Draft Water/Sewer Rate Study — Gonzales City Council, September 18, 2023

CITY OF GONZALES
Water and Sewer Utility
Rate Study 2023

DRAFT REPORT
September 2023
909 Marina Village Parkway #135
Alameda, CA 94501
(510) 545-3182
www.LTmuniconsultants.com

City of Gonzales
Water and Sewer Utility Rate Study 2023

TABLE OF CONTENTS

Section 1: Introduction ..............................................................................................................................1

1.1 Background ...................................................................................................................................1

1.2 Requirements of Proposition 218.................................................................................................1

1.3 Rate Study Process........................................................................................................................2

1.4 Financial Analysis and Rate Structure Adjustments......................................................................3

1.5 Summary of Proposed Rates.........................................................................................................4 Section 2: Current Rates and Customer Base............................................................................................6

2.1 Current Water Rates.....................................................................................................................6

2.2 Water Customer Base ...................................................................................................................7

2.3 Current Water Sales Revenues .....................................................................................................8

2.4 Current Sewer Rates.....................................................................................................................9

2.5 Sewer Customer Base .................................................................................................................10 Section 3: Water Revenue Requirement .................................................................................................11

3.1 Water System Overview .............................................................................................................11

3.2 Water Reserves...........................................................................................................................11

3.3 Water Capital Improvement Plan ...............................................................................................11

3.4 Water Cash Flow Projection........................................................................................................12 Section 4: Water Cost Allocation and Rate Design..................................................................................15

4.1 Water Cost Allocation .................................................................................................................15

4.2 Water Rate Design ......................................................................................................................17

4.3 Water Bill Impacts.......................................................................................................................22

4.4 Drought Rates.............................................................................................................................25

4.5 Low Income Discount..................................................................................................................26 Section 5: Sewer Revenue Requirement .................................................................................................27

5.1 Sewer System Overview..............................................................................................................27

5.2 Sewer Capital Improvement Plan ...............................................................................................27

5.3 Sewer Cash Flow Projection........................................................................................................29 Section 6: Sewer Cost Allocation and Rate Design ..................................................................................31

6.1 Sewer Cost Allocation .................................................................................................................31

6.2 Sewer Rate Design ......................................................................................................................32

6.3 Sewer Flows................................................................................................................................33

6.4 Rate Derivation ...........................................................................................................................33

6.5 Sewer Bill Impacts.......................................................................................................................37 City of Gonzales
Water and Sewer Utility Rate Study 2023

LIST OF TABLES
Table 1: Current and Proposed Water Rates................................................................................................4 Table 2: Proposed Drought Rates.................................................................................................................5 Table 3: Current and Proposed Sewer Rates................................................................................................5 Table 4: Current Monthly Water Rates.........................................................................................................7 Table 5: Inventory of Water Meters.............................................................................................................8 Table 6: Estimated 2022/23 Water Rate Revenues......................................................................................8 Table 7: Current Monthly Sewer Rates.........................................................................................................9 Table 8: Current Sewer Rate Revenue........................................................................................................10 Table 9: Water Capital Improvement Plan..................................................................................................12 Table 10: Water Cash Flow Projection........................................................................................................14 Table 11: Water Cost Allocation .................................................................................................................16 Table 12: Annual Revenue Requirement Allocation...................................................................................17 Table 13: Current and Proposed Meter Ratios...........................................................................................19 Table 14: Water Fixed Meter Charge Rate Derivation................................................................................20 Table 15: Water Consumption Rate Derivation..........................................................................................21 Table 16: Current and Proposed Water Rates............................................................................................22 Table 17: Sample Single Family Residential Bill Impacts.............................................................................23 Table 18: Drought Rates .............................................................................................................................25 Table 19: Wastewater CIP...........................................................................................................................28 Table 20: Sewer Cash Flow Projection........................................................................................................30 Table 21: Sewer Cost Allocation .................................................................................................................32 Table 22: Flow and Loading ........................................................................................................................33 Table 23: Unit Cost Calculation...................................................................................................................34 Table 24: Total Sewer Charges....................................................................................................................34 Table 25: Current and Proposed Monthly Sewer Rates..............................................................................35 Table 26: Proposed Sewer Rate Revenue - January 1, 2024 Rates if billed 12 months..............................36 Table 27: Sample Monthly Commercial Sewer Bill Impacts .......................................................................38

LIST OF FIGURES
Figure 1: Comprehensive Cost of Service Study Process..............................................................................2 Figure 2: Monthly Single Family Residential Water Bill Survey ..................................................................24 Figure 3: Monthly Single Family Residential Sewer Bill Survey ..................................................................37 City of Gonzales Page 1
Water and Sewer Utility Rate Study 2023
SECTION 1: INTRODUCTION

1.1 Background
The City of Gonzales (City) is located 17 miles south of Salinas, California and provides water and sewer service to a population of 8,650 residents as well as major industrial food processors. The last formal rate review was conducted in 1986 for the water utility and 1990 for the wastewater (sewer) utility.

Since then, water and sewer rates have been increased annually by the Consumer Price Index (CPI). The City engaged Lechowicz & Tseng Municipal Consultants (L&T) to complete a comprehensive water and wastewater (sewer) rate study to recommend utility rates to ensure the continued financial health and stability of the City’s enterprise funds.

The City’s wastewater treatment plant is at capacity and the City will construct a new industrial treatment plant. Once flow is transferred to the new plant, the City will conduct improvements to the existing facility. These improvements will be funded through a combination of grants, loans, capacity fees and rate revenues. Rate revenues must increase to fund these costs. This rate study covers the fiveyear period beginning in Fiscal Year (FY)2023/24 through 2027/28.

1.2 Requirements of Proposition 218
The implementation of utility rates in California is governed by the substantive and procedural requirements of Proposition 218 the “Right to Vote on Taxes Act” which is codified as Articles XIIIC and XIIID of the California Constitution. The City must follow the procedural requirements of Proposition 218 for all utility rate increases. These requirements include:

1. Noticing Requirement – The City must mail a notice of the proposed rate increases to all affected property owners or ratepayers. The notice must specify the amount of the fee, the basis upon which it was calculated, 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 property owners or ratepayers submit written protests against the proposed rate increases, the increases cannot be adopted.

Proposition 218 also established substantive requirements that apply to water and sewer rates and charges, including:

1. Cost of Service – Revenues derived from the fee or charge cannot exceed the funds required to provide the service. In essence, fees cannot exceed the “cost of service”.

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Water and Sewer Utility Rate Study 2023

2. Intended Purpose – Revenues derived from the fee or charge can only be used for the purpose for which the fee was imposed.

3. Proportional Cost Recovery – The amount of the fee or charge levied on any customer shall not exceed the proportional cost of service attributable to that customer.

4. Availability of Service – No fee or charge may be imposed for a service unless that service is used by, or immediately available to, the owner of the property.

5. General Government Services – No fee or charge may be imposed for general governmental services where the service is available to the public at large.

Charges for water and wastewater service are exempt from additional voting requirements of Proposition 218, provided the charges do not exceed the cost of providing service and are adopted pursuant to the procedural requirements of Proposition 218.

1.3 Rate Study Process
This section details the development of the City’s water and sewer rates via the Proposition 218 process as shown in the following figure.

Figure 1: Comprehensive Cost of Service Study Process
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Water and Sewer Utility Rate Study 2023
The following is a brief description of the rate study process:
 Revenue Requirements - Revenue requirements are analyzed via financial plans developed from the Water and Sewer Fund budgets. Based on the best information currently available, the financial plans incorporate projected operation and maintenance costs, capital expenditures, debt service, and growth to estimate annual revenue requirements. The plans serve as a roadmap for funding the City’s future operating and capital programs while maintaining longterm fiscal stability.  Cost of Service Allocation - The cost of service process builds on the financial plan analysis and assigns water and sewer system costs to functional cost components: metering and customer service, base, and extra for water, and customer service, flow, BOD, and TSS for sewer.  Rate Design - Rate design involves developing a rate structure that proportionately recovers costs from customers. Final rate recommendations are designed to (a) fund the utilities’ shortand long-term costs of providing service; (b) proportionately allocate costs to all customers and customer classes; and (c) comply with the substantive requirements of Proposition 218.

The rates developed in this report were based on the best available information gathered from City budgets, audits, and input from staff. The cost allocations proposed herein are based on American Water Works Association methodologies and industry standard practice. The proposed rates are based on the reasonable cost of providing service and are proportional to the benefits received by each customer.

1.4 Financial Analysis and Rate Structure Adjustments
Both the water and sewer funds are generating positive net revenues and are meeting their reserve fund targets. However, annual rate increases are needed to pay for operating cost increases and capital funding needs. The sewer utility will fund a new industrial treatment plant that will increase capacity for the entire system. The $25 million project will be financed with a loan from the State Revolving Fund (SRF). The new treatment plant is critical because the current treatment plant is at capacity and cannot serve new customers or increased flows. In addition to the industrial plant, the City intends to make improvements to serve the City’s collection system and domestic treatment stream.

The water rate structure changes proposed in this study are designed to comply with Proposition 218 and to more equitably recover costs from each customer class. This study recommends realigning fixed charges based on the maximum flow rates of each meter size and transitioning to a single volume rate for water consumption billing.

The sewer rate structure is not proposed to be adjusted in this study. However, the flow and pollutant loadings for all sewer customers have been updated based on an analysis of the City’s water usage and sewage flow patterns over the past three years.

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Water and Sewer Utility Rate Study 2023

1.5 Summary of Proposed Rates
The updated water and sewer proposed rates were developed to fairly recover costs, adhere to California statute, and be affordable to customers. Current and proposed monthly water rates are provided in Table 1, drought rates are provided in Table 2, and current and proposed sewer rates are provided in Table 3. The first rate increase is proposed to go into effect January 1, 2024, and future rate adjustments are proposed to go into effect January 1 each year thereafter.

The typical monthly water use of a single family customer is 12 ccf per month. Based on these parameters, the City’s current total combined water and sewer bill for a typical single family home with a 5/8” meter is $81.13 per month. After the proposed increase, the typical combined residential bill would increase to $90.81 per month on January 1, 2024, an increase of about 12%.

Table 1: Current and Proposed Water Rates
City of Gonzales
Water and Sewer Utility Rate Study 2023

PROPOSED
Fiscal Year Current 2023/24 2024/25 2025/26 2026/27 2027/28 Effective Date July 1, 2023 Jan 1, 2024 Jan 1, 2025 Jan 1, 2026 Jan 1, 2027 Jan 1, 2028

FIXED METER CHARGE
Meter Size
5/8" $22.12 $23.06 $24.68 $26.40 $28.25 $30.22
1" $23.50 $23.50 $24.68 $26.40 $28.25 $30.22
1-1/2" $24.86 $46.12 $49.36 $52.80 $56.50 $60.44
2" $26.26 $73.79 $78.98 $84.48 $90.40 $96.70
2-1/2" $27.28 $110.69 $118.46 $126.72 $135.60 $145.06
3" $29.12 $147.58 $157.95 $168.96 $180.80 $193.41
4" $30.53 $230.60 $246.80 $264.00 $282.50 $302.20
6" $31.94 $461.20 $493.60 $528.00 $565.00 $604.40
CONSUMPTION RATES ($/ccf)
Residential/Commercial
0 - 25 ccf $2.27 $2.41 $2.58 $2.76 $2.95 $3.16
26 - 30 ccf $2.35 $2.41 $2.58 $2.76 $2.95 $3.16
31 - 49 ccf $2.56 $2.41 $2.58 $2.76 $2.95 $3.16
50+ ccf $2.84 $2.41 $2.58 $2.76 $2.95 $3.16
Industrial
All use $2.27 $2.41 $2.58 $2.76 $2.95 $3.16
1 - One unit = 100 Cubic Feet (ccf) = 748 gallons
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Water and Sewer Utility Rate Study 2023
The proposed water rates also include a schedule of drought rates, which would only be implemented during a water shortage emergency. The City does not currently have a schedule of drought rates. Under drought conditions, the meter charges would remain the same, but the consumption rate would increase according to the level of water cutback, as shown in Table 2. Drought rates are intended to make the City financially whole and avoid a loss of revenues due to lower water sales.

Table 2: Proposed Drought Rates
City of Gonzales
Water and Sewer Utility Rate Study 2023

PROPOSED
Fiscal Year 2023/24 2024/25 2025/26 2026/27 2027/28
Effective Date Jan 1, 2024 Jan 1, 2025 Jan 1, 2026 Jan 1, 2027 Jan 1, 2028 CONSUMPTION RATES ($/ccf for all customers at all levels of use) Normal Water Year $2.41 $2.58 $2.76 $2.95 $3.16
10% Water Cutback $2.61 $2.79 $2.98 $3.19 $3.42
25% Water Cutback $3.00 $3.21 $3.43 $3.67 $3.93
40% Water Cutback $3.58 $3.83 $4.10 $4.39 $4.69
Table 3: Current and Proposed Sewer Rates
City of Gonzales
Water and Sewer Utility Rate Study 2023

PROPOSED
Fiscal Year Current 2023/24 2024/25 2025/26 2026/27 2027/28 Effective Date July 1, 2023 Jan 1, 2024 Jan 1, 2025 Jan 1, 2026 Jan 1, 2027 Jan 1, 2028 FIXED CHARGE PER MONTH ($/account)
Residential $31.77 $38.83 $46.60 $55.92 $59.28 $62.84
Commercial $15.18 $10.57 $12.68 $15.22 $16.13 $17.10
Industrial $312.62 $10.57 $12.68 $15.22 $16.13 $17.10
Schools $0.91 $1.04 $1.24 $1.49 $1.58 $1.67
COMMERCIAL & INDUSTRIAL VOLUME RATE ($/ccf) (in addition to fixed charge) $/ccf $2.40 $3.39 $4.06 $4.87 $5.16 $5.47
Note: Schools are billed annually rather than monthly based on reported average daily attendance (ADA)
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Water and Sewer Utility Rate Study 2023
SECTION 2: CURRENT RATES AND CUSTOMER BASE
This section provides an overview of the City of Gonzales’s current water and sewer rates, customer base, water usage statistics, and current rate revenues.

2.1 Current Water Rates
The City bills customers for water service on a monthly basis such that each billing period covers one month of service. The last water rate study was conducted in 1986. Water rates have been increased each year by the annual change in the Consumer Price Index (CPI). A schedule of current monthly water rates that went into effect on July 1, 2023 is provided in Table 4. The City’s current rate structure includes two components: (1) a Fixed Meter Charge and (2) Consumption Rates.

2.1.1 Fixed Meter Charge
All customers are charged a monthly fixed charge based on their meter size. The fixed charge is levied regardless of water consumption and recognizes that even when a customer does not use any water, the City incurs fixed costs associated with maintaining the ability or readiness to serve each connection.

Currently, the City’s meter fees have very little difference in cost when comparing the smallest and largest meter fees. Fixed charges currently generate about 22% of total water rate revenues.

2.1.2 Consumption Rates
In addition to Fixed Meter Charges, all customers pay a consumption rates per hundred feet (ccf) of water consumption. One ccf is equal to 748 gallons of water. The charges for water usage for residential and commercial customers are based on a 4-tiered rate structure where the price per unit of water is higher as more water is used. Industrial customers pay a uniform rate that does not vary based on the amount of water used. Consumption rates collect about 78% of total water rate revenues.

2.1.3 Fire Sprinkler Fee
The City also levies a flat charge to customers that have a separate meter for fire sprinklers. The fee is charged whether or not any water is used in the billing cycle and is used to fund the costs required to maintain the ability to serve each connection.

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Water and Sewer Utility Rate Study 2023
Table 4: Current Monthly Water Rates
City of Gonzales
Water and Sewer Utility Rate Study 2023
Water Service Fees
Residential Per Meter
5/8" meter $21.01
1" meter $22.31
Multi-Family
1-1/2" meter $23.61
2" meter $24.94
2-1/2" meter $25.91
Commercial
3" meter $27.66
4" meter $28.99
6" meter $30.33
Unmetered Service/Standby $31.62
Consumption Fees*
Residential/Commercial Charge per Unit
0 - 25 ccf $2.16
26 - 30 ccf $2.23
31 - 49 ccf $2.43
50+ ccf $2.69
Industrial Users
All use $2.16
*One unit = 100 Cubic Feet (ccf) = 748 gallons
Fire Sprinkler
Residential $7.49
Nonresidential $22.73

2.2 Water Customer Base
Table 5 includes a summary of the number of water accounts by customer class based on the City’s billing data. The water utility has 1,869 active accounts. 5/8” and 1” meters make up over 97% of the total meters within the City. It should be noted that the 1” meter size is the minimum meter size based on the California Building Code as the 1” size is needed for fire flow.

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Water and Sewer Utility Rate Study 2023
Table 5: Inventory of Water Meters
City of Gonzales
Water and Sewer Utility Rate Study 2023
Meter Size No. of Meters % of Total
5/8" 977 52.3%
1" 841 45.0%
1-1/2" 15 0.8%
2" 19 1.0%
2-1/2" 0 0.0%
3" 7 0.4%
4" 8 0.4%
6" 2 0.1%
Total 1,869 100.0%
Source: June 2023 billing report

2.3 Current Water Sales Revenues
Table 6 summarizes revenues derived from Meter Fees and Consumption Rates by customer class. Total Water Sales Revenues for FY2022/23 are estimated at $2.1 million.

Table 6: Estimated 2022/23 Water Rate Revenues
City of Gonzales
Water and Sewer Utility Rate Study 2023
Estimated 2022 Water Sales Revenues
Customer Class Fixed Charge Consumption Rates
Total Water
Sales Revenues
% of
Total
Residential $443,053 $489,834 $932,887 44.1%
Commercial $13,796 $230,987 $244,783 11.6%
Industrial $5,724 $930,154 $935,878 44.3%
Total $462,573 $1,650,975 $2,113,548 100.0%
% of Total 21.9% 78.1% 100.0%
Source: Utility Billing History - Usage 2022
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Water and Sewer Utility Rate Study 2023

2.4 Current Sewer Rates
The City’s last sewer rate study was conducted in 1990. Since then, sewer rates have been increased each year by the annual adjustment in the CPI. A schedule of current monthly sewer rates that went into effect on July 1, 2023 is provided in Table 7. The City’s current rate structure includes two components:
(1) a Flat Rate and (2) a Volume Rate for nonresidential customers. Schools are billed annually based on average daily attendance (ADA).

