EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: October 18, 2022
TO: Honorable Mayor and Members of the City Council
VIA: Patrick Heisinger, Interim City Manager
BY: Greg Henry, Senior Management Analyst
SUBJECT: Water Rate Reduction
Recommendation
Adopt a Resolution suspending a portion of the water usage charge and authorizing the temporary reduction of $0.79, to be effective November 1, 2022, in the rate schedule adopted by Resolution 5154 and amended by Resolution 66-2022.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority #2: Enhance Economic Vitality
Priority #4: Improve Public Facilities and Infrastructure Priority #6: Create a Healthy and Safe Community
Background
The current lease agreement for the City’s water operations requires that the City request a water rate schedule such that Veolia, who operates the City’s system and collects and retains the revenue due from this schedule, earn an after-tax return of 8% on “Gross Contractual Revenues.” “Gross Contractual Revenues” are returns on all operational rate revenue (exclude the meter and capital surcharge) adjusted slightly to account for changes in the City’s wholesale cost of water. This lease agreement is for 25-years and is in place until March of 2026.
On July 16, 2019, the City set the current water rate schedule following the Proposition 218 process via Resolution 5154. The budget provided by AWE was the basis of that rate schedule, including annual cost inflation assumptions. However, in 2019 the City was transitioning from prior contracted water operator American Water Enterprise (AWE) to the current operator Veolia.
In August of this year, as required by the lease agreement, Veolia provided actual expense and revenue for the fiscal year (FY 2021-22), their first full year of operations. As part of that report, Veolia provided a budget for Fiscal Year 2022-23, based now on their experience operating the system (as opposed to the forecast prepared for the water rate schedule). Veolia has been able to prevent the cost inflation that was anticipated in the original rate study and costs have not gone up as expected.
Complicating the process, the City’s wholesale water provider is the San Francisco Public Utility Commission (SFPUC) increased the wholesale cost of water. SFPUC provides essentially all water used by the customers of the City’s water system.
Usage water rates from SFPUC and to the City’s customers are in terms of centum cubic feet (ccf) or a hundred cubic feet. There are 748 gallons per ccf. This represents a square 10 ft by 10 ft that is then a 1 foot deep.
On May 10, 2022, SFPUC approved an increase in the wholesale rate from $4.10 to $4.75 per ccf, as a result, the Council approved Resolution 66-2022 authorizing a pass-through increase of $0.78, bringing the current water usage charge to $8.55.
Analysis
Based on the budget provided by Veolia, annual operations costs have not and are not expected to increase by as much as the water rate study expected. As a result, the City should lower the Water Usage Charge to be in line with the requirements of the water lease agreement.
Staff have calculated the charge, based upon the budget and actual expenses provided by Veolia. Staff used the anticipated consumption by system customers provided by Veolia and accounting for expected nonrevenued water (system loss due to leaks, water lost during maintenance flushing and water which isn’t measured at customer meters). As a result, staff have determined that the current water service charge should be $7.76, a $0.79 reduction in the current charge. The following table summarizes the calculation.
Water Cost 3,689,241
Direct Veolia Operational Budget 1,454,696
Franchise and Lease Payments 710,606
Taxes 169,445
Contractual After-Tax Return 436,070
Total (A) 6,460,057
Fixed Revenue (expected) (B) 1,370,970
Variable Revenue Required (C, A-B) 5,089,087
Consumption (ccf) (D) 655,771
Rate (C/D) $7.76
This reduction meets the requirements of the City’s lease agreement with Veolia but provides relief to system customers. The following table shows the change to the City’s Water Usage Charge. The table does not include the City’s surcharges for water meters or capital.
Current
Water Rates
Effective
Nov 1 July 1
2022 2023
Water Usage Charges ($ per ccf)
Base $8.55 $7.76 $8.67
Monthly Single Family Residential Meter Chart
5/8” - 1” $18.06 $18.06 $18.33
Monthly All Other Meter Charge
5/8” $26.63 $26.63 $27.03
3/4” 39.94 39.94 40.54
1” 66.58 66.58 67.58
1-1/2” 133.16 133.16 135.16
2” 213.06 213.06 216.26
3” 399.47 399.47 405.46
4” & large 665.78 665.78 675.77
Monthly Fire Service & Emergency Intertie Charge
5/8” $5.33 $5.33 $5.41
3/4” 7.99 7.99 8.11
1” 13.32 13.32 13.52
1-1/2” 26.63 26.63 27.03
2” 42.61 42.61 43.25
3” 79.89 79.89 81.09
4” & larger 133.15 133.15 135.15
The City recently completed a Water Master Plan which will inform and develop the City’s water capital improvement program over the next five to ten years. As a result of that study, the City’s meter replacement and capital surcharges will be revisited. While this will likely result in an additional adjustment, staff did not want to delay this decrease.
In 2023, staff expect that SFPUC’s wholesale rates will increase further to $5.28 per ccf. Staff will monitor this additional increase and work with Veolia to manage the rate schedule as required in the lease agreement and with the goal of developing a single adjustment for Fiscal Year 2023-24.
Fiscal Impact
As of July 1, 2022, the water usage charge is $8.55 per ccf, the proposed reduction of $0.79 will result in a new water usage charge of $7.76 per ccf to be effective November 1, 2022.
Public Notice
The public was provided notice of this agenda item by posting the City Council agenda on the City’s official bulletin board outside City Hall and making the agenda and report available at the City’s website and at the San Mateo Co. Library located at 2415 University Avenue, East Palo Alto.
Environmental
The action being considered does not constitute a “Project” within the meaning of the California Environmental Quality Act (CEQA), pursuant to CEQA Guideline section 15378 (b)(5), in that it is a government administrative activity that will not result in direct or indirect changes in the environment.
Attachments
A. Rate Reduction Resolution
B. Reso 5154 Water Svc Rates Increase
C. Resolution 66-2022