City Council Meeting: May 13,
2008
Agenda Item: 8-A
To: Mayor and City Council
From: Joan L.
Akins, Acting Director - Environmental and
Subject: Five-Year
Rate Schedules for Water and Wastewater
Recommended
Action
Staff
recommends that the City Council:
1.
approve a
five-year plan to increase water rates;
2.
approve a
five-year plan to increase wastewater rates;
3.
approve a
revision of the rate structure for both water and wastewater to a
commodity-only structure to promote water efficiency and conservation;
4.
approve a
discounted low income customer water rate for the first tier usage of water;
5.
approve a
discounted low income customer wastewater rate for usage corresponding to the first
tier water consumption;
6.
approve enhanced
funding levels for capital, operating, and rate stabilization reserve funds for
both water and wastewater; and
7.
adopt a
resolution setting a public hearing on July 8, 2008, in accordance with
Proposition 218, to consider water and wastewater rate increases.
Executive Summary
At a study session
with Council on April 22, 2008, staff presented updated financial projections
and alternate scenarios for water and wastewater rates. SIx options were
presented for water rates and five options were presented for wastewater rates.
The discussion focused on staffs recommended option, with and without a
one-time cash infusion from the MtBE settlement
funds. Council directed staff to return
with what was reflected as option 5 for
water and option 4 for wastewater, which preserved the MtBE
settlement funds, changed the rate structure to be all commodity use based,
built a reserve over time and continued the pay-as-you-go capital financing
model. Following this direction, a the recommended rates are as follows:
|
WATER |
FY 08/09 |
FY 09/10 |
FY 10/11 |
FY 11/12 |
FY 12/13 |
|
Presented
April 22 |
11.5 |
10.5 |
10.5 |
10.5 |
9 |
|
Corrected |
11.0% |
10.5% |
10.5% |
10.0% |
10.0% |
|
WASTEWATER |
FY 08/09 |
FY 09/10 |
FY 10/11 |
FY 11/12 |
FY 12/13 |
|
Presented April 22 |
18 |
18 |
15 |
8 |
5 |
|
Corrected |
18.0% |
18.0% |
15.0% |
9.0% |
4.0% |
It should be noted
that these rates are slightly different than the percentages shown in the April
22 report. The attached consultant reports on April 22 included the correct
tables.
Background
In a City Council study session on May 17, 2005, staff presented
information addressing the status of the fund balances for the Water and
Wastewater funds. Specifically,
expenditures in both of these funds were outpacing revenues. Options were provided in the study session
to balance expenditures and revenues.
A subsequent report to Council on June 21, 2005, provided additional
information regarding expenditures and revenues for the Water fund and
presented additional options for bringing expenditures and revenues into
balance. Staff indicated in the June 21,
2005 report that consideration of wastewater rate adjustments could be deferred
until FY 2006-2007 or FY 2007-2008 depending on actual costs and revenues
during the ensuing period.
Council direction to staff received on June 21, 2005 included:
·
Implement a 6% increase to water rates for FY 2005-2006 that
would balance revenues and expenditures for one year only;
·
Conduct a water rate study to finalize the additional
rate increase amounts required to balance the fund, including examining a
restructuring of the tiered system to provide a conservation incentive to
reward customers who voluntarily conserve water;
·
Utilize a cost of service approach in any new rate
design; and
·
Review practices and procedures to assess efficiencies
throughout the operational functions of the Division.
Concurrent with the commissioning of a water rate study in 2007, staff
also commissioned a wastewater rate study to review the revenue requirements
necessary to meet required wastewater operating and capital expenditures as
well as existing debt service obligations.
Existing Wastewater Rates
Established pursuant to a 1996 rate study, the existing
wastewater rate structure comprises a fixed service charge plus a commodity
charge. The rate structure has remained
unchanged since 1996; however, an annual CPI-based rate increase has been in
effect since 2001.
