Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: REVIEW PROPOSED SONOMA WATER TRANSMISSION
SYSTEM BUDGET FOR FISCAL YEAR 2024-2025
Date: March 12, 2024
Written by: Craig Scott, Director of Public Works/City Engineer Recommendation
It is recommended the City Council adopt a motion providing direction to the City's Water Advisory Committee Member to endorse the proposed Sonoma County Water Agency FY 2024- 25 Water Transmission System Budget.
Background
The Sonoma County Water Agency (Sonoma Water) has a Technical Advisory Committee (TAC) comprised of staff from the prime water contractors (specific cities and water districts that purchase water from Sonoma Water, as named in the Restructured Agreement for Water Supply), and a Water Advisory Committee (WAC) comprised of designated elected officials from these same prime water contractors.
At the TAC meeting on March 4, 2024, Sonoma Water presented the attached proposed budget for the TAC consideration and recommendation to the WAC. The TAC unanimously approved the proposed budget. At the prior joint WAC/TAC meeting on February 5, 2024, the WAC Chair set April 1, 2024, as the special meeting date to have the WAC vote on the proposed FY 24/25 Water Agency water transmission system budget.
Analysis/Discussion
The Technical Advisory Committee (TAC) formed a Budget Subcommittee and met with Sonoma Water staff over the past month to review the proposed budget and the TAC Subcommittee. Although appreciative of the dialog and responses to questions, the TAC Subcommittee has ongoing questions on the proposed budget and have proposed keeping the committee meeting with Sonoma Water staff past adoption of the budget to find resolution to these questions. The primary questions are the funding of the tank recoating, SCADA remediation and upgrade projects with O&M funds instead of Capital funds and the extended duration of several studies including the Regional Water Supply Resiliency Study, started in 2019, and not completed, as well as a costly Water System Comprehensive Master Plan.
Additionally, the Subcommittee has asked for more information on the long-range capital plan and the long-term projection.
In accordance with the Restructured Agreement for Water Supply (the wholesale water supply agreement for the prime water contractors, including Cotati), the City’s wholesale water rate is tied to the Petaluma Aqueduct rate. The proposed overall increase to the wholesale water rate for FY 24/25 is 9.98 percent. Based on the Restructured Agreement for Water Supply, the rates are to be based on the lower of the prior 12-month average or 3-year average. Sonoma Water staff recommended deviating from this basis to use the 3-year average, which was higher, as it was believed to be more in line with delivery projections. On February 5, 2024, the WAC approved the deviation. Therefore, the basis for budgeted deliveries used is 42,826 Acre-Feet (AF) which is the average actual deliveries for the past 3 years. The prior 12 month estimated average is 40,845 AF which is 4.6 percent lower than the 3-year average. The proposed Budget package prepared by Sonoma Water is attached and contains a summary, table of contents and budget detail sheet.
The water rate is comprised of four groupings of charges as follows: 1) Operations and Maintenance, 2) Aqueduct Facilities Capital Charges, 3) Storage Facilities Capital Charge, and 4) Common Facilities Capital Charge. Page 7 of the attached budget shows the proposed water rate for the aqueducts and broken down by the these groups. The rate groupings are each described below.
Operations and Maintenance
This charge consists of a base O&M charge and four sub-charges that together make up the “Total O&M Charge”. The base O&M charge would increase by $112.09/AF (12.41%) due to increased infrastructure maintenance needs coupled with elevated material and labor costs. The increased maintenance needs includes a $63 million tank recoating project over seven years, pumps/meter/valve replacements, collector maintenance, nearly $44 million on SCADA upgrades over ten years, studies, and emergency inventory procurements. A summary of the O&M fund changes for FY24/25 compared to the FY23/24 adopted budget is shown on page x, and changes to the O&M rate, revenues and expenditures are shown on pages x and xi of the attached document.
The four sub-funds within the Total O&M Charge are as follows:
1. Water Management Planning. This sub-charge is used primarily to fund the Urban Water Management Plan and related activities. The plan is required by the State for years ending in zero and five. Past rate increases have accumulated the fund balance and has enabled the proposed FY24/25 rate to be $0.35/AF (was zero last year). The current UWMP was submitted in FY 2021, and rate increases are anticipated to begin work on the 2025 UWMP.