2.4.1 Flat Charge
All customers are charged a monthly Flat Charge that varies based on customer class. The Flat Charge is the minimum charge for all customers. Even when a customer does not use the sewer system, the City incurs fixed costs associated with maintaining the ability or readiness to serve each connection. The rate structure also includes a separate lift station charge for some residential customers. In the past, lift station charge has not been billed and is proposed to be phased out.

2.4.2 Volume Rate
In addition to the Flat Charge, commercial and industrial customers pay a Volume Rate per ccf based on monthly water use. Because sewer flow is not typically metered, water consumption is used as an approximation for sewer flow. It is assumed that any outdoor irrigation water use that does not flow into the sewer is separately metered through an irrigation only connection. Outdoor irrigation consumption is not billed for sewer service. The Volume Rate currently generates about 53% of total wastewater rate revenues.

Table 7: Current Monthly Sewer Rates
City of Gonzales
Water and Sewer Utility Rate Study 2023
Sewer Flat Rate Per Account
Residential $31.77
Commercial $22.31
Industrial $312.62
Volume Rate Per ccf*
Commercial & Industrial $2.40
Lift Pump Users Per Account
Residential $2.35
Schools (Billed Annually) Per ADA
Average Daily Attendance (ADA) $0.91
*One unit = 100 Cubic Feet (ccf) = 748 gallons
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Water and Sewer Utility Rate Study 2023

2.5 Sewer Customer Base
The City’s sewer utility provides service to about 2,000 single family, multi family, commercial, industrial, and school accounts within the City. Table 8 provides the current estimated number of accounts, annual flow, and sewer service revenues by customer class. Average flows are 1.2 million gallons per day. Based on current water usage patterns, the City would collect about $1.9 million in annual revenues based on the July 1, 2023 rates. Residential revenues account for approximately 37% of total revenues while industrial accounts represent over 56%. Schools and commercial customer revenues make up the remainder.

Table 8: Current Sewer Rate Revenue
City of Gonzales
Water and Sewer Utility Rate Study 2023
Customer
Class # of Accounts Fixed Monthly Fee
Fixed Annual
Revenues % of Total
Residential 1,785 $31.77 $680,513
Commercial 155 $15.18 $28,235
Industrial 40 $312.62 $150,058
1,980 $858,806 46.1%
Flow GPD Flow ccf/year
Volume Rate
Revenues
($2.28/ccf)
Residential 354,947 173,203 NA
Commercial 63,905 31,183 $74,840
Industrial 775,000 378,175 $907,620
1,193,852 582,561 $982,461 52.8%
Fee per Student Revenues
Schools $0.91 $21,028 1.1%
Total Rate Revenue $1,862,294 100.0%
Total Revenue by Customer Class
Residential $680,513 36.5%
Commercial $103,075 5.5%
Industrial $1,057,678 56.8%
Schools $21,028 1.1%
$1,862,294 100.0%
GPD – gallons per day
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Water and Sewer Utility Rate Study 2023
SECTION 3: WATER REVENUE REQUIREMENT
Proposition 218 requires that utility rates be based on the reasonable cost of providing service to customers. The cost of service includes annual operating expenses, capital improvement projects, and the accumulation of appropriate reserves. This section summarizes the water utility and the expenses that make up its cost of service and revenue requirement.

3.1 Water System Overview
The City derives its water supply from groundwater sources within the Salinas Valley groundwater basin.

The water system includes 4 deep-water wells, three tanks with a total capacity of seven million gallons, and many miles of pipes ranging in size from one inch to eighteen inches.

On average over the past 3 years, the City has consumed roughly 1.1 million ccf (hundred cubic feet) of water each year. Industrial use comprises more than half of the City’s total consumption at approximately 56% with the remaining 44% of use by residential, commercial, and school customers.

Based on City billing records, the current average monthly residential water use is 12 ccf per month.

3.2 Water Reserves
As of the beginning of FY2022/23, the water utility had operating fund reserves of approximately $2.98 million and is meeting its reserve fund targets. The City currently has two water reserve fund targets:
o Operating Reserve: The fund balance target is equal to 25% of annual operating expenses per City policy. This is in line with industry standards that recommend an operating reserve target of at least 25% of annual expenses to account for the time (at least 4 months) that it would take an agency to approve new rate increases to comply with Proposition 218. o Capital Reserve: The fund balance target is $500,000 to fund infrastructure projects.

Adequate fund reserves protect the City when faced with unforeseen financial challenges such as emergency expenses or revenue deficits. Fund reserves allow the City to maintain its financial health and positive credit ratings, especially during emergencies. Moreover, funding can be drawn from reserves to supplement rate revenues lost during drought conditions or other unexpected situations.

The City can also choose to use reserves to smooth cash flows and mitigate impacts to ratepayers.

3.3 Water Capital Improvement Plan
Table 9 provides the City’s capital improvement plan (CIP) by year for the rate study period, totaling $7.1 million. No projects are identified in FY2026/27 or FY2027/28. The City plans to secure loans to pay for the projects.

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Water and Sewer Utility Rate Study 2023

Table 9: Water Capital Improvement Plan
City of Gonzales
Water and Sewer Utility Rate Study 2023
1 – Total project cost is $5 million. $1M of available impact fee funds will be applied to the project

3.4 Water Cash Flow Projection
The water fund cash flow for the five-year period beginning in FY2023/24 through FY2027/28 is provided in Table 10. Revenue increases of 7.0% annually over the rate study period are needed to keep up with operating cost inflation and to fund necessary capital projects. It should be noted that this level of increase is applied to the City’s total water rate revenues and doesn’t not necessarily reflect the level of increase for individual customers. Each customer’s bill depends on meter size and water usage.

3.4.1 Water Revenues
The City’s main revenue source for the water utility is Water Service Revenues. Rate revenues are estimated at about $2.2 million in FY2023/24, comprising 95% of total water revenues. Other revenues include Interest Income, Late Charges, Meter Set Fees, Meter Sales, and Other Miscellaneous Income.

3.4.2 Water Expenses
Major expenses include Salaries and Benefits, Administrative Expenses, Supplies and Equipment, Outside Services, and Utilities. Most operating expenses are projected to increase 3.0% annually beginning in 2023/24. Utilities are escalated by 10.0% each year.

3.4.3 Debt Service
The water utility currently has one outstanding debt obligation – a 2012 Loan Agreement for $2.45 million. Total annual debt service is $229,400 and will be paid off in 2025. The City is proposing to secure $7.1 million in loans to fund the water CIP over the next 5 years. For planning purposes, debt service in the cash flow is estimated based on a 20-year loan at 3.35% interest with the first payment due in FY2024/25.

Project Title FY2023/24 FY2024/25 FY2025/26
18" Pipeline in Johnson Canyon Rd (6800 LF) [1] $2,000,000 $2,000,000 $0 12" Pipeline from Herold Way to Rincon Rd (1600 LF) $0 $0 $0 12" Pipeline from SE end of Herold Pkwy to Venice Way Park (985 LF) $0 $1,300,000 $0 12" Pipeline in 1st Street from Alta to Elko (1540 LF) $0 $0 $800,000 Hydropneumatic tank $0 $0 $1,000,000
Total Water CIP Projects $2,000,000 $3,300,000 $1,800,000 City of Gonzales Page 13
Water and Sewer Utility Rate Study 2023

3.4.4 Debt Service Coverage
A chief covenant for the City to secure loans, grants, or revenue bonds/Certificates of Participation (COPs) is to maintain a specific debt service coverage ratio. A debt service coverage ratio is a financial measure of an agency’s ability to repay outstanding debt. For the water fund, the debt service coverage ratio means that annual water net revenues (gross revenues less operating and maintenance expenses) must be at least 1.2 times the combined annual debt service payments on all parity obligations. Failure to meet the debt service coverage ratio on an annual basis is considered to be technical default, thereby making the revenue bonds/COPs callable or payable upon demand. Thus, rates and fees must be set to meet this legal requirement. The rates proposed in this study are expected to generate adequate revenues to meet the City’s current and future coverage requirements.

