City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Utilities
Meeting Date: October 20, 2025
Report #:2505-4736
TITLE
PUBLIC HEARING: Finance Committee Recommends Adoption of Resolution Amending Five Rate Schedules Setting Forth Utility Connection Fees and Other Charges: Utilities Rate Schedule E-15 (Electric Service Connections), W-5 (Water Service Connections), G-5 (Gas Service Connections), S-5 (Sewer Service Connections) and C-1 (Utility Miscellaneous Charges); CEQA Status: Not a Project Under CEQA Guidelines Sections 15378(b)(4) and (5) and Exempt Under Section 15273(a)
RECOMMENDATION
The Finance Committee and staff recommend the City Council adopt a resolution (Attachment A) amending five utilities rate schedules that set forth charges for utility connection charges and service call fees, effective January 1, 2026, including an annual increase based on the California Construction Cost Index (CCCI) in fiscal years when a cost-of-service study is not performed:
a. E-15 (Electric Service Connection Charges),
b. W-5 (Water Service Connection Charges),
c. G-5 (Gas Service Connection Charges),
d. S-5 (Wastewater Service Connection Charges), and
a. C-1 (Utility Miscellaneous Charges).
EXECUTIVE SUMMARY
The Utilities Department has completed a comprehensive update of its service connection fees and service call charges for electric, gas, water, and wastewater services. The Finance Committee reviewed the revised fee schedules at its September 16, 2025 meeting and unanimously recommended City Council approval. These revised fees are designed to recover the full cost of installation, engineering, inspection, equipment, and labor for standard projects—including new installations, upgrades, relocations, and abandonments. Non-standard projects will continue requiring a customized work estimate prepared by the Engineering Divisions.
The last full cost-of-service study for electric and gas services was conducted in 2019 (Staff Report #103131), rates have not been changed since that time. Material costs, labor rates, off-hauling costs, and job complexity have increased substantially. As part of the 2025 update, staff modernized the cost model to improve accuracy and ensure scalability for future fee adjustments. Beginning in FY 2027, utility connection and service-related fees will be incorporated into the City’s municipal fee schedule for annual updates. In years without a formal cost-of-service study, adjustments will follow the California Construction Cost Index (CCCI) as published by the California Department of General Services (DGS) 2. These actions are intended to alleviate future large increases like the six-year updates recommended in this report.
While staff consistently seek out and implement cost-saving measures for electric, water, gas, and wastewater utility, the proposed increases to connection and service fees are essential to ensure proper cost recovery, uphold quality service, and promote fairness by aligning fees with the required work for customer utility services. Key drivers of the fee updates:
Increased labor costs and updated time estimates based on actual field data; Rising material costs and disposal expenses, particularly for sand, concrete, rock, and landfill haul-away;
Updated construction standards and regulatory compliance requirements; Addition of previously unaccounted services
BACKGROUND
Staff determines connection charges based on the costs of labor, materials, equipment, changes that impact the utility’s system requirements, street paving needs, meter costs (where applicable), and landfill disposal charges.
Connection and service-related costs are recovered via a single charge based on standard conditions, or a project-specific estimated charge based on unusual, non-standard field conditions. The standard connection fee is based on the typical engineering and construction labor costs, and material requirements for a standard utility service connection or upgrade.
Projects that do not qualify for a single charge are larger projects that may require modifications to the electric, water, gas, or wastewater distribution and collection system, and therefore involve more staff analysis of design, capacity and construction requirements. These non- standard projects require a customized cost estimate, prepared by engineering staff and approved by engineering managers.
ANALYSIS
The proposed connection and service call charges reflect changes in labor rates, material costs, and time required to complete the work. New items and services were also added to the rate 1 Council Meeting June 24, 2019, Item 34: https://www.cityofpaloalto.org/files/assets/public/v/1/agendas- minutes-reports/reports/city-manager-reports-cmrs/year-archive/2019/id-10313-mini-packet-61319.pdf 2 California Construction Cost Index by DGS website: https://www.dgs.ca.gov/RESD/Resources/Page-Content/Real- Estate-Services-Division-Resources-List-Folder/DGS-California-Construction-Cost-Index-CCCI schedule to cover additional scenarios, new standards, and changing conditions. A few services which are not common or have not been requested in the past several years are proposed to be removed from the rate schedule. If these instances arise, staff will prepare customized engineering estimates for non-standard projects to determine the appropriate charges for special requirements as needed.
Whenever possible, staff seek to implement cost-saving measures to mitigate the cost for the provision of these services. Examples include training in-house staff to perform minor saw- cutting and minor traffic control services instead of hiring contractors. Staff applies boring or drilling methods whenever possible instead of open trench, which is significantