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City Council Report

 

City Council Meeting: December 16, 2014

Agenda Item: 8-A

To:               Mayor and City Council  

From:           Martin Pastucha, Director of Public Works

Subject:        Water Rate Analyses and Proposed Water Rate Options

 

Recommended Action

Staff recommends that the City Council:

1.  Approve a 13% rate increase option (9% first year) as the proposed five-year plan to raise water rates, to be considered at a public hearing, in accordance with Proposition 218.

2.  Adopt a resolution setting the public hearing to increase water rates on February 24, 2015, in accordance with Proposition 218.

3.  Authorize the City Clerk to issue notices of the proposed water rate increases and public hearing on February 24, 2015, in accordance with Proposition 218.

 

Executive Summary

Due to declining water sales and increased capital funding needs, the City's cost to provide water service is projected to exceed the City's water revenues without additional water rate increases.  A Water Rate and Revenue Plan report (Attachment A) (referenced hereinafter as the "Rate Study") is included with this report to detail the revenue requirements of three proposed water rate alternatives to address the projected revenue shortfall.  Water rates were last adjusted in a five year schedule in July 2008.  At that time, a commodity-only rate structure was approved which eliminated the fixed service charge and provided a strong conservation signal.  Presently, revenue requirements are driven by the need to augment conservation plans, offset reduced revenues due to declining water sales, and increase capital program funding to address the needs for continued infrastructure investment and Sustainable Water Master Plan requirements. Council’s recent adoption of city-wide mandatory water conservation will result in a 20% reduction in water sales. Staff has identified three water rate alternatives for Council’s consideration:

 

 

2015

2016

2017

2018

2019

Option 1

(CPI only)

2.5%

2.5%

2.5%

2.5%

2.5%

Option 2

(9% plan)

9%

9%

9%

9%

9%

Option 3

(9/13% plan)

9%

13%

13%

13%

13%

 

Staff proposes to maintain the existing commodity-only rate structure, and adjust the unit pricing in each tier.  Staff recommends that Council adopt Option 3 because it would fully support Council’s stated goal of achieving water self-sufficiency by the year 2020 as well as continue to invest in the City’s water infrastructure.

 

Background

The City provides water service to three customer classifications.  These classifications are single-family, multi-family and non-residential.  The current water rate structure was adopted on July 8, 2008 to provide equity between customer types and among customers within a classification.  The rate structure adopted in 2008 eliminated the bi-monthly fixed service charge so that the water bill became entirely based on actual water usage, thereby improving the water conservation incentive at all levels.  For residential customers, the previously existing three tier structure was replaced with a four tier structure.  For non-residential customers, a uniform commodity rate was established, applicable to nearly all water use.  A second tier for non-residential customers applied at the high end of consumption, in order to provide a strong disincentive for excessive water use. 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.  Rates were adjusted by CPI annually between 1999 and 2008 with the exception of a 6% increase in 2005.  After the 2008 schedule of rate adjustments was completed in FY 2012-13, rates were adjusted by CPI on July 1, 2013, and July 1, 2014.

 

The Rate Study was completed by Kennedy Jenks Consultants as part of its contract with the City to prepare the Sustainable Water Master Plan (SWMP).  The objectives of the Rate Study include development of a strategy for meeting the utility’s ongoing financial obligations for the five year planning period (FY 2014-15 through FY 2019-20) and assessment of changes to the rate structure in keeping with the City’s self-sufficiency goals to encourage water conservation and sustainability.  The Rate Study is included with this report as Attachment A.

 

Discussion

Water Rate Analysis

Santa Monica’s water revenues are expected to cover the cost of providing service through user charges and other revenues generated by the City’s provision of water service.  The financial revenue plans presented in the Rate Study are based on the premise that the Water Fund will be self-supporting, with revenues sufficient to address ongoing operations and maintenance expenses as well as capital program expenses and programmatic expenses in support of the SWMP.  Infrastructure rehabilitation, replacement, and upgrade requirements are necessary to maintain an aging water distribution system, certain parts of which are approaching 100 years in age.  Ongoing funding of water main replacements at a level necessary to ensure reliability and long term performance are essential to system sustainability.  In addition, other financial demands placed on the Water Fund arise from the need to fund capital programs to accomplish the City’s water self-sufficiency goals, from the reduction in water sales that reduces annual revenues, and from increased conservation projects. 

 

Capital Requirements

By nature, water systems are capital intensive operations.  The SWMP addresses system capacity, long range water supply reliability, and conservation programs necessary to meet the City’s stated water self-sufficiency goals.   This is supported by the City’s water system Capital Improvement Program (CIP).   Details of the five-year $33 million CIP are provided in Table 4 of the attached Rate Study, with selected projects and cost projections included below:

·       General Water System Capital Improvement Program:

Ø  Infrastructure improvements associated with replacing aging existing infrastructure facilities comprised of water mainlines and appurtenant distribution system facilities that are approaching the end of their useful lives, $20M

Ø  Commencement of an Advanced Meter Infrastructure (AMI) program to provide more frequent and accurate metering of water use.  Additionally, AMI would aid customers to better monitor their daily water use, $5M

Ø  Plans for reliability and water transmission improvements for the City’s highest pressure zone (zone 500) with a new booster pump station, $2.5M

Ø  Funding for various other ongoing rehabilitation and facility specific improvements or studies, $5.5M 

 

·       Sustainable Water Master Plan program expenditures included in the CIP and identified as those items that comprise short-term Water Fund obligations related to decreased reliance on imported water and achieving the City’s year 2020 self-sufficiency goal, include:

Ø  Brine concentrator evaluation at Arcadia Treatment Plant to increase finished water recovery, $0.3M

Ø  Charnock Granular Activated Carbon (GAC) improvements to improve carbon performance and potentially reduce carbon change-out frequency, $0.3M

Ø  Infrastructure Capacity Improvements (water main connections to new supply sources), $2.0M

 

·       Olympic Basin Water Treatment Program.  Funding for the capital costs of these improvements is from settlement agreements with Gillette/Proctor & Gamble and the Boeing Company arising from groundwater contamination. System improvements have been noted in the CIP that are associated with the Olympic well field contamination and related water treatment plant construction. These improvements are necessary improvements to maintain and to develop local water sources for water self-sufficiency, and include:

Ø  Treatment Evaluation Pilot Study, $0.65M

Ø  Well siting, design, construction,  $6M

Ø  Treatment facility, full scale construction and operation, $40M

Revenue Loss from Reduced Water Consumption

The City’s Water Fund is projected to experience a decrease in water sales associated with the implementation of additional self-sufficiency related water conservation programs and the City's adoption of a Stage II Water Shortage, which calls for mandatory 20% reduction in water use by all customers. Since most of the water utility’s costs are fixed, the Water Fund is projected to be affected by the addition of costs associated with a new water conservation unit, conservation programs and incentives, and a reduction in water sales-based revenues.  Water sales revenues in FY 2013-14 were $21.5 million.  With a rate adjustment limited to only a CPI increase, and the projected reduction in demand due to conservation program requirements, projected revenue from water sales in FY 2015-16 is $16.9 million.

  

Water Rate Options

Three projected revenue plan scenarios with various rate adjustments were developed to compare the water utility’s revenues and revenue requirements through FY 2019-20.  They include the following:

·       Option 1 – Baseline scenario (CPI-only)

Implement a water rate increase in accordance with the estimated increase of the consumer price index (CPI).  This scenario is a baseline option; essentially a status quo or no change alternative.

 

·       Option 2 – Implement a water rate increase of 9% per year. 

This increase would improve the Water Fund's financial position over the CPI-only plan, but would limit the City's ability to fully invest in all of its programmed capital improvements, require annual/bi-annual cash flow balancing by prioritization of capital projects and programs, and place additional vulnerability on fund reserves and debt financing capabilities in later years of the projection.

 

·       Option 3 – Implement a water rate increase of 9% in year one, and 13% per year thereafter. 

This increase would improve the financial position of the Water Fund, reduce the risk of revenue shortfalls from reduced water sales, fund identified self-sufficiency related improvements, and improve net operating parameters that are required to issue new municipal debt that may be needed for future water system improvements.

The revenue plans include the potential option for a debt financing program in later years for water system improvements.  Although debt funding of capital expenditures is common among utilities, the City has historically funded its water fund obligations on a pay-as-you-go basis.  From the cash flow pro forma developed herein, approximately $10 million in additional debt financing is anticipated in FY 2018-19 to fund various pipeline or water supply-related capital improvements.  It is assumed that the need and viability of any external borrowing to support Water Fund activities will be evaluated during the City's annual budget process.  As discussed with Finance Department staff, the City would contract with its municipal financial advisor for the evaluation and support of such actions as required. 

 

Three options are presented in Table 1 and further discussed below.

 

Table 1 – Rate Adjustment Options

 

2015

2016

2017

2018

2019

Option 11.

(CPI only)

2.5%

2.5%

2.5%

2.5%

2.5%

Option 22.

(9% plan)

9%

9%

9%

9%

9%

Option 32.

(9/13% plan)

9%

13%

13%

13%

13%

1.      CPI-only increases would be implemented on a fiscal year basis (July 1)

2.      Option 2 and 3 would be implemented on a calendar year basis ( March 1 in the first year and January 1 each year thereafter)

The financial projection for each scenario is based on the City’s projected customer account characteristics, the projected operation and maintenance expenses, and the inclusion of the City’s comprehensive Capital Improvement Program.  Additionally, several ratemaking criteria were also integrated in the revenue plan.  These key criteria include:

·       Short term population growth is based on the projections indicated in the City’s 2010 Urban Water Management Plan and estimated annualized LUCE projections of 0.5% per year.  This is expected to be approximately 0.5% per year and yield a modest increase in new accounts through 2020. 

·       Water usage is projected to reduce by approximately 10% during FY 2014-15, and an additional 10% during FY 2015-16 due to conservation efforts.  Water usage is projected to essentially remain at these reduced levels during the balance of the planning period. Reduced water consumption would result in reduced revenues to the water fund.

·       The option of an additional $10 million in debt financing is programmed for FY 2018-19.  This may be available through a new debt issuance, potential short-term inter-fund borrowing, or other strategies as determined appropriate by the Finance Department at that time. 

·       With potential rate increases commencing in March of FY 2014-15, no change in rates is proposed beyond FY 2018-19. Years beyond the five years in the planning horizon exceed the maximum allowed by state law.

·       Rate increases corresponding to Options 2 and 3 would be implemented in January of each year.  Implementation of new rates in this time frame would minimize the immediate impact of any rate increase as customer water use is at its lowest during the winter.

 

To demonstrate the potential short and long-term implications of the alternative rate-related approaches, a revenue plan of the City’s water utility was developed for each scenario by integrating the ratemaking criteria with the projected water system costs and projected capital improvement program expenditures.  The results of these financial projections are provided in the following section.

 

Option 1: Projected Revenue Plan – Consumer Price Index (CPI) Based Annual Water Rate Increase (Baseline Option)

This percentage is consistent with the City's recent budget forecasts.  Including the actual CPI increases in the analysis in FY 2013-14 and FY 2014-15, a projected CPI increase of 2.5% is included in all subsequent years through FY 2019-20.  The results of this analysis are shown graphically in Figure 1.  Under this option, projected revenues do not support an ongoing capital program.  Water conservation efforts continue to reduce revenue from water sales.  Based on the Council adopted Sustainable Water Master Plan and water conservation efforts, water rate increases limited only to the general rate of inflation are insufficient to support the activities of the Water Fund. The Water Fund would be in deficit as of FY 2016-17.

Option 2:  9% Projected Revenue Plan – 9% Annual Water Rate Increase

This percentage is less than the annual increases adopted during the 2008 Rate Study, but higher than the average annual CPI increases derived in the Option 1 baseline plan.  Similar to the prior plan, following actual CPI increases in FY 2013-14 and FY 2014-15, a projected increase of 9% is included in all subsequent years through FY 2018-19.  The results of this analysis are shown graphically in Figure 1.  While this rate plan provides a much stronger financial performance than the CPI only (baseline) alternative and achieves a positive net operating performance in the later years of the forecast, it does fall short of some Water Fund financial goals and performance metrics.  These shortfalls are as follows:

·       Approximately $5 million in capital projects would have to be eliminated; a reduction in general system planned capital improvements of 20%.  The Water Fund is projected to fall short of the adopted minimum annual reserve fund targets in four of the five planning years.

·       Net operating revenues may not be adequate to issue the $10 million in new debt forecasted for capital improvements in FY 2018-19. 

 

Option 3:  9%/13% Projected Revenue Plan

As previously noted, this plan is based on a 9% increase in the first year, and a 13% increase in each of the remaining four years of the financial plan.  The results of this analysis are shown graphically in Figure 1.  This rate plan provides a much stronger financial performance over the previous rate plans and provides additional financial stability for the Water Fund to meet projected capital improvements, potential emergency system improvements, and absorb more than projected declines in water demands and water sales revenues.  A summary of the benefits of this option follows:

·       The $5 million in capital projects would no longer have to be eliminated from the budget, although there may need to be a small reduction in capital spending in FY 2017-18.

·       The Water Fund is projected to fall short of the adopted minimum annual reserve fund targets in essentially only one of the five planning years.

·       Net operating revenues should be adequate to issue new debt in the FY 2018-19. 

 

The fund balance trends corresponding to the three options are presented in Figure 1 below.  The fund balance trend in the 13% option (red line) dips below the trend of the 9% option (green line) due to reductions in capital improvement and conservation programs in the 9% option.

 

Figure 1 – Water Fund Revenue Requirements, Fund balance trends

 

Recommended Revenue Plan

Based on revenue projections, the rate plan that incorporates a 9% increase in the first year and a 13% increase in each of the remaining four years in water rates is recommended at this time.  Proceeding with Option 3, the 9%/13% rate plan, provides the City with the financial stability necessary to fund the projected programs and projects that will be required to reach self-sufficiency, to promote additional water use efficiency, and to remain financially stable during the projected level of continued drought in California.  This rate plan is projected to provide a reasonable estimate of the projected revenue requirements of the City’s Water Fund through 2020.  Since state law only permits the adoption of rates up to five-years, no rate increase is schedule for FY 2019-20 as this is year six of a proposed five-year rate plan.  

 

Rate Structure Considerations

Potential adjustments to the City’s water rates were developed to support both the financial health of the City’s water utility and the Sustainable Water Master Plan (SWMP) objectives through the 2020 planning period.  The rates and rate structures derived during the rate study were based upon an analysis of future system costs and financial obligations established by the City and the recommendations from the SWMP.  Input from the City’s Task Force on the Environment and the SWMP Advisory Committee were obtained throughout the development of the SWMP’s self-sufficiency strategies and activities and financial elements contained in this financial plan.

 

There was extensive discussion among City staff, the SWMP Advisory Committee, and the Task Force on the Environment regarding enhancements that could be made to the existing rate structure, adopted in 2008.  The alternative structures that were considered by these groups included:

·       Modifying the existing tiered block rate structure for changes in water allocation per block.

·       Increasing the number of tiered blocks.

·       Altering the current basis of change in price between tiered blocks.

·       Re-introducing a fixed bimonthly service charge back into the structure.

·       Consideration for a base level water allocation to be include with the new service charge.

·       Abandoning the current structure and migrate to a full water budget based rate structure.  

 

The result of this process was the development of a small group of alternative structures that was considered.  This short-list included: a) the current structure, b) a structure with the current tiered blocks and a new fixed service charge with a potential water allowance, and c) a structure with new tiered blocks and a new fixed service charge with a potential water allowance. 

 

On July 15, 2014, the State Water Resources Control Board (SWRCB) adopted an Emergency Regulation for Statewide Urban Water Conservation, requiring the City and other urban retail water agencies to implement all requirements and actions of their water shortage contingency plans that impose mandatory outdoor irrigation restrictions.  Subsequently on August 12, 2014, Council approved a resolution declaring a Stage 2 Water Supply Shortage requiring mandatory water conservation to achieve a 20% reduction in water use (as compared to the 2013 base year).  On October 28, 2014, Council adopted the SWMP.  Additional evaluation and assessment is ongoing regarding the appropriate basis for new drought surcharges or penalties and the associated administrative structure to implement these charges.  This is anticipated to be presented to Council in January 2015.

 

Given the complexities of the development and implementation of the Water Shortage Response Plan concurrent with consideration of rate adjustments, staff recommends continuation of the current tiered rate structure rather than a new rate structure with new blocks and/or a new fixed service charge.  This approach would produce a more understandable message associated with the rate increase and minimize the potential confusion associated with drought compliance related charges and structures.  As such, no adjustment in the current tiered water rate structure is proposed.  The City’s current water rate structure is very common in California.  It provides a built in mechanism to support water conservation on a pay for what you use basis.  It is simple to understand, generally fosters public acceptance, and provides relatively predictable revenues. 

 

Rate Comparison

It is worth noting that Santa Monica has experienced the same pressure for increased water efficiency and conservation over recent years due to drought and climate effects as other statewide and regional water agencies.  In comparison to other regional jurisdictions, Santa Monica single-family residential rates remain in the lower third of neighboring comparison agencies.   Figure 2 below provides a comparison of proposed Santa Monica single-family residential (SFR) water rates, including a 13% increase over current rates, with neighboring agency SFR water rates.  This 13% increase represents the proposed year two increase following the 9% increase in year one, as in option 3. The bill comparison is based on a ¾” water meter and 24 hundred cubic feet HCF of bi-monthly water usage.  This represents the water allowance in the Stage 2 Water shortage plan for single-family residences. The proposed bi-monthly average charge of $89.30 for Option 3 (13% increase) in year two reflects a monetary increase of $16.80 (bi-monthly) over the existing charge of $72.50.  Even with the proposed 13% increase, residential water bills in Santa Monica will be lower than the current average rate of the other communities surveyed.  Tables 2, 3, and 4 provide a summary of average water bills under the presented options for average water use.

 

Figure 2 – Proposed Water Rate Comparison with Neighboring Agencies

(1.)   Increases proposed for FY 2014-15

(2.)   Culver City serviced by Golden State Water Company, a CPUC regulated utility

 

A summary of potential bi-monthly water bill impacts for select customer classifications at average consumption rates is presented in Tables 2, 3, and 4.

 

 

Table 2

Example of Proposed Bi-Monthly Bill

Single-Family Residential, ¾-inch meter, 30 HCF current average use

 

 

Year 1

Year 2

Year 3

Year 4

Year 5

Current Bill,

without conservation

$90.63

 

 

 

 

Option 1(1.)

Current Rates, with 20% conservation(24HCF)

$72.50

$74.31

$76.17

$78.07

$80.03

Option 2(2.),

9%  increase in unit prices, with 20% conservation

$79.03

$86.14

$93.90

$102.35

$111.56

Option 3(3.),

13% increase in unit prices, with 20% conservation

$79.03

$89.30

$100.91

$114.03

$128.86

(1.)   CPI Increase only in all years, effective January 1

(2.)   9% increase effective January 1 each year

(3.)   13% increase effective years 2 through 5, 9% increase year 1

 

 

Table 3

Example of Proposed Bi-Monthly Bill

Multi-Family Residential, 1 ½ - inch meter, 77 HCF current average use(1.)

 

 

Year 1

Year 2

Year 3

Year 4

Year 5

Current Bill,

without conservation

$342.30

 

 

 

 

Option 1(2.)

Current Rates, with 20% conservation (62HCF)

$273.84

$280.69

$287.70

$294.90

$302.27

Option 2(3.),

9%  increase in unit prices, with 20% conservation

$298.49

$325.35

$354.64

$386.55

$421.34

Option 3(4.),

13% increase in unit prices, with 20% conservation

$298.49

$337.29

$381.14

$430.69

$486.68

 

(1.)   11 HCF per res. unit; average 7 units per Multi-Family residential account

(2.)   CPI Increase only in all years, effective January 1

(3.)   9% increase effective March 1, 2015; January 1 each year thereafter.

(4.)   13% increase effective years 2 through 5 (January 1), 9% increase year 1 (March 1, 2015)

 

 


 

Table 4

Example of Proposed Bi-Monthly Bill

Non- Residential, 2- inch meter, 192 HCF current average use.

 

Year 1

Year 2

Year 3

Year 4

Year 5

Current Bill,

without conservation

$687.23

 

 

 

 

Option 1(1.)

Current Rates, with 20% conservation (154 HCF)

$549.78

$563.52

$577.61

$592.05

$606.85

Option 2(2.),

9%  increase in unit prices, with 20% conservation

$599.26

$653.19

$711.98

$776.07

$845.90

Option 3(3.),

13% increase in unit prices, with 20% conservation

$599.26

$677.16

$765.20

$864.67

$977.08

 

(1.)   CPI Increase only in all years, effective January 1

(2.)   9% increase effective January 1 each year

(3.)   13% increase effective years 2 through 5, 9% increase year 1

 

Low Income Provision

On May 13 2008, Council approved a change in the discount for low income customers.  Because the rate structure changed in 2008 to eliminate the fixed charge and move to a commodity-only rate structure, the reduced first tier water rate for qualified single-family low income customers was discounted $1 per HCF.  Staff recommends continuing this discount of $1 per HCF for the first tier only.  This is appropriate given that the rate structure is unchanged from the 2008 structure; this discount would apply to all of the options.

 

For single-family customers the maximum bi-monthly discount would be $14.  Second, third, and fourth tier rates would not be discounted since these apply to more discretionary uses of water, rather than basic water needs.  Low income customers become qualified for the water discount by providing evidence of qualification and enrollment in the low income program offered by Southern California Edison or the Southern California Gas Company.  There are currently 213 customers qualified as low income and receiving the discounted first tier water rate.

 

Proposition 218 Compliance

Proposition 218 requires a public notice of proposed changes to rates be made to all property owners in the affected area.  A 45 day notice/ response period will be in effect from the date of approval of proposed new rates (with a few days allowance for mailing). The notices to be mailed to all property owners will include a description of the need for a rate adjustment, and explain the protest process for the public to follow if they wish to oppose the proposed rates.  Absent a majority protest, City Council may then approve the final adoption of the rates at a public hearing.

 

By not changing the rate structure and staying with the commodity-only rate structure adopted in 2008, the cost of service requirements of Proposition 218 are achieved.  The findings of a cost of service analysis performed on the commodity-only rate structure,  included in Appendix B of the attached Rate Study, indicates that the costs of providing service coincide with revenues generated by single family residential, multi-family residential, and commercial (non-residential) customer classifications.

 

Community Outreach

Outreach efforts continue in an effort to engage the community in discussions about proposed rate adjustments, the Sustainable Water Master Plan (SWMP), and the Water Shortage Response Plan.  Staff from Public Works and the Office of Sustainability and the Environment (OSE) conducted a community forum for the business community and residents, “Let’s Talk Water”, on November 24, 2014 at Ken Edwards Center, and have presented drought and rate information at neighborhood and business groups including North of Montana Association, Northeast Neighbors, Ocean Park Association, Chamber of Commerce Government Affairs Committee, and the Convention and Visitors Bureau Hotel Managers Group.  City staff has also been present at all of the recent Santa Monica Talks community forums.  Outreach will continue with the community throughout the period leading to the formal adoption of rate adjustments by Council. 

 

Wastewater Rate Analysis

Present day wastewater rates were established in 2008, concurrent with the last water rate adjustments.  Consistent with the adopted water rates at the time, wastewater rates were also established as a commodity-only rate structure, based upon 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.  All non-residential customers are assigned a discharge factor of 89%.  Commodity charges for non-residential customers vary depending on sewage strength (as represented by biochemical oxygen demand and suspended solids) for each class.

 

On May 13, 2014, Council approved redemption of all outstanding Wastewater Enterprise Revenue Bonds.  This action will save the Wastewater Fund approximately $600,000 over the next four years (bond maturity was January 1, 2018).  Coupled with a remaining healthy fund balance, an increase in wastewater rates, other than an annual CPI adjustment, will not be required over the five year planning period considered in this analysis.

 

Summary and Recommended Option

Taking into account the expected levels of water conservation mandated by the Stage 2 restrictions and the SWMP, and the added loss of revenue, a revenue increase of 13% annually (9% in first year) would be required in order to keep the Water Fund balance positive throughout the five year planning period and fund necessary capital improvements and conservation programs.  Rate increases are driven equally by the need to fund capital programs to accomplish the City’s water self-sufficiency goals, the need to invest in infrastructure rehabilitation and replacement, the reduction in water sales that reduces annual revenues, and increased water conservation programs.   

 

Option 1 is presented as the base line option and an indication of the status quo, or the result of non-action relative to rates, other than an annual CPI increase.  This option would leave the fund unsustainable, as adopting this course would result in a negative fund balance by FY 2016-17. 

 

Option 2 includes an across-the-board 9% increase on all tiers of the existing unit prices.  This option is included to indicate the effect of utilizing a single digit rate increase.  As might be expected, a lower percentage rate increase results in lower revenue generation.  Accordingly, expenditure reductions are required to accommodate the lower rate increase.  This may be achieved through modifications in capital programs such as main replacements, valve rehabilitation, automatic meter infrastructure development, or some water conservation programs.  The consequence of cuts to these programs would likely result in a delay in reaching the self-sufficiency goal by 2020.

 

Staff recommends Option 3, (the 9%/13% option) which fully funds the projected capital programs, infrastructure investments, and conservation programs over the five year planning period.   Because the first rates increase in the five year planning period is proposed to take effect in March 2015 only a 9% increase is required for the first year (i.e., one quarter of FY 2014-15 would be subject to the rate increase).  This approach maintains progress toward achieving the City’s 2020 self-sufficiency goal.  Due to the water conservation achieved by customers  as a result of the mandatory Stage 2 water shortage plan, water bill increases would be somewhat offset by the reduction in water use which is anticipated from each customer.  As indicated in Figure 3, residential water bills remain competitive with comparison cities even after a 13% rate increase.

 

Next Steps

Following direction from Council regarding a preferred rate alternative, staff will continue with community outreach to discuss drought actions and financial planning efforts.  Staff recommends Council set a public hearing date of February 24, 2015 for formal approval of rate adjustments.  This date allows ample time for the required 45 day notice period, during which the Proposition 218 public notices will be mailed to every property owner in the City, which allows them to send in a protest vote.  If over 50% of the eligible property owners vote to protest the proposed rates, the Council would not be allowed to enact the proposed rate increase.  At the February 24, 2015 Council meeting, staff will return with a summary of community responses and a formal recommendation to adopt new rates (unless there is a majority protest).

 

Financial Impacts & Budget Actions

Contingent upon Council direction, the FY 2014-15 budget would be revised as follows:

1.     For Option 1, no change in water sales revenue account number 25671.402310 would be required because rates were adjusted by CPI on July 1, 2014.

2.     For Options 2 and 3 (both 9% in the first year), there would be an increase in water sales of $645,265 in revenue account number 25671.402310.

 

Prepared by: Gil Borboa, P.E., Water Resources Manager

 

 

Approved:

 

 

Forwarded to Council:

 

 

 

 

 

 

 

 

Martin Pastucha

Director of Public Works

 

Rod Gould

City Manager

 

Attachment:

A - Water Rate and Revenue Plan Report

B - Resolution