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Water and Sewer Utility Rate Study 2023
Table 10: Water Cash Flow Projection
City of Gonzales
Water and Sewer Utility Rate Study 2023
Rate Study Period
2023/24 2024/25 2025/26 2026/27 2027/28
Overall Rate Revenue Adjustment 7.0% 7.0% 7.0% 7.0% 7.0% Rate Increase Effective Jan 1, 2024 Jan 1, 2025 Jan 1, 2026 Jan 1, 2027 Jan 1, 2028 BEGINNING FUND BALANCE [1] $2,983,000 $3,051,000 $3,035,700 $2,178,600 $2,197,300

REVENUES
Operating Revenues
Water Service Revenues [2] 2,245,000 2,403,000 2,571,000 2,751,000 2,943,000 Interest Income 15,000 15,000 15,000 15,000 15,000
Late Charges 43,000 43,000 43,000 43,000 43,000
Meter Set Fee 400 400 400 400 400
Meter Sales 0 0 0 0 0
Other Income - Misc Payments 3,000 3,000 3,000 3,000 3,000 Transfer from Sewer 60,000 60,000 30,000 0 0
Subtotal Operating Revenues 2,366,400 2,524,400 2,662,400 2,812,400 3,004,400 New Debt Proceeds 2,000,000 3,300,000 1,000,000 0 0
Total Revenues 4,366,400 5,824,400 3,662,400 2,812,400 3,004,400

EXPENSES
Operating Expenses
Salaries and Benefits 411,000 423,000 436,000 449,000 462,000 Administrative Expenses 111,000 114,000 117,000 121,000 125,000 Supplies and Equipment 58,000 60,000 62,000 64,000 66,000 Outside Services 785,000 809,000 833,000 858,000 884,000 Utilities [3] 180,000 198,000 218,000 240,000 264,000
Transfers Out to Solar 364,000 364,000 364,000 364,000 364,000 Subtotal O&M 1,909,000 1,968,000 2,030,000 2,096,000 2,165,000 Net Operating Revenues 457,400 556,400 632,400 716,400 839,400 Debt Service
2012 Loan 229,400 229,400 114,700 0 0
New Debt Service [4] 0 142,300 374,800 447,700 447,700
Subtotal Debt Service 229,400 371,700 489,500 447,700 447,700 Capital Projects
Outlay & Vehicles 160,000 200,000 200,000 250,000 250,000 Water CIP Projects 2,000,000 3,300,000 1,800,000 0 0
Subtotal Capital Projects 2,160,000 3,500,000 2,000,000 250,000 250,000 Total Expenses 4,298,400 5,839,700 4,519,500 2,793,700 2,862,700 Total Net Revenues 68,000 (15,300) (857,100) 18,700 141,700 ENDING FUND BALANCE 3,051,000 3,035,700 2,178,600 2,197,300 2,339,000 Operating Reserve Target (25% of O&M) 477,000 492,000 508,000 524,000 541,000 Capital Reserves 500,000 500,000 500,000 500,000 500,000 Total Reserve Target 977,000 992,000 1,008,000 1,024,000 1,041,000 Total Reserve Target Met? yes yes yes yes yes
Debt Service Coverage Target - 1.20x [5] 1.99 1.50 1.29 1.60 1.87 Target Met? yes yes yes yes yes
1 - Estimated 07/01/2023 fund balance from 2023/24 Budget. 2 - Revenues adjusted for Jan 1 implementation date.
3 - Utilities escalated by 10% each year.
4 - Debt service is estimated based on a 20 year term at 3.35% and $50,000 of issuance costs 5 - Net Operating Revenues divided by total Debt Service City of Gonzales Page 15
Water and Sewer Utility Rate Study 2023
SECTION 4: WATER COST ALLOCATION AND RATE DESIGN

4.1 Water Cost Allocation
The water revenue requirement detailed in the previous section determines the amount of revenue to be recovered from water rates, and the cost of service allocation determines how revenues will be recovered from customers based on how they use the water system. Proposition 218 requires that agencies providing “property-related services” (including water utility service) set rates and charges that are based on the cost of providing those services and are proportional to how customers use the system.

4.1.1 Overview of Water Cost of Service Methodology
The purpose of the cost allocation is to classify costs and to determine the amount of revenue that will be recovered from fixed charges and from volume rates. The American Water Works Association (AWWA) recommends methods to classify costs among various customers. Using the Base-Extra Capacity Method as recommended by the AWWA, water operating expenses are allocated to the following categories: (a) Base, (b) Extra, (c) Metering and Services, and (d) Customer Service. The Base and Extra categories are intended to recover variable (consumption) costs, while the Customer Service and Metering and Services categories are intended to recover fixed expenses that are incurred regardless of water used.
 Base: Base costs include the expenses related to providing water under average, “base” demand conditions.
 Extra: The extra category includes costs related to providing water above the system average demand (ie. related to peak, “extra” usage).
 Metering and Services: These include costs related to maintaining and replacing water meters.
 Customer Service: This category contains costs associated with serving customers, such as billing and answering customer inquiries.

4.1.2 Cost Allocation
The cost allocation for the water utility is provided below in Table 11. The FY2023/24 budget is used as the base year for the cost allocation. Costs are allocated according to how they are incurred by the City.

Based on Table 11, roughly 22% of costs will be recovered from the Fixed Charges while the remaining 78% will be recovered from the Consumption Rate.

City of Gonzales Page 16
Water and Sewer Utility Rate Study 2023
Table 11: Water Cost Allocation
City of Gonzales
Water and Sewer Utility Rate Study 2023
Expenses Budget
2023/24
Base/Extra
(Usage Rate)
Meters & Customer
Service
(Meter Fee)
Operating Expenses
Salaries and Benefits $411,000 66.67% 33.33%
Administrative Expenses $111,000 0.00% 100.00%
Supplies and Equipment $58,000 50.00% 50.00%
Outside Services $785,000 80.00% 20.00%
Utilities $180,000 100.00% 0.00%
Transfers Out to Solar $364,000 100.00% 0.00%
Subtotal Operating $1,909,000 $1,475,000 $434,000
Non-Operating Expenses
Debt Service (5-Year Average) $397,200 100.00% 0.00%
Capital Outlay & Vehicles $160,000 30.00% 70.00%
Subtotal Non-Operating $557,200 $445,200 $112,000
Total Water Expenses $2,466,200 $1,920,200 $546,000
Proposed Cost Allocation % 100.0% 77.9% 22.1%

4.1.3 Annual Revenue Requirement Allocation
Table 12 shows the annual revenue requirement for the rate study period based on the cost allocation percentages from Table 11. The total water rate revenue requirements for each year are from the cash flow projection (Table 10). The fixed charge revenue requirement is based on the Meters and Customer Service category from the cost allocation. The consumption charge revenue requirement is based on the Base/Extra category.

City of Gonzales Page 17
Water and Sewer Utility Rate Study 2023
Table 12: Annual Revenue Requirement Allocation
City of Gonzales
Water and Sewer Utility Rate Study 2023
Cost
Allocation %

PROJECTED - RATE STUDY PERIOD
2023/24 2024/25 2025/26 2026/27 2027/28
Total Revenue
Requirement [1] $2,337,000 $2,501,000 $2,676,000 $2,863,000 $3,063,000 Allocation
Fixed Meter Charge 22.1% $516,477 $552,721 $591,396 $632,723 $676,923 Consumption Rate 77.9% $1,820,523 $1,948,279 $2,084,604 $2,230,277 $2,386,077 Total 100.0% $2,337,000 $2,501,000 $2,676,000 $2,863,000 $3,063,000 1 – 7% increase in applied to current rate revenues over 12 months

4.2 Water Rate Design
Following the allocation of costs, the next step is to derive the total cost responsibility for each customer class by developing unit costs of service for each cost function and then assigning those costs to the customer classes based on the respective service requirements of each.

4.2.1 Rate Structure Modifications
To comply with Proposition 218, the proposed modifications to the existing water rate structure are as follows:
 Fixed Meter Charge
 Combine 5/8” and 1” meters as the base meter size
o Over 97% of customers have either a 5/8” or 1” meter. To comply with State regulations, new residential construction is required to have a 1” meter for fire flow. By combining the 5/8” and 1” meters as the base meter size, a separate Fire Sprinkler Charge is no longer needed.
 All customer classes will be charged the same Fixed Meter Charges which will vary by meter size.
o L&T recommends developing a single fixed rate structure based on meter size that applies to all customer classes. Additionally, we propose to use the AWWA meter capacity ratios to calculate rates for the larger meter sizes. The re-alignment will amend the fixed charges so that each meter size will be charged based on their proportional impact on the system.

City of Gonzales Page 18
Water and Sewer Utility Rate Study 2023
 Consumption Rates
 Eliminate the tiered rate structure for residential and commercial customers and implement a single rate per unit of water (ccf) for all customers. o Per Proposition 218 and legal rulings, each water rate tier breakpoint (i.e. the consumption used in each tier) and the price of each tier must be individually costjustified. Higher use must be directly tied to specific costs such as imported water, higher electricity costs associated with peak pumping, increased maintenance, and/or conservation programs. Tiers can no longer be assigned to customers solely based on conservation objectives. Because the City relies solely on groundwater for its supply, it is difficult to assign additional costs to the higher tiers. Moreover, the majority of water consumption is by industrial users who are currently charged a single tier for usage.

4.2.2 Meter Equivalents
The most common method to levy fixed charges is by meter size. AWWA guidelines recommend using meter equivalents to assign demand-related costs to larger meter sizes. The ratio at which the meter charge increases is typically a function of either meter investment (estimated cost) or the meter’s safe operating capacity. Larger meters have the ability to place a greater demand on the water system and are therefore charged based on that potential demand. For example, based on the AWWA meter capacity ratios, a customer that has a 2” meter has 3.20 times the capacity equivalency of a customer with a 5/8” or 1” meter. (A 2” meter has a safe operating capacity of 160 gallons per minute (gpm) compared to a 5/8” or 1” meter which has a safe operating capacity of 50 gpm).

Table 13 shows the proposed meter equivalents based on AWWA standards and number of meter equivalents. The re-alignment will amend the fixed charges so that each meter size will be charged based on their proportional impact on the system.