2. Watershed Planning/Restoration. This sub-charge is used primarily to fund activities required for the implementation of the Biological Opinion. This sub-charge would increase by $4.09/AF (11.4%). The rate increase is primarily due to not being able to utilize as much fund balance to offset the rate as was used in the prior year.
3. Recycled Water & Local Supply. This sub-charge is used primarily for funding recycled water and local supply projects. Fiscal Year 2024/25 rate is held to zero as accumulated fund balance is sufficient. Entire expenditure is for Sonoma Water’s share of Groundwater Sustainability Agencies’ budgets.
4. Water Conservation. This sub-charge is used for funding regional water conservation efforts, such as regional media ads and supporting the regional Sonoma-Marin Water Saving Partnership. This sub-charge is to increase by $5.47/AF (10.1%). The rate increase is primarily due to not being able to use as much fund balance to offset rates as was used in prior year.
Summaries of the major expenses in each of these sub-funds can be found on pages 25-34 of the attached Proposed Sonoma Water FY 24/25 Transmission System Budget.
Aqueduct Facilities Capital Charge
A discretionary charge is added by the water Contractors to build fund balance for future aqueduct capital projects and to provide rate stabilization. The Contractors on the Petaluma Aqueduct, Cotati, Rohnert Park and Petaluma, decided last year and again this year to use the fund to stabilize rates and the funding rate is zero. There are adequate funds for near-term capital projects, but Staff anticipates having a contribution to this fund in the following years.
Storage Facilities Capital Charge
The rate is calculated by dividing the annual debt service and reserve requirements by water deliveries. The debt was to fund the construction of new storage tanks. Sonoma Water does not consider tank remediation (i.e. recoating, seismic retrofits, cathodic protection systems) as capital projects so these are paid for out of the O&M fund and not the Capital fund.
Common Facilities Capital Charge
The rate is calculated by dividing the annual debt service and reserve requirements by water deliveries. The total debt service is lower than the previous year due to reallocation of 2022 bond proceeds to fund capital projects in the Storage Fund.
Financial Considerations
Approval of the budget is expected to result in an increase of 9.98 percent to the wholesale rate of water that the City purchases from Sonoma Water. This is following the 9.42 percent rate increase last year. The City’s 5-Year rate model, includes a 6 percent wholesale water rate increase for years 2022 and 2023, and a 5.5 percent increase for years 2024, 2025, and 2026. The difference of the rate model rate and the proposed Sonoma Water rate increase represents approximately $80,000 of increased operations costs to the City. This increase can be offset by increasing City local groundwater pumpage and by finding operational savings. The continued disparities between the City’s rate model and actual wholesale increases over the past 2 years is a factor in City Staff considering the need for an early reevaluation of the City’s 5-year rate program.
The City, Rohnert Park and Petaluma TAC representatives all agreed to keep the discretionary Capital Charge at $0/AF to zero to avoid increasing the rate further. The Capital Charge is to steadily build up a fund for capital projects. The two-year pause may be justified due to the extenuating circumstances of the drought, which led to a dramatic decrease in water deliveries, and this rate can be replenished once demands increase above drought levels.
last year and the proposed rate of nearly 10 percent are a deviation from the prior 12 years where rates increases varied between 3.5 and 6.9%.
A slide of the attached power point, shows a chart comparing the proposed Sonoma Water rate increase to other wholesale water agencies. Even with the proposed rate increase, Sonoma Water’s rate remains well below those of other wholesale water agencies.
As with the City’s financial planning, the Sonoma Water long range financial model’s goal is to provide long term rate stability while preparing for long range capital projects. The goal is to build up capacity for future projects, while avoiding large year-over-year rate increases.
Environmental Issues
Council action on this item is exempt from the California Environmental Quality Act (CEQA) because it does not constitute a project as defined by CEQA Guidelines Section 15378.