The fixed service charge component is assessed to each
customer account based on water meter size, and the commodity charges are based
on estimated wastewater flows during the bi-monthly billing period. A discharge factor is applied to the metered
water consumption to represent the portion of water usage returned to the
wastewater system. The discharge factors
range from 51% for single family residential accounts, to 95% for multi-family
residential accounts with more than 4 units.
Typically, single family residential users exhibit the greatest level of
outdoor water usage which is not returned to the wastewater system. All non-residential customers are assigned a
discharge factor of 89%. Commodity
charges for non-residential customers vary depending on type of business.
In a study session with Council on May 8, 2007, staff presented various
options for both water and wastewater rate and structure modifications. A five year plan was presented for each, with
water rate increase recommendations by staff comprising an 11% annual rate
increase for water, and a wastewater rate increase plan of 30%, 25%, 20%, 10%,
and 0%. Structural modifications for
each were also suggested. Council was
informed that alternative information was pending at the time and that staff
would return with updated information, and very likely lower rate increase
options at a later date.
At a follow-up study session with Council on April 22, 2008, staff
presented updated financial projections and alternate scenarios for water and
wastewater rates. Two updated options
each were presented for water and wastewater rates (each presented with and
without a one time cash infusion alternate).
A change to a commodity-only rate structure was recommended, in addition
to a recommendation for enhanced reserve levels in order to provide increased
flexibility in the event of unforeseen financial challenges. Council directed staff to return with the
recommendation to approve Option 5 for water and Option 4 for wastewater, as
described in detail herein, with the proposed change to a commodity-only rate
structure and the enhanced reserve levels.
Existing Water Rates
The City provides water service to three customer types: single-family,
multi-family and non-residential. The
current water rate structure was adopted in 1996 to provide equity between
customer types and among customers within a class. There were no rate changes
in 1997 or 1998. In 1999, a resolution
to annually increase rates by the actual Consumer Price Index (CPI) increase
was adopted and has been implemented with each annual budget. A 6% increase was approved by Council for FY
2005/06.
The existing water rate is structured so that every single family,
multi-family and non-residential customer pays a bi-monthly service charge
based on size of the water meter. The rates do not differ by customer class.
Customers are also charged a commodity, or usage rate based on the quantity of
water used in each two-month billing period. There are three levels, or tiers,
of the commodity rate, the purpose of which is to provide financial incentives
for water conservation. As an example,
for single family customers, Tier 1 rates are charged on the first 13 hundred
cubic feet (HCF: each HCF represents 748 gallons of usage). Tier 2 rates are charged for usage from 14 to
126 HCF, and Tier 3 rates are charged on any usage above 127 HCF, which very
few customers reach.
Discussion
Water Rate Study
A water rate study was conducted for the city by The Reed
Group, Inc. (Attachment A) Among the objectives of the study were to present a
strategy for meeting the utility’s financial obligations for the five year
planning period (FY 2007-2008 through FY 2011-2012) and to assess changes to
the rate structure in keeping with the city’s sustainability goals to encourage
water conservation. The study confirmed
that the cost of operating and maintaining the water system and replacing and
upgrading existing facilities exceeds current and projected revenues.
The
current practice of applying an inflation-only (CPI) rate increase annually
will result in all reserve funds being depleted by FY 2008-2009. Exhibit I
summarizes the major categories of cost within the water utility based on
the FY 07-08 budget. The two largest
cost categories are Metropolitan Water District (MWD) imported water purchase
costs and labor costs. Both cost
categories have exceeded the pace of inflation.
Furthermore, the third largest category of cost (capital improvement
projects) should not be correlated to inflation, but to the long-term
replacement needs of the water system which greatly exceed the ongoing
inflation rate, particularly due to construction cost increases in recent
years. The 15% shown for capital
improvement projects in Exhibit I represent current planned annual replacement
of the water system and miscellaneous other projects. A more in-depth examination of long-term
water infrastructure upgrade and replacement CIP needs is planned to be
conducted during FY 2007-2008. Water
Fund costs also includes funding for programs to increase water efficiency and
water re-use by residents, businesses and institutions within
Exhibit I
Water System Costs, Capital and Operating, by Category
Financial Strategy Options – Water
As an enterprise fund, the City’s water utility is expected
to be financially self sufficient.
