EAST PALO ALTO
CITY COUNCIL
STAFF REPORT
DATE: March 21, 2023
TO: Honorable Mayor and Members of the City Council
VIA: Melvin E. Gaines, City Manager
BY: Batool Zaro, Associate Engineer
Humza Javed, Public Works Director
Greg Henry, Senior Management Analyst
SUBJECT: Public Hearing on Proposed Increases to Water Capital Surcharge Rates on April,1 2023 and Reducing Operational Water Rates by $0.02.
Recommendation
That the City Council:
1. Conduct a Public Hearing concerning water capital surcharge rates; and
2. After closing the public hearing, adopt a resolution suspending the water meter replacement surcharge and increasing the water capital surcharge service rates on April 1, 2023, for all water service customers within the City of East Palo Alto water system; and
3. Adopt a resolution suspending a portion of the water usage charge and authorizing a temporary reduction of $0.02, to be effective April 1, 2023, in the rate schedule adopted by Resolution 5154.
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 October 4, 2022, City Council adopted the 2022 Water System Master Plan (“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 On January 17, 2023, City Council received a presentation and heard oral testimony regarding recommended water capital surcharge rates. At the January 17th meeting, City Council adopted a resolution 07-2023, Attachment 5, with the intent to increase water capital surcharge rates, to set a public hearing date of March 21, 2023, and to send notices to all customers within the City’s water service area.
Proposition 218 Public Hearing to Consider Increased Rates On February 3rd, 2023 City staff directed Precise Printing & Mailing, a third-party contractor, to mail a Proposition 218 notice titled “Water Capital Surcharge Rates Notice of Public Hearing” (“notice”) to affected account holders in East Palo Alto. The notice was provided in English and Spanish.
The notice included the public hearing date and time, the background and explanation of the proposed water capital surcharge rate increases, and instructions regarding the written protest process. Copies of the notices are attached to this report (Attachment 4).
Written protests will be accepted and validated by the City Clerk through the end of the public testimony portion of the public hearing. There are 3,987 accounts in the City’s water system.
Of this amount, a total of 1,994 (50% plus 1) written protests must be submitted prior to the close of the public hearing in order to achieve a majority protest.
Notices were mailed to both the property address and the owner’s mailing address, and were addressed to the current resident/owner. In total, 3,980 notices were mailed. Customers with multiple accounts per address may receive multiple letters in the mail. Customers may also receive multiple letters in the mail because a letter was sent out to each account holders mailing address and service address. Customers with multiple accounts may file one formal protest per account, but each protest must include a different account number (i.e., multiple protests may come from a single address if the address has multiple accounts linked to that address, but the customer must include the account numbers).
As of March 17, 2023, the City has received less than 5% of the number of protests required to achieve a majority and invalidate the proposed rate increases. Specifically, the City has received one (1) protest submitted to the City Clerk’s Office in rejection of the proposed rate increases but is counting all 171 returned ballots as protests.
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 procedure for the public hearing is as follow:
1. City Council opens the Public Hearing.
2. Staff reports on proposed water capital surcharge rate increases effective April 1, 2023.
3. The City Clerk announces both the number of “writings purporting to be protests” that have so far been received as well as the threshold at which a majority protest exists.
4. City Council hears public testimony.
5. The Mayor asks for a final call for written protests.
6. The City Clerk announces the final number of written protests and whether a majority protest exists.
7. City Council closes the Public Hearing.
Water Capital Surcharge Rates Resolution
At the conclusion of the public hearing if a majority protest does not exist, staff recommends Council adopt a resolution adopting the updated water capital surcharge rates which take effect on April 1, 2023.
Decrease in Water Usage Charge
On May 17, 2022, the City Council adopted a pass-through increase of $0.78 to the water usage charge due to increases in the wholesale water rate provided by the City’s sole water provider San Francisco Public Utility Commission.
On October 18, 2022, City Council authorized the temporary reduction of $0.79 per ccf, to be effective November 1, 2022, suspending a portion of the water usage charges in the rate schedule adopted by Resolution 5154 and amended by Resolution 66-2022.
Bay Area Water Supply and Conservation Agency (BAWSCA), to which the City is a member issued bonds for capital improvement on the water conveyance system which provides water to the City. On January 5, 2023, the settlement of Revenue Bond Series 2023A to refund the 2013A bonds was completed. This refunding bond transaction will generate approximately $27.1 million in net present value savings over the term of the bonds, or an average of approximately $2.5 million of savings per year, starting in FY 2022-23.