City of Gonzales Page 19
Water and Sewer Utility Rate Study 2023
Table 13: Current and Proposed Meter Ratios
City of Gonzales
Water and Sewer Utility Rate Study 2023
No. of
Meters

CURRENT PROPOSED
Meter
Size
Monthly Fixed
Charge
Meter
Ratio
Operating
Capacity
(gpm) [1]
AWWA
Meter Ratios
No. of
Meter
Equivalents
5/8" 977 $22.12 1.00 50 1.00 977
1" 841 $23.50 1.06 50 1.00 841
1-1/2" 15 $24.86 1.12 100 2.00 30
2" 19 $26.26 1.19 160 3.20 61
2-1/2" 0 $27.28 1.23 240 4.80 0
3" 7 $29.12 1.32 320 6.40 45
4" 8 $30.53 1.38 500 10.00 80
6" 2 $31.94 1.44 1,000 20.00 40
Total 1,869 2,074
1 - Gallons per minute (gpm) safe maximum operating capacity 2 - Meter Ratio x No. of Meters

4.2.3 Fixed Meter Charge Calculation
Table 14 calculates the Fixed Meter Charge by meter size based on the AWWA meter ratios from Table 13 and the total revenue requirement from Table 12. The proposed FY2023/24 charge for a 5/8” meter is $23.06. It is proposed that the 1” meter fee remain at the current rate of $23.50 in FY2023/24 and equal the 5/8” meter fee in FY2024/25 and beyond.

City of Gonzales Page 20
Water and Sewer Utility Rate Study 2023
Table 14: Water Fixed Meter Charge Rate Derivation
City of Gonzales
Water and Sewer Utility Rate Study 2023

PROJECTED - RATE STUDY PERIOD
2023/24 2024/25 2025/26 2026/27 2027/28

FIXED METER CHARGE REVENUE REQUIREMENT
Total Fixed Meter Charge Revenue Requirement [1] $516,477 $552,721 $591,396 $632,723 $676,923 Total Number of Meter Equivalents [2] 1,867 1,867 1,867 1,867 1,867 Total Fixed Meter Charge for 5/8" and 1" meters $23.06 $24.68 $26.40 $28.25 $30.22 % Change 7.0% 7.0% 7.0% 7.0%

PROPOSED FIXED METER CHARGES
Meter Size Meter Ratio
5/8" 1.00 $23.06 $24.68 $26.40 $28.25 $30.22
1" [3] 1.00 $23.50 $24.68 $26.40 $28.25 $30.22
1-1/2" 2.00 $46.12 $49.36 $52.80 $56.50 $60.44
2" 3.20 $73.79 $78.98 $84.48 $90.40 $96.70
2-1/2" 4.80 $110.69 $118.46 $126.72 $135.60 $145.06
3" 6.40 $147.58 $157.95 $168.96 $180.80 $193.41
4" 10.00 $230.60 $246.80 $264.00 $282.50 $302.20
6" 20.00 $461.20 $493.60 $528.00 $565.00 $604.40
1 - Table 12
2 - Table 13. Total number of meter equivalents adjusted down to account for billing data discrepancies. 3 - To provide rate stability, it is proposed that the 1” meter fee remain the same in FY2023/24 and become aligned with the 5/8” fee in FY2024/25

4.2.4 Consumption Rate Derivation
Table 15 calculates the Consumption Rate for all customers based on the total revenue requirement from Table 12 and projected total water consumption. The proposed Consumption Rate is a single uniform tier in which all customer classes are charged the same rate for each unit of water consumption. The proposed FY2023/24 Consumption Fee is $2.41 per ccf.

City of Gonzales Page 21
Water and Sewer Utility Rate Study 2023
Table 15: Water Consumption Rate Derivation
City of Gonzales
Water and Sewer Utility Rate Study 2023

PROJECTED - RATE STUDY PERIOD
2023/24 2024/25 2025/26 2026/27 2027/28

CONSUMPTION FEE REVENUE REQUIREMENT
Total Consumption Fee Revenue Requirement [1] $1,820,523 $1,948,279 $2,084,604 $2,230,277 $2,386,077 Total Consumption [2] 755,000 755,000 755,000 755,000 755,000 Proposed Consumption Rate per ccf $2.41 $2.58 $2.76 $2.95 $3.16 % Change 7.1% 7.0% 6.9% 7.1%
1 - Table 12
2 - Estimated consumption reflects delinquencies, water conservation, and meter reading errors from billing in arrears and debt collection

4.2.5 Proposed Water Rates
Table 16 summarizes the proposed monthly water rates for the next five years. All accounts, including residential, commercial, and industrial customers, will be charged according to the proposed rate schedule shown. The first rate change is proposed to take effect on January 1, 2024, with subsequent rate increases each January 1 through 2028.

City of Gonzales Page 22
Water and Sewer Utility Rate Study 2023
Table 16: Current and Proposed Water Rates
City of Gonzales
Water and Sewer Utility Rate Study 2023

PROPOSED
Fiscal Year Current 2023/24 2024/25 2025/26 2026/27 2027/28 Effective Date July 1, 2023 Jan 1, 2024 Jan 1, 2025 Jan 1, 2026 Jan 1, 2027 Jan 1, 2028

4.3 Water Bill Impacts
For FY2023/24, the proposed 7.0% revenue adjustment in the cash flow does not directly correlate to a

7.0% increase in rates due to the cost of service reallocation and the updated rate structure. Because of the reallocation, the bill impacts to customers for the first year will vary based on customer class, meter size, and actual consumption. Moreover, water consumption, particularly for single family customers, typically varies due to seasonal variations in weather and/or other factors. Hence, a single customer could face a range of impacts throughout the year. Table 17 includes a sample of bill impacts for single family residential customers with a 5/8” meter.

City of Gonzales Page 23
Water and Sewer Utility Rate Study 2023
Table 17: Sample Single Family Residential Bill Impacts City of Gonzales
Water and Sewer Utility Rate Study 2023
Monthly Proposed
Use
(ccf)
Current
Bill
Jan 1,
2024
Jan 1,
2025
Jan 1,
2026
Jan 1,
2027
Jan 1,
2028
6 ccf
Fixed Meter Charge - 5/8" $22.12 $23.06 $24.68 $26.40 $28.25 $30.22 Consumption Charge 6 $13.62 $14.46 $15.48 $16.56 $17.70 $18.96 Total Monthly Water Bill $35.74 $37.52 $40.16 $42.96 $45.95 $49.18 $ Change $1.78 $2.64 $2.80 $2.99 $3.23
% Change 5.0% 7.0% 7.0% 7.0% 7.0%
12 ccf
Fixed Meter Charge - 5/8" $22.12 $23.06 $24.68 $26.40 $28.25 $30.22 Consumption Charge 12 $27.24 $28.92 $30.96 $33.12 $35.40 $37.92 Total Monthly Water Bill $49.36 $51.98 $55.64 $59.52 $63.65 $68.14 $ Change $2.62 $3.66 $3.88 $4.13 $4.49
% Change 5.3% 7.0% 7.0% 6.9% 7.1%
20 ccf
Fixed Meter Charge - 5/8" $22.12 $23.06 $24.68 $26.40 $28.25 $30.22 Consumption Charge 20 $45.40 $48.20 $51.60 $55.20 $59.00 $63.20 Total Monthly Water Bill $67.52 $71.26 $76.28 $81.60 $87.25 $93.42 $ Change $3.74 $5.02 $5.32 $5.65 $6.17
% Change 5.5% 7.0% 7.0% 6.9% 7.1%
40 ccf
Fixed Meter Charge - 5/8" $22.12 $23.06 $24.68 $26.40 $28.25 $30.22 Consumption Charge 40 $94.10 $96.40 $103.20 $110.40 $118.00 $126.40 Total Monthly Water Bill $116.22 $119.46 $127.88 $136.80 $146.25 $156.62 $ Change $3.24 $8.42 $8.92 $9.45 $10.37
% Change 2.8% 7.0% 7.0% 6.9% 7.1%
55 ccf
Fixed Meter Charge - 5/8" $22.12 $23.06 $24.68 $26.40 $28.25 $30.22 Consumption Charge 55 $134.18 $132.55 $141.90 $151.80 $162.25 $173.80 Total Monthly Water Bill $156.30 $155.61 $166.58 $178.20 $190.50 $204.02 $ Change ($0.69) $10.97 $11.62 $12.30 $13.52
% Change -0.4% 7.0% 7.0% 6.9% 7.1%
City of Gonzales Page 24
Water and Sewer Utility Rate Study 2023

4.3.1 Regional Water Bill Survey
The following figure compares the City’s current average monthly single family residential bill with those of surrounding agencies. The typical monthly water use for a single family customer is 12 ccf of water use. The City’s current average water bill is $49.36 per month. With the proposed increase for FY2023/24, the average water bill is projected to be $51.98. The City’s water rates are on the lower end of those charged by surrounding agencies.

Figure 2: Monthly Single Family Residential Water Bill Survey City of Gonzales Page 25
Water and Sewer Utility Rate Study 2023

4.4 Drought Rates
Drought rates are only implemented during a water shortage emergency, allowing for financial stability during periods of reduced water sales. During times of water shortages, a water utility has two core objectives: 1) to reduce the amount of water customers consume, and 2) to maintain an adequate amount of revenue to continue operations. The two competing objectives work against each other because as less water is sold, it becomes more difficult to maintain adequate revenue to cover an agency’s costs. It should be noted that under drought conditions, certain expenses will decrease relative to the decrease in water use such as electricity, supplies, and equipment. However, other costs to operate the water system such as staffing and maintaining long-term supply remain the same. The reduction in cost during drought conditions is reflected in the revenue requirements shown in Table 18.

