comparisons, and efficiency programs and services to help keep utility bill costs low. The City of Palo Alto Utilities (CPAU) communication methods include use of the utilities website, utility bill inserts, messaging on utility bills, MyCPAU online account management platform, email newsletters, print and digital ads in local publications, social media, community messaging platforms, and through direct mailings of the Home Water Reports and online WaterSmart portal. As a not for profit public utility, CPAU must recover its costs primarily through revenue generated by rates. Any increased supply costs are passed through rates to CPAU customers, including for capital improvement. The cost to deliver water supply to Palo Alto and for CPAU to distribute water to customers is high, as it includes maintaining and replacing water infrastructure, customer service, billing, and administration. CPAU’s communication about water utility rates will focus on the forecasted increase in costs passed down from Palo Alto’s water supplier, the San Francisco Public Utilities Commission (SFPUC), ongoing capital improvement and infrastructure upgrades, and what CPAU is doing to keep costs down. Maintaining water pipes, mains, and service connections is necessary to prevent leaks, which cost the utility and rate payers money, and prevents damage to infrastructure which could exacerbate safety and reliability concerns in the long term. CPAU promotes water use efficiency programs and easy water-saving behaviors to aid in our water saving efforts and help customers keep utility costs low. Messaging reinforces that although rates may increase, efficient usage can help customers avoid seeing a significant water cost increase on the utility bill. Staff maintain a dedicated webpage at cityofpaloalto.org/ratesoverview to provide an overview on all utility rates, costs to the utility, updates to financial forecasts and proposed rate changes. While print materials such as bill inserts and ads feature prominently, CPAU is exploring additional ways to communicate directly to customers utilizing unique programs like the relatively new WaterSmart portal and Home Water Reports, in addition to the near real-time water usage data provided by new Advanced Metering Infrastructure (AMI) and the ability to send customers alerts about high water usage. Staff continue to maintain an active presence in social media and information sharing through citywide email newsletters. Staff attend community outreach events and host educational workshops on these related topics. March 17, 2026 www.paloalto.gov Water Utility Financial Forecast and Proposed Rate Changes for FY 2027 Finance Committee 1 2 Water Rate Projection FY 2027 Proposal: 10% rate increase in FY 2027, approximately $12.60/month increase for residential customers Drivers •San Francisco Public Utilities Commission (SFPUC) wholesale rate increase of 7.4%* •Restoring reserve levels •Capital Improvement Plan (CIP) projects •Long-term decline in water sales Compared with Preliminary Rates (November 2025) •Overall rate projection is the same for FY 27 through FY 29 and lower for FY 30 and FY 31 •Distribution rate increases were adjusted in response to revised wholesale rate projections •$10 million reduction to 5-year CIP budget reflecting timeline shifts •Budget Reductions in operating expenses Fiscal Year 2026 2027 2028 2029 2030 2031 Overall System Average Rate Trajectory 10% 10% 10% *The financial forecast assumes a wholesale rate increase of 7.6%. On January 14, 2026, the SFPUC provided a rate range for FY 2027 between 5.9% to 9.1%. On February 19th, the SFPUC provided a wholesale rate estimate of 7.4%. 2 3 FY 2027 Proposed Budget Reductions 3 •FY 2027 Proposed Budget Changes (Water Only) •Included in FY 2027 Financial Forecast •Eliminate vacant Meter Reader positions: $260K •Outsource utility bill printing and mailing: $30K •Implement credit card processing fee: $200K •Transfer from pension trust: $150K •Sources of additional potential budget reductions: •Council priority on organizational efficiencies •Leverage internal resources between departments •Citywide Hiring Review Committee evaluates recruitments Water Bill Comparisons 2026 Monthly Bill Comparison of Agencies with 100% SFPUC (10 CCF) Supply As of 2026, Palo Alto water bills ($139) are below average ($143) among agencies with 100% SFPUC supply. Source: Agency websites and rate study proposals. Bills are based on either fiscal year 2026 or calendar year 2026 rates. 4 5 FY 2027 Rate Increase Drivers 10% Rate Increase Drivers •Restore reserve levels to comply with the City’s adopted Water Reserve Management Practices •Assumed SFPUC wholesale rate increase of 7.4% •Increased capital spending planned for FY 2027 – 2031 •Seismic improvements for two reservoirs •Water main replacement projects •Inflationary increases to operating costs, offset by new cost reductions and retirement of the Series 2011 Revenue Bonds •Revenue impacts from recent drought resulted in long- term decline in water consumption. Low rate increases in prior years If sales were flat relative to pre- drought demand, the rate increase for FY27 would be 8%. 5 Water Cost and Revenue Projections 10%9% 10%10% 10% <- Preliminary Forecast Rate Projections * Costs exclude transfers from the Operations Reserve to the Capital Reserve 6 7 Water Operations Reserve Projections Risk Assessment: Based on the maximum historical non-commodity revenue variance for the past 10 years Reserve Target: 90 days of O&M and commodity expense Reserve Maximum: 120 days of O&M and commodity expense Reserve Minimum: 60 days of O&M and commodity expense 7 8 Water CIP Reserve Projections Reserve Maximum: Average annual CIP budget for 48 months of budgeted CIP expense Reserve Minimum: 20% of the maximum CIP Reserve guideline level 8 CIP reserves are increasing in FY2030 and FY2031 in anticipation of ongoing large WMR projects Water Reserve Projections 9 Cash On Hand and Credit Ratings •A measure of cash, investments, and equivalents (cash/operating expenses*365) •Allows for apples-to-apples comparison to peers •A key financial metric used by rating agencies. The water fund's outstanding revenue bonds are currently rated 'AAA' by S&P Global Ratings. Days Cash levels are important for maintaining a high rating. 10 TITLE 40 FONT BOLD Subtitle 32 font Water Conservation Programs & Ways to Save •Water Conservation Tools and Resources: •WaterSmart customer web portal •Automated leak alert emails based on hourly AMI data•Waterfluence large landscape irrigation budget program•Seasonal landscape workshops •Landscape efficiency rebates in partnership with Valley Water: •Landscape Conversion•Graywater Laundry to Landscape•Irrigation Upgrades•Stormwater Rebates Learn more at paloalto.gov/waystosave 11 12 Communication and Outreach Key Messages •Reasons for rate changes, including SFPUC rate increase and cost for local water distribution maintenance and operation •What the city is doing to keep costs down •City services to help customers use water efficiently, leak alerts, high water usage, and to 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 and SFPUC rates notices •Local Media Engagement: articles, interviews Palo Alto's water comes from the San Francisco Regional Water System Water quality is tested daily 12 Recommendation Staff Recommends the Finance Committee Recommend that the City Council Adopt a Resolution: •Approving a Fiscal Year 2026 Transfer of up to $5.5 million to the CIP Reserve from the Operations Reserve; •Approving the Fiscal Year 2027 Water Utility Financial Forecast; and •Amending Rate Schedules (Attachment B) effective July 1, 2026: •W-1 (General Residential Water Service) •W-2 (Water Service from Fire Hydrants) •W-3 (Fire Service Connections) •W-4 (Residential Master-Metered and General Non-Residential Water Service) •W-7 (Non-Residential Irrigation Water Service) 13