Generally, revenues should match annual expenditures. Additionally, the city has to date maintained
target levels for reserve funds to meet unforeseen operating expense cash flow
needs (operating reserve: $1.3 million target level = 10% of O&M), to
provide a buffer in the event of a drought or other water supply emergency
circumstance which might have adverse affects on revenues (rate stabilization
reserve: $1.0 million target level), and to provide a buffer for the
variability of capital program expenses (capital reserve: $1.275 million target
level). As further discussed below,
target reserve levels have since been revised.
With the goal of maintaining financial reserves at acceptable
levels throughout the planning period, four rate options were initially
developed as alternates to the baseline scenario of continuing with inflation
only increases. These options were
presented at the May 8, 2007 Council study session.
The following options are summarized in Table 1:
·
Baseline
- apply an annual inflation-only (CPI) rate increase; reserve
funds are exhausted and fund balance goes negative in FY 2008-2009.
·
Option
1 - apply annual increases in water rates to cover all
financial obligations and maintain all reserves at or above target levels each
year of the planning period.
·
Option
2 - utilize the $1 .0 million rate stabilization reserve to
offset a portion of required rate increases and provide additional time to
correct the financial imbalance. The
rate stabilization reserve will be reestablished to the minimum target level by
the end of the planning period. Use of
the rate stabilization reserve in this manner is consistent with its intended
purpose.
·
Option
3 - utilize the $1.0 million rate stabilization reserve and a
portion of the $1.275 million capital reserve to offset required rate
increases, providing additional time to correct the financial imbalance. The rate stabilization reserve and the
capital reserve are restored to minimum target levels by the end of the
planning period. Use of the capital
reserve may limit flexibility in accomplishing capital program objectives
during this period; however, the size of the present capital program
contributes to the projected deficit so the use of the capital reserve would be
consistent with its intended purpose.
·
Option
4 - equalize annual rate increases; rate increases will be
consistent across the planning period.
All reserves will be reestablished to target levels at the end of the
planning period. This option also
utilizes the rate stabilization and capital reserves, but to a lesser extent
than Option 3 thereby providing additional financial flexibility to respond to
unanticipated occurrences during the next five years.
TABLE 1 – WATER RATE INCREASE OPTIONS
Option 4 had been recommended as the preferred alternative at
the May 8, 2007 Study Session.
Subsequently, in light of revised financial information and a review of
industry standards regarding reserve level targets, the water rate consultant
was requested to revise the previously recommended option to address a revised
planning horizon and revised reserve fund levels. The revised reserve levels include the
following:
·
An operating reserve of 25% of the water
utility operating budget, exclusive of the capital improvement program and
transfers to other funds (increase from 10%)
·
A capital reserve of 50% of annual capital
program expenditures (change from a flat $1,275,000)
·
A rate stabilization reserve of $1,000,000
(no change)
In
addition, in March 2008, MWD, from which the City purchases approximately 85%
of its water, approved a 14% increase in treated water delivery rates effective
January 1, 2009. This increase is
necessary for MWD in order to purchase additional water supplies in response to
a 30% reduction in State Water Project deliveries to Southern California due to
court-ordered pumping restrictions in the Sacramento-San Joaquin Delta on top
of a long term drought on the
Two
additional options were developed for water rate enhancements. In option 5, the revised reserve levels were
incorporated, along with the recent information concerning the increase in MWD
water rates. Option 5a is similar to
Option 5, with the added consideration of a one time cash infusion of $2.5
million into reserves. This is a one
time cash supplement, and not an ongoing demand.
The
resulting Options 5 and 5a, presented at the April 22, 2008 Study Session, are
detailed in Table 2.