Drought rates are designed to cover costs at decreased levels of consumption. The City recognizes that ratepayers are already doing their part to conserve. Therefore, applying the drought surcharge to only the consumption charge component gives customers the increased ability to control a portion of their water bills. The proposed drought rates would be charged on a temporary basis and would be phased out when the City determines that water supply conditions have returned to normal and droughtrelated costs and revenue reductions have been recovered. Table 18 shows the proposed drought rates for varying levels of reduction in overall consumption.

Table 18: Drought Rates
City of Gonzales
Water and Sewer Utility Rate Study 2023

PROJECTED - RATE STUDY PERIOD
2023/24 2024/25 2025/26 2026/27 2027/28
Drought Rates - 10% Cutback
Total Consumption Fee Revenue Requirement $1,770,938 $1,895,214 $2,027,826 $2,169,532 $2,321,088 Total Estimated Consumption 679,500 679,500 679,500 679,500 679,500 Proposed Consumption Rate per ccf $2.61 $2.79 $2.98 $3.19 $3.42 Drought Rates - 25% Cutback
Total Consumption Fee Revenue Requirement $1,696,560 $1,815,617 $1,942,659 $2,078,413 $2,223,605 Total Estimated Consumption 566,250 566,250 566,250 566,250 566,250 Proposed Consumption Rate per ccf $3.00 $3.21 $3.43 $3.67 $3.93 Drought Rates - 40% Cutback
Total Consumption Fee Revenue Requirement $1,622,183 $1,736,020 $1,857,493 $1,987,295 $2,126,121 Total Estimated Consumption 453,000 453,000 453,000 453,000 453,000 Proposed Consumption Rate per ccf $3.58 $3.83 $4.10 $4.39 $4.69 City of Gonzales Page 26
Water and Sewer Utility Rate Study 2023

4.5 Low Income Discount
The City currently offers a discount for seniors on their utility bill. The discount is calculated annually and credited back to the customers. To comply with Proposition 218’s cost of service requirements, it is recommended that the City transition to a low income discount that is offered to all customers.

Moreover, water rate revenues from one group of customers cannot be used to subsidize the rates of another group. Instead, the City can utilize non-rate revenues, such as General Fund revenues, interest earnings, or delinquent penalties to fund a low income discount program. The 2023/24 water budget includes $43,000 in Late Charges which can be used to fund a discount program.

Because non-water rate revenues will be used to pay for the discount, the amount and structure of the low income discount is based on the discretion of the City. The discount program should be reviewed annually by the City to determine whether the water fund has adequate non-rate revenues to fund the program. Additionally, to eliminate the administrative burden of the City developing its own low-income criteria, it is recommended that the City provide assistance to low income residents who meet the criteria of other local assistance programs such as PG&E’s CARE program.

City of Gonzales Page 27
Water and Sewer Utility Rate Study 2023
SECTION 5: SEWER REVENUE REQUIREMENT
Similar to the water utility, the sewer utility’s cost of service and revenue requirement is comprised of operating costs, capital improvement costs, and the need to maintain reasonable reserves.

5.1 Sewer System Overview
The City of Gonzales owns, operates, and maintains a wastewater collection system composed of sewer pipelines and associated manholes, five lift stations, forced and gravity fed mains, and a trunk line that runs two miles to the Wastewater Treatment Plant (WWTP). The City’s WWTP has a 1.3 million gallons per day (MGD) capacity and existing flows are approximately 1.2 MGD. Wastewater is collected via a gravity collection system and conveyed to the City’s WWTP.

5.2 Sewer Capital Improvement Plan
Table 19 below provides the sewer capital improvement plan (CIP) for all projects that will be funded through rates rather than impact fees. The CIP includes the construction of a new Industrial Wastewater Reclamation System, rehabilitation of the City’s existing WWTP, and preparation for a new Discharge Permit. This rate study excludes projects funded by impact fees that benefit growth.

The new Industrial Wastewater Reclamation System is an approximately $25 million project which is anticipated to be funded by a State Revolving Fund (SRF) loan from the State Water Resources Control Board. Ratepayers will be responsible for the financing costs related to the annual loan payment. The industrial treatment plant is expected to take three years to complete, beginning this year - FY2023/24.

City of Gonzales Page 28
Water and Sewer Utility Rate Study 2023
Table 19: Wastewater CIP
City of Gonzales
Water and Sewer Utility Rate Study 2023
2023/24 2024/25 2025/26 2026/27

WASTEWATER TREATMENT
1 Wastewater Treatment Plan Expansion 0 0 0 0
2 Wastewater Rate Study 10,000 0 0 0
3 Wastewater Master Plan 25,000 275,000 0 0
4 Groundwater Monitoring Plan 15,000 0 0 0
5 Install New Groundwater Monitoring Wells at WWTP 125,000 0 0 0 6 Wastewater Treatment Plant Upgrades 80,000 125,000 300,000 300,000 7 Wastewater Treatment Plant Sludge Removal 0 0 0 750,000 8 Replace SCADA/Control System 0 10,000 100,000 0
9 WWTP Process Optimization 25,000 25,000 0 0
10 Renewal of WWTP WDR 20,000 0 0 0
11 Sampling, Analysis and Regulatory Report Plan 14,000 0 0 0 12 Spill Prevention, Emergency Responds and Staff Training Plans 7,500 0 0 0 13 Wastewater Disposal and Sludge Management Plan 14,000 0 0 0 14 WWTP and Collections Staffing Study 5,500 0 0 0
15 Annual Waste Discharge Requirement Fees (WWTP and IWTF) 25,000 27,500 27,500 55,000 16 CUPA Spill Prevention Control and Countermeasures Plan 0 20,000 0 0 17 Climate Change Adoption Plan 0 0 25,000 0
18 Time Schedule Compliance Plan 9,500 0 0 0
Subtotal Wastewater Treatment 376,000 483,000 453,000 1,105,000

COLLECTIONS SYSTEM
1 Industrial Wastewater Pretreatment Program 25,000 0 0 0 2 Update Sewer System Management Plan 10,000 0 0 0
3 Clean and Video Inspect 21" Trunk Sewer (Along Fermin Ln from Alta St to WWTP) 50,000 50,000 0 0 4 Rehabilitate Manholes on 21" Sewer (Along Fermin Ln from Alta St to WWTP) 100,000 100,000 0 0 5 Sewer System Condition Assessment 150,000 180,000 180,000 180,000 Subtotal Collections System 335,000 330,000 180,000 180,000

INDUSTRIAL SYSTEM
1 Industrial Wastewater Reclamation System 8,300,000 12,500,000 3,500,000 0 Subtotal Industrial System 8,300,000 12,500,000 3,500,000 0 TOTAL WASTEWATER CIP $9,011,000 $13,313,000 $4,133,000 $1,285,000 City of Gonzales Page 29
Water and Sewer Utility Rate Study 2023

5.3 Sewer Cash Flow Projection
Table 20 provides the sewer cash flow projection for the five-year period beginning in FY2023/24 through FY2027/28.

5.3.1 Proposed Rate Revenue Increases
The proposed revenue increases to sewer service charges are needed to ensure that the sewer fund covers its cost of service over the next five years. FY2023/24 through FY2025/26, it is proposed that rate revenues increase 20% each year. FY2026/27 and FY2027/28, annual rate increases of 6% are proposed.

The primary driver for rate increases is meeting the reserve requirements and required debt service coverage ratio for the SRF loan the City secured to finance the construction of the new Industrial Wastewater Reclamation System.

5.3.2 Sewer Revenues and Expenses
The vast majority of operating revenues are service charge (rate) revenues, though the sewer fund also has non-rate revenue sources such as late charges and miscellaneous payments. Major operating expenses include salaries and benefits, utilities, and outside services. Operating expenses in future years were projected by City staff based on anticipated inflationary increases to existing costs as well as new expenses. Projected new expenses during the rate study period include two additional WWTP Operators in FY2025/26 and FY2026/27 and annual costs for chemicals beginning in FY2024/25.

5.3.3 Debt Service and SRF Loan Requirements
The sewer fund has a current reserve balance of $1.2 million. The only current debt against the sewer fund is the 2005 Bond for improvements at the City’s Wastewater Treatment Plant (new grinders, larger capacity pumps, new aerators, and new piping from the headworks to the treatment ponds). This bond will be paid off as of December 30, 2025 and is shown in the cash flow as an annual transfer to the water fund. Adequate fund reserves protect the City when faced with unforeseen financial challenges such as emergency expenses or revenue deficits. Moreover, fund reserves allow the City to maintain its financial health and positive credit ratings. The SRF loan will require the City to maintain a reserve equal to one annual debt service payment, at minimum. It is anticipated that the City will build up the debt service reserve over the next four years from rate revenues. It is anticipated that debt repayment will begin one year after construction is complete. The recommended reserve target is 25 percent of annual operating costs plus one debt service payment. Maintaining at least 25% of annual operating costs in reserves is in line with industry standards that recommend an operating reserve target to account for the time (at least 4 months) that it would take an agency to approve new rate increases to comply with Proposition 218.

