EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: January 17, 2023
TO: Honorable Mayor and Members of the City Council
VIA: Patrick Heisinger, Interim City Manager
BY: Batool Zaro, Assistant Civil Engineer
Humza Javed, Public Works Director
SUBJECT: Resolution of Intent to increase water capital surcharge rates on April,1 2023 and provide notice of a proposition 218 public hearing set for March 21, 2023 Recommendation
Adopt a Resolution of Intent to increase water capital surcharge rates on April,1 2023 and provide notice of a Proposition 218 Public Hearing set for March 21, 2023.
Alignment with City Council Strategic Plan
This recommendation is primarily aligned with:
Priority No. 1: Enhance Public Safety and Emergency Preparedness Priority No. 4: Improve Public Facilities and Infrastructure Priority No. 6: Create a Healthy and Safe Community
Background
The City of East Palo Alto (City)-owned water system is leased to and operated by Veolia under the management of the Public Works Department. The service area covers approximately 80 percent of the City with nearly all water provided by San Francisco Public Utilities Commission (SFPUC). The lease was entered into on April 9, 2001, with American Water, the former operator, and expires in 2026. The lease was amended on July 19, 2016, and Veolia took over the lease agreement from American Water around July 2020.
On July 27, 2021, City Council adopted a resolution authorizing the City Manager to execute a contract with EKI Environment & Water, Inc., (EKI) for the preparation of the 2022 Water System Master Plan (WSMP).
On October 4, 2022, City Council adopted the 2022 WSMP. The adopted Master Plan provides the City with an overall plan for potable water infrastructure improvements over the next twenty (20) years to maintain water system reliability and support anticipated development within the City. The 20-year CIP plan was based on the developed hydraulic model.
The Final 2022 WSMP may be found on the City website here:
https://www.cityofepa.org/publicworks/project/water-system-master-plan-2022 As part of the WSMP scope, a rate study and funding analysis were performed to determine how the proposed CIP project may affect rates and how the program will be funded. Bartle Wells Associates (BWA) performed the rate analysis, in conjunction with EKI.
During the October 4, 2022, meeting, City Council approved a funding strategy for a few of the Priority 1A projects, and the rate study looked at how the allocated Water Capital Funds will impact rates. Detailed project information is included on the project summary sheets in the WSMP. The goal of the rate study was to understand how all priority projects identified in the WSMP will be financed. Table 2 details the cost recovery needed to be able to fund the priority projects identified in the WSMP over the next five (5) years.
TABLE 2
5-Year Water Capital Improvements for Cost Recovery
Project # Project Description Cost Included in Fee
Recovery
WS-04B/WD-04C/P-3/P21A12" University Avenue
Watermain Replacement
Project
12" Weeks Street Watermain
Replacement Project
$3,006,000
P-29 Pipeline Replacement on East
Bayshore Road
$1,290,000
P-32 Pipeline Replacement on
West Bayshore Road
$727,600
P-33 Pipeline Replacement West of
Highway 101 and West of
University Ave
$1,752,000
WD-07 Small Projects/ Water Valve
Replacement Project
$750,000
WD-06 Hydrant Replacement Project $331,500
Subtotal with Cost Escalation $8,459,707
Less Use of Water Capital Reserves ($2,000,000)
Total for Fee recovery $6,459,707
Note: Costs include project expenditures anticipated over the next 5 years; some projects will require additional funding in subsequent years. Some of the priority projects listed in the WSMP will be financed by funds other than the City (i.e. development-funded or grant-funded), so the costs are not included in the recovery fee.
A portion of the costs needed for water capital improvements will come from the existing water capital reserves. The City has approximately $4.6 million in water capital reserves. These reserves are typically set aside to be able to fund any emergency/ unexpected water system costs. Staff is comfortable drawing down the reserves, collected over the past 5 years, by $2 million as an effort to finance water capital projects without significantly impacting customers.
The project price estimates come from the adopted WSMP and account for design and construction management. The amount budgeted for design/construction management could potentially allow the City to hire a full-time water capital project engineer in the future. This would give the City the staffing capacity to take on more water capital projects.
The City’s existing water capital fees currently include a water meter replacement surcharge to fund the City’s water meter replacement program. The goal of the program is to replace all meters within the City’s service area. The City has purchased approximately 2800 meters and approximately 460 meters have been installed to date. Veolia will have the remaining meters installed by 2025. The City collected sufficient revenue, approximately $1.5 million, for this program through the surcharge, so staff proposes suspending the water meter surcharge fee.
In the future, any additional program charges will be funded through the City’s water capital surcharge.
Analysis
Increase in Water Capital Improvements Surcharges
The proposed water capital surcharge rates will be increased to fund priority 1A projects identified in the WSMP over the next five years. The costs recovered for each project are demonstrated in Table 2.
As a result of the WSMP rate study, the City’s meter replacement surcharge is planned to be suspended, and the capital surcharge was revisited. This was done to be able to fund the capital improvement projects identified in the 2022 WSMP to support the City’s water supply strategy and increase capacity to meet the recommended performance criteria.
Projects were prioritized based on two main categories (1) the condition of the improvement, which includes physical condition (pipe material, age, and size) and hydraulic performance, and (2) the consequence of failure of the improvement, which includes service requirements, environmental/public impact, safety, and supply impact.