As a result, BAWSCA has notified the SFPUC to reduce the BAWSCA agencies monthly bond surcharge that is included in the wholesale water bill each month, starting March 1, 2023. The City of East Palo Alto’s monthly BAWSCA surcharge will be reduced to $14,269. Because this charge is applied on the monthly SFPUC water wholesale bill, the cost of this expense is recovered from the operational charges (fixed and variable).
Analysis
Rate Study and Increase in Water Capital Improvements Surcharges As part of the WSMP scope, a rate study and funding analysis were performed to determine how the proposed CIP project may affect rates and how the program will be funded. Bartle Wells Associates (BWA) performed the rate analysis, in conjunction with EKI.
The proposed water capital surcharge rates will be increased to fund priority 1A projects identified in the WSMP over the next five years. As a result of the WSMP rate study, the City’s meter replacement surcharge is planned to be suspended, and the capital surcharge was revisited. This was done to be able to fund the capital improvement projects identified in the 2022 WSMP to support the City’s water supply strategy and increase capacity to meet the recommended performance criteria. The surcharge is used to fund high‐priority capital improvements needed to address current deficiencies, improve water system reliability, and minimize the potential for service outages. Revenues are used to fund costs associated with planning, analysis, design, and construction of water system infrastructure, and cannot be used for any other purpose.
Table 1 below reflects current water capital rates along with the proposed rate increase:
TABLE 1
Proposed Water Capital Improvement Surcharges
Current Proposed
Total Surcharge
Water Capital
Improvement
Surcharges
Water Usage Charges ($ per ccf)
All Customers $0.43 $0.65
Fixed Monthly Meter Charges
Single Family Residential
5/8’’ - 1’’ $9.12 $9.73
All Other Water Service Meters
5/8’’ $10.70 $15.07
¾” $13.20 $22.61
1’’ $18.10 $37.69
1- ½'’ $12.13 $75.37
2’’ $46.58 $120.60
3’’ $102.96 $226.12
4’’ & Larger $148.78 $376.86
As shown in Table 1, 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.
The proposed rate increases are proposed to begin April 1, 2023. The full rate study is attached as Attachment 3 and can also be found on the City website linked here:
https://www.cityofepa.org/publicworks/project/water-system-master-plan-2022 Decrease in Water Usage Charge
Due to the reduction in the BAWSCA surcharge, staff are recommending a further temporary reduction in of $0.02 to the water usage charge.
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 3 of the Rate Study Report for the breakdown of the recovery cost • The City currently collects around $820-840K in 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.
• For the impact on specific customers, see Table 6 of the Rate Study Report. • A $0.02 per CCF reduction in the water usage charge.
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.
Notices were published in a newspaper of general circulation informing the public and their right of protest on February 3, 2023. A public hearing is planned for March 21, 2023, no less than 45 days following the mailing of the notice.
Environmental
The proposed action is statutorily exempt from the California Environmental Quality Act (“CEQA”). Public Resources Code Section 21080(b)(8) and State CEQA Guidelines Section 15273(a) provide that CEQA does not apply to the establishment, modification, structuring, restructuring, or approval of rates or other charges by a public agency that the public agency finds are for the purpose of (1) meeting operating expenses; (2) purchasing or leasing supplies, equipment, or materials; (3) meeting financial reserve needs and requirements; or (4) obtaining funds for capital projects necessary to maintain service within existing service areas.
Here, as set forth above and in the attached rate study (Attachment 3), the approval of the rates for water service charges are necessary for these very purposes. Accordingly, the approval of the proposed rate plan for water service and infrastructure charges, and the implementation of such rates are exempt from CEQA pursuant to California Public Resources Code Section 21080(b)(8) and State CEQA Guidelines Section 15273(a). As a separate and independent basis, the proposed action is exempt from CEQA, pursuant to CEQA Guidelines Sections 15378 and 15061(b)(3), because there is both no potential physical change in the environment, directly or cumulatively, and because based on the facts in the record it can be seen with certainty there is no possibility of a significant effect on the environment arising from the proposed action.
Attachments
1. Resolution #1 - WSMP Rate Increase - Intent Resolution
2. Resolution #2 - RateReduction
3. East Palo Alto Water Capital Improvement Surcharges - December 2022
4. WSMP Rate Study Notice - English
5. 07-2023 Intention Of The City Council Of The City Of East Palo Alto To Increase Water Capitol Rates