It is also imperative that the sewer fund generate sufficient rate revenues to maintain the debt service coverage ratio required for the SRF loan. A debt service coverage ratio is a financial measure of an agency’s ability to repay outstanding debt. For the purposes of the SRF loan, the required debt service coverage ratio means that annual sewer net operating revenues must be at least 1.2 times the annual debt service payment. Failure to meet the debt service ratio on an annual basis is considered to be technical default. Thus, rates and fees must be set to meet this legal requirement.

City of Gonzales Page 30
Water and Sewer Utility Rate Study 2023
Table 20: Sewer Cash Flow Projection
City of Gonzales
Water and Sewer Utility Rate Study 2023
Years 1 -5: Proposition 218
2023/24 2024/25 2025/26 2026/27 2027/28
Overall Revenue Adjustment 20.0% 20.0% 20.0% 6.0% 6.0%
Rate Increase Effective Jan 1, 2024 Jan 1, 2025 Jan 1, 2026 Jan 1, 2027 Jan 1, 2028 BEGINNING FUND BALANCE [1] $1,186,000 $1,044,000 $1,436,000 $2,095,000 $992,000

REVENUES
Operating Revenues
Sewer Service Revenues [2] 2,011,000 2,413,000 2,895,000 3,294,000 3,492,000 Interest Income 3,000 3,000 3,000 3,000 3,000
Late Charges 45,000 45,000 45,000 45,000 45,000
Other Income - Misc Payments 16,000 16,000 16,000 16,000 16,000 Subtotal Operating Revenues 2,075,000 2,477,000 2,959,000 3,358,000 3,556,000 Debt Proceeds 8,300,000 12,500,000 3,500,000 0 0
Grants 25,000 275,000 0 0 0
Total Revenues 10,400,000 15,252,000 6,459,000 3,358,000 3,556,000

EXPENSES
Operating Expenses [3]
Salaries and Benefits 412,000 491,000 620,000 750,000 768,000 Administrative Expenses 98,000 71,000 75,000 79,000 82,000 Supplies and Equipment 45,000 85,000 95,000 105,000 115,000 Outside Services 225,000 207,000 238,000 257,000 273,000 Chemicals 0 25,000 25,000 25,000 25,000
Utilities 160,000 107,000 113,000 189,000 203,000
Transfers Out to Water 60,000 60,000 30,000 0 0
Transfers Out to Solar 121,000 121,000 121,000 121,000 121,000 Subtotal O&M 1,121,000 1,167,000 1,317,000 1,526,000 1,587,000 Net Operating Revenues 954,000 1,310,000 1,642,000 1,832,000 1,969,000 Debt Service
SRF Loan 0 0 0 1,250,000 1,250,000
Capital Projects
Outlay & Vehicles 50,000 50,000 50,000 50,000 50,000
Wastewater Treatment 376,000 483,000 453,000 1,105,000 0 Collections System 335,000 330,000 180,000 180,000 0
Industrial System 8,300,000 12,500,000 3,500,000 0 0
Working Capital/Bridge Financing 60,000 30,000 0 0 0
Debt Service Reserve 300,000 300,000 300,000 350,000 0
Subtotal Capital Projects 9,421,000 13,693,000 4,483,000 1,685,000 50,000 Total Expenses 10,542,000 14,860,000 5,800,000 4,461,000 2,887,000 Total Net Revenues (142,000) 392,000 659,000 (1,103,000) 669,000 ENDING FUND BALANCE 1,044,000 1,436,000 2,095,000 992,000 1,661,000 Operating Reserve Target [4] 280,300 291,800 329,300 1,631,500 1,646,800 Operating Reserve Target Met? yes yes yes no yes
SRF Debt Service Coverage (Target - 1.2x) [5] 1.47 1.58 Target Met? yes yes
1 - Estimated 07/01/2023 fund balance from 2023/24 Budget 2 - Revenues adjusted for Jan 1 implementation date
3 - 2023/24 Expenses from 2023/24 adopted Budget. 2024/25 onwards, operating expenses projected by City staff 4 - 25% of O&M plus debt service payment beginning in 2025/26 5 - Net operating revenues divided by total debt service City of Gonzales Page 31
Water and Sewer Utility Rate Study 2023
SECTION 6: SEWER COST ALLOCATION AND RATE DESIGN
The revenue requirements detailed in the previous section determine the amount of revenue to be recovered from sewer rates. The cost of service allocation determines how revenues will be recovered from customers based on their estimated impact on the sewer system. Proposition 218 requires that agencies providing “property-related services” (including sewer service) set rates and charges that are based on the cost of providing those services.

6.1 Sewer Cost Allocation
The determination of the sewer flows, sewer loadings, and the revenue requirements of the sewer utility provide the basis for performing the cost of service analysis. The concept of proportionate allocation to each customer class indicates that allocations should take into consideration the quantity of effluent a customer contributes in addition to the strength of sewer effluent.

The key factors used to assign sewer utility costs are estimated effluent (flow) going to the wastewater treatment plant and effluent strengths, measured in biochemical oxygen demand (BOD) and total suspended solids (TSS). Higher levels of BOD or TSS typically equate to increased treatment costs. The total revenue requirement shown in the sewer cash flow projection is the net cost of providing service and is allocated to the flow, BOD, and TSS parameters. These allocations are then used as the basis to develop unit rates for the sewer parameters and to assign costs to each customer class in proportion to the sewer services rendered.

Using the FY2023/24 budget as the base year, sewer expenses are allocated to the following categories (a) Customer Service, (b) Flow, (c) Biochemical Oxygen Demand (BOD), and (d) Total Suspended Solids (TSS).
 Customer Service Costs: Base costs represent the fixed expenditures of the sewer utility, including personnel costs and overhead expenses. These fixed costs are allocated based on the total number of sewer accounts or meters.
 Flow Costs: Volume- or flow-related costs that vary with the total quantity of wastewater collected. Because most agencies do not meter wastewater discharges, metered water consumption is used to estimate contributed average wastewater volume units of service.  Strength Costs: Strength-related costs are those expenditures associated with the additional handling and treatment of high strength sewer. Sewer strength is typically measured in BOD and TSS. Increased levels of BOD or TSS typically equate to increased treatment costs.

Table 21 provides the proposed cost allocation. The budgeted expenses were allocated to each category based on how the City incurs each cost. The overall proposed allocation is 11.2% to customer service,

49.6% to flow, 19.6% to BOD, and 19.6% to TSS.

City of Gonzales Page 32
Water and Sewer Utility Rate Study 2023

6.2 Sewer Rate Design
The cost of service analysis calculated the revenue requirements for each customer class. The next step is rate design which determines how those revenue requirements are collected from each class based on their estimated impact on the sewer system.

As part of the rate study process, the City reviewed its current rate structure and potential alternative rate structures. Sewer rates in California are typically charged as either a fixed charge per equivalent dwelling unit (EDU), a volume rate charged per unit of wastewater flow, or as a combination of both fixed and volume rates. Ultimately, this study recommends maintaining the current rate structure. The categories of charges and customer classes are proposed to remain the same, but the amounts charged to each customer will change each year. For residential customers, fixed sewer charges provide revenue stability, are easy for customers to understand and are straightforward to bill. Because sewer flow is not individually metered for non-industrial customers (only water service is), the sewer flow of each customer is not readily apparent and thus fixed charges are appropriate.

Table 21: Sewer Cost Allocation
City of Gonzales
Water and Sewer Utility Rate Study 2023
2023/24 Expense
Customer
Service Flow BOD TSS
Salaries and Benefits $412,000 15.0% 42.5% 21.3% 21.3%
Administrative Expenses $98,000 100.0% 0.0% 0.0% 0.0%
Supplies and Equipment $45,000 0.0% 50.0% 25.0% 25.0%
Outside Services $225,000 10.0% 45.0% 22.5% 22.5%
Chemicals $0 0.0% 0.0% 50.0% 50.0%
Utilities $160,000 0.0% 80.0% 10.0% 10.0%
Operating Costs $940,000 $182,300 $426,850 $165,425 $165,425

19.4% 45.4% 17.6% 17.6%
Transfers Out to Water $60,000 0.0% 50.0% 25.0% 25.0%
Transfers Out to Solar $121,000 0.0% 80.0% 10.0% 10.0%
$181,000 $0 $126,800 $27,100 $27,100
5-Year Average Debt Service $500,000 0.0% 50.0% 25.0% 25.0% Total Expenses $1,621,000 $182,300 $803,650 $317,525 $317,525 Proposed Cost Allocation % $100.0% 11.2% 49.6% 19.6% 19.6% City of Gonzales Page 33
Water and Sewer Utility Rate Study 2023

6.3 Sewer Flows
Total system flows and pollutant loads are estimated in Table 22. The average residential sewer flow is estimated as 205 gallons per day (gpd) for a single family home. 205 gpd is equivalent to 8.336 ccf per month. Total annual residential flows are estimated based on the number of residential accounts multiplied by 8.336 ccf less the 3 percent vacancy rate noted in the City’s 2019 Wastewater Master Plan prepared by Kimley Horn. Total flows for other customer classes are estimated based on data from the WWTP as well as water use data from 2021. Pollutant loads consist of biochemical oxygen demand (BOD) and total suspended solids (TSS). The strength factors and sewer loadings are based on data from the City’s WWTP.