Table 2 – Water Rate Increase Options
5 and 5a
|
|
Use of
Reserves |
July 2008 |
July 2009 |
July 2010 |
July 2011 |
July 2012 |
|
Option 5 |
Implement updated reserve level targets; Rate stabilization
and capital reserves are used, but are fully replenished by the end of the
planning period |
11.5% |
10.5% |
10.5% |
10.5% |
9.0% |
|
Option 5a |
Same as option 5 above, but with one-time $2.5
million cash infusion to reserves in the first year. |
9.5% |
9.5% |
9.5% |
9.0% |
9.0% |
It should be noted that the percentage increases presented in
Tables 1 and 2 address the increases necessary to meet revenue requirements even
if the existing rate structure is maintained.
The rate study also takes into account the City’s sustainability goals
and ongoing water conservation efforts.
Additionally, all increases indicated in Tables 1 and 2 for FY 2008/2009
are inclusive of the planned CPI increase of 3.7% for FY 08/09. As detailed in the following section,
however, a structural modification to the rates is also proposed.
At the April 22, 2008 study session, Council discussed the
merits of options 5 and 5a and provided direction to staff to return May 13,
2008 with a final recommendation to adopt option 5. Subsequently, staff has determined that the
numbers presented for option 5 did not match the numbers presented in the
consultant’s rate report. Accordingly,
the corrected numbers for option 5 are presented in Table 2a below, and in
subsequent Tables 3, 3a, and 4.
Table 2a – Water Rate Increase Option
5 (corrected)
|
|
Use of
Reserves |
July 2008 |
July 2009 |
July 2010 |
July 2011 |
July 2012 |
|
Option 5 (corrected) |
Implement updated reserve level targets; Rate
stabilization and capital reserves are used, but are fully replenished by the
end of the planning period |
11.0% |
10.5% |
10.5% |
10.0% |
10.0% |
Rate Structure Modifications
The
proposed rate restructuring eliminates the bi-monthly fixed service charge so
that the water bill will be entirely based on actual water usage, thereby
improving the water conservation incentive at all levels. For residential customers, the existing three
tier structure is replaced with a four tier structure. For non-residential customers, a uniform
commodity rate is established, applicable to nearly all water use. A second tier for non residential customers
applies at the high end of consumption, in order to provide a strong
disincentive for excessive water use.
The
proposed rate structure:
·
Improves the water conservation
incentive. A customer can directly
reduce their water bill amount by reducing water consumption.
·
Continues to protect the affordability of
basic levels of water use, even as water rates increase.
·
Reflects the cost of providing water
service to each group of customers.
·
Maintains rate equity between customer
classes and among customers within a class.
Recommended
Option and Rate Impacts
The
options presented in Table 1 (not including the baseline) were prepared in
advance of reserve fund level enhancements and before considering the impacts
of the MWD rate increase in March 2008.
When the impacts of the enhanced funding levels and the MWD increases
are included, the rate impacts are as indicated in Table 2. As directed by Council, Option 5 (corrected)
is recommended for adoption.
In
Table 3, option 5 (corrected) in combination with the revised commodity-only
rate structure, results in a variation of water charge impacts within each
customer group proposed for FY 2008/2009.
Rather than a uniform increase to all customers, the actual percentage
increase will be less for lower consumption users and more for higher consumption
users. This is true for the first year
only, due to the change in rate structure.
In subsequent years, all customer classes will see the same percentage
increase in charges. Table 3a
demonstrates this uniform percentage increase for all customer classes in the
following year (FY2009/2010).
Table 3
Proposed Water Rates, FY 2008/2009
|
Customer |
meter size |
Bi-monthly water use, HCF |
Current Rates &
Structure(1) |
Option 5(corrected), w/ Proposed Structure |
$ Change(2) |
% Change(2) |
notes |
|
Single
family, average
use |
3/4" |
35 |
$75.37 |
$74.89 |