Table 3 below reflects current water capital rates along with the proposed rate increase:
TABLE 3
Proposed Water Capital Improvement Surcharges
As shown in Table 3, the meter replacement program surcharge was removed and replaced solely with the water capital improvements surcharge. The proposed rate schedule is projected to achieve the cost recovery needed as shown in Table 2. The rates include a cost escalation factor to account for inflation.
Table 4 demonstrates the projected billing impacts on the fixed and per-usage surcharge:
TABLE 4
Projected Billing
Impacts
Table 4 shows the potential impact on low, typical, moderate-high, and high water users.
The proposed calculated rates include two components a fixed charge component that is levied based on customer class and water meter size regardless of water use, and a variable charge component that is levied based on metered water consumption.
The proposed surcharges are designed to recover costs from a balance of fixed and variable charges with 65% of revenues recovered from fixed charges and 35% from variable charges.
This balance reflects that a large share of water system infrastructure is sized to meet the capacity needs of each account based on customer class and meter size, but also reflects that a significant portion of costs will be recovered based on actual water usage such that customers that use more water will also pay for more infrastructure related to actual water delivery. Staff recommends the 65/35 split in order to ensure enough revenue is collected to fund the capital projects. Having a heavily fixed charge is recommended by experts because it’s guaranteed revenue based on customers. Additionally, with the California drought water, water usage is anticipated to decrease, reducing the revenue to be recovered from variable charges. The variable charge percentage (35%) is higher than most jurisdictions, and this was done to protect customers with lower water use. If a 100% fixed charge was used, all the revenue needed will come from the fixed charge, meaning all customers with the same meter size would be charged the same rate regardless of actual water use. Having 35% of the revenue coming from a variable charge allows lower water users to pay less.
The proposed rate increases are proposed to begin April 1, 2023.
The full rate study is attached as an Attachment 2 and can also be found on the City website linked here:
https://www.cityofepa.org/publicworks/project/water-system-master-plan-2022 As part of the study, the consultant evaluated what the City’s water capital surcharge rates would look like if the City planned to complete all the projects outlined in the WSMP over the next 20 years. The 20-year CIP plan includes approximately $81 million dollars of capital projects; this amount includes projects that will be fully funded by developers and projects partly funded by grants or other sources. The total includes a) roughly $14 million of development‐related hydraulic improvements that will be funded by new development, b) approximately $2 million for replacement of old water meters, and c) roughly $65 million for replacement of aging and substandard pipelines and other improvements needed to support water system reliability for the City’s customer base.
City Staff will continue to investigate alternative funding options such as usage of bonds to accelerate water projects without significantly impacting ratepayers.
See Appendix A of the 2022 WSMP rate study for the water capital surcharges with a 20-year capital program. Appendix A includes a set of tables deriving Maximum Surcharges designed to support full funding of the roughly $65 million of ratepayer infrastructure improvements needed over the next 20 years as identified in the updated WSMP.
Proposition 218 rate Increase Process
Water Capital Surcharge rates are subject to the procedural and substantive requirements as set forth in Proposition 218. Proposition 218 was adopted by California voters in 1996 and added Articles XIIIC and XIIID to the California Constitution. Article XIIID governs propertyrelated charges which have been determined to include ongoing utility service charges such as water, sewer, and garbage rates. The procedural requirements of Proposition 218 include:
1. Noticing Requirement: The City must mail a notice of proposed rate increases to all affected customers of record. The notice must specify the basis of the fee, the reason for the fee, and the date/time/location of a public rate hearing at which the proposed rates will be considered/adopted.
2. Public Hearing: The City must hold a public hearing prior to adopting the proposed rate increases. The public hearing must be held not less than 45 days after the required notices are mailed.
3. Rate Increases Subject to Majority Protest: At the public hearing, the proposed rate increases are subject to majority protest. If more than 50% of affected customers submit written protests against the proposed rate increases, the adjustments cannot be adopted.
Staff and the City Clerk are recommending that notices be issued in English and Spanish.
Fiscal Impact
Water capital improvement projects are funded with revenue derived from the rates paid by water customers.
• Approximately $6.5 million needs to be recovered over the next 5 years to fund the planned CIP projects; about $1.29 million needs to be collected per year. See Table 2 of this report (or Table 3 of the Rate Study Report) for the breakdown of the recovery cost • The City currently collects around $820-840K in revenue and this includes the revenue from the water capital surcharge and the water meter replacement surcharge • An increase in the water capital surcharge rate would result in an increase in water capital funds of approximately $471k per fiscal year totaling in a new annual revenue of about $1.29 million a year
• For the impact on specific customers, see Table 4 of this report (or Table 6 of the Rate Study Report)
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.
The proposed rate increases will be presented to the City Council at the regular January 17, 2023 City Council meeting. Should the Council choose to go forward in the process, following that meeting, staff will issue notices informing the public and their right of protest. A public hearing is planned for March 21, 2023, no less than 45 days following the mailing of the notice.
Staff and the City Clerk are recommending that notices be issued in English and Spanish.
Environmental
The action being considered by the City Council is exempt from the California Environmental Quality Act (CEQA) because it is not a “project” pursuant to 15378(b)(4) because it is a fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant impact on the environment.
Attachments
1. Intent Draft Resolution - WSMP Rate Study
2. Attachment 2 - East Palo Alto Water Capital Improvement Surcharges - December 2022
3. Attachment 3 - Proposed Prop 218 Notice English