Table 22: Flow and Loading
City of Gonzales
Water and Sewer Utility Rate Study 2023
Customer Class Total ADF (gallons) BOD (mg/L) TSS (mg/L) BOD
(lbs/yr)
TSS
(lbs/yr)
Residential 354,947 30% 299 163 323,068 176,121
Commercial 63,905 5% 299 163 58,165 31,709
Industrial 775,000 65% 299 163 705,394 384,546
Schools 6,148 1% 299 163 5,596 3,051
Total 1,200,000 99% 1,092,223 595,426

6.4 Rate Derivation
As noted in the cost allocation section, sewer rates are determined based on customer service costs as well as the amount of wastewater flow and pollutants flushed into the sewer system.

Total flow and pollutant loading estimates are used to derive unit costs for customer service, flow, BOD, and TSS as shown below in Table 23. The total revenue requirement to be collected from rates is divided between each category according to the percentages derived in the cost allocation (Table 21). The revenue requirement for each category is then divided by the number of billing units to calculate a unit charge.

City of Gonzales Page 34
Water and Sewer Utility Rate Study 2023
It is proposed that customer service costs be recovered through a fixed portion of the monthly bill that is applied to all customer classes. For commercial and industrial customers, the flow, BOD, and TSS costs are proposed to be recovered through a monthly volume rate per ccf similar to the current rate structure. For residential customers, a monthly flow charge is estimated based on existing average daily flows and added to the customer service portion of the bill to calculate a proposed fixed monthly charge, see Table 24. Schools are proposed to continue to be charged a fixed rate based on average daily attendance.

Table 24: Total Sewer Charges
City of Gonzales
Water and Sewer Utility Rate Study 2023
Customer Class Flow BOD TSS Total Cost per ccf
Residential $1.89 $0.7474 $0.7473 $3.39
Commercial $1.89 $0.7474 $0.7473 $3.39
Industrial $1.89 $0.7474 $0.7473 $3.39
Estimated
Monthly Flow
(ccf)
Flow
Charge
($/ccf)
Total Flow
Charge
Customer
Service
Fee
Total
Monthly
Charge
Residential 8.336 x $3.39 $28.26 $10.57 $38.83
Table 23: Unit Cost Calculation
City of Gonzales
Water and Sewer Utility Rate Study 2023
Cost Allocation Total Cust. Serv. Flow BOD TSS
Cost Allocation % 11.2% 49.6% 19.6% 19.6%
FY2023 Revenue Req [1] $2,234,000 $251,200 $1,107,600 $437,600 $437,600 Billing Units 1,980 585,561 1,092,223 595,426
# of accounts ccf/year lbs/year lbs/year
Rate $10.57 $1.8915 $0.4007 $0.7349
$/month $/ccf $/lb $/lb
1 - 12 months of revenue with proposed rate increases
City of Gonzales Page 35
Water and Sewer Utility Rate Study 2023
Current and proposed rates are provided below in Table 25. The proposed rates maintain the current rate structure. The table also provides the percentage change in each rate category for each year. The first year, the percentage change for each customer does not align with the percentage increase shown in the cash flow due to the reconfiguration of the cost allocation and the unit cost components used to calculate the rates. Following the first year, each customer’s monthly rate will increase as shown in the cash flow projection (Table 20).

Table 25: Current and Proposed Monthly Sewer Rates
City of Gonzales
Water and Sewer Utility Rate Study 2023
Proposed
Fixed Charge
($/account)
2023/24 2024/25 2025/26 2026/27 2027/28
Current Jan 1, 2024 Jan 1, 2024 Jan 1, 2025 Jan 1, 2026 Jan 1, 2027 Residential $31.77 $38.83 22.2% $46.60 20.0% $55.92 20.0% $59.28 6.0% $62.84 6.0% Commercial $15.18 $10.57 -30% $12.68 20.0% $15.22 20.0% $16.13 6.0% $17.10 6.0% Industrial $312.62 $10.57 -97% $12.68 20.0% $15.22 20.0% $16.13 6.0% $17.10 6.0% Schools $0.91 $1.04 14% $1.24 20.0% $1.49 20.0% $1.58 6.0% $1.67 6.0% Commercial & Industrial Volume Rate ($/ccf)
(in addition to
fixed charge) $2.40 $3.39 41% $4.06 20.0% $4.87 20.0% $5.16 6.0% $5.47 6.0% City of Gonzales Page 36
Water and Sewer Utility Rate Study 2023
Table 26 calculates the estimated annual sewer rate revenues the City would realize if the proposed 2023/24 rates from Table 25 were billed for 12 months. Estimated annual revenues under the existing rates are also provided for comparison. Compared with the current rates, the proposed rates would generate a larger percentage of total revenues from volume rate revenues from commercial and industrial customers. However, the total percentage of revenues generated from each customer class would remain roughly equal to the existing rate structure.

Table 26: Proposed Sewer Rate Revenue - January 1, 2024 Rates if billed 12 months City of Gonzales
Water and Sewer Utility Rate Study 2023
Proposed July 1, 2023 Rates
Customer
Class
# of
Accounts
Fixed
Monthly Fee
Fixed Annual
Revenues
% of
Total
Fixed Annual
Revenues % of Total
Residential 1,785 $38.83 $831,727 $680,513
Commercial 155 $10.57 $19,660 $28,235
Industrial 40 $10.57 $5,074 $150,058
1,980 $856,460 37.8% $858,806 46.1%
Customer
Class Flow GPD
Flow
CCF/year
Volume Rate Revenues
($3.33/ccf)
Residential 354,947 173,203 NA NA
Commercial 63,905 31,183 $105,594 $74,840
Industrial 775,000 378,175 $1,280,577 $907,620
1,193,852 582,561 $1,386,170 61.2% $982,461 52.8%
Fee per
Student
Schools 23,107 $1.04 $23,957 1.1% $21,028 1.1%
Students ADA Annualized
Total Rate Revenue $2,266,587 100.0% $1,862,294 100.0%
Total Revenue by Customer Class
Residential $831,727 36.7% $680,513 36.5%
Commercial $125,254 5.5% $103,075 5.5%
Industrial $1,285,650 56.7% $1,057,678 56.8%
Schools $23,957 1.1% $21,028 1.1%
$2,266,587 100.0% $1,862,294 100.0%
City of Gonzales Page 37
Water and Sewer Utility Rate Study 2023

6.5 Sewer Bill Impacts
Due to the updated cost of service allocation, the bill impacts to customers for the first year will vary based on customer class.

6.5.1 Residential Bill Impacts
Residential customers are proposed to have a bill increase from $31.77 per month to $38.83 per month, as shown in Figure 3. Figure 3 also shows the current monthly sewer bills of other local agencies. Despite the bill increase, the City’s monthly sewer rates would remain low compared to the surveyed agencies.

Figure 3: Monthly Single Family Residential Sewer Bill Survey

6.5.2 Commercial Bill Impacts
For FY2023/24, the bill impacts for commercial customers will depend on actual consumption. Table 27 includes a sample of commercial sewer bill impacts at different levels of monthly water use. Higher water users will have larger increases in their FY2023/24 monthly bills.

City of Gonzales Page 38
Water and Sewer Utility Rate Study 2023
Table 27: Sample Monthly Commercial Sewer Bill Impacts
City of Gonzales
Water and Sewer Utility Rate Study 2023
Monthly Current Proposed
Flow
(ccf) Bill
Jan 1,
2024
Jan 1,
2025
Jan 1,
2026
Jan 1,
2027
Jan 1,
2028
Commercial - 10 ccf
Flat Rate $14.41 $10.57 $12.68 $15.22 $16.13 $17.10
Volume Rate 10 $24.00 $33.86 $40.60 $48.70 $51.60 $54.70 Total Monthly Sewer Bill $38.41 $44.43 $53.28 $63.92 $67.73 $71.80 $ Change $6.02 $8.85 $10.64 $3.81 $4.07
% Change 15.7% 19.9% 20.0% 6.0% 6.0%
Commercial - 25 ccf
Flat Rate $14.41 $10.57 $12.68 $15.22 $16.13 $17.10
Volume Rate 25 $60.00 $84.66 $101.50 $121.75 $129.00 $136.75 Total Monthly Sewer Bill $74.41 $95.23 $114.18 $136.97 $145.13 $153.85 $ Change $20.82 $18.96 $22.79 $8.16 $8.72
% Change 28.0% 19.9% 20.0% 6.0% 6.0%
Commercial - 50 ccf
Flat Rate $14.41 $10.57 $12.68 $15.22 $16.13 $17.10
Volume Rate 50 $120.00 $169.31 $203.00 $243.50 $258.00 $273.50 Total Monthly Sewer Bill $134.41 $179.88 $215.68 $258.72 $274.13 $290.60 $ Change $45.47 $35.80 $43.04 $15.41 $16.47
% Change 33.8% 19.9% 20.0% 6.0% 6.0%
Commercial - 80 ccf
Flat Rate $14.41 $10.57 $12.68 $15.22 $16.13 $17.10
Volume Rate 80 $192.00 $270.90 $324.80 $389.60 $412.80 $437.60 Total Monthly Sewer Bill $206.41 $281.47 $337.48 $404.82 $428.93 $454.70 $ Change $75.06 $56.01 $67.34 $24.11 $25.77
% Change 36.4% 19.9% 20.0% 6.0% 6.0%

Gonzales City CouncilSeptember 18, 2023

Gonzales City Council
September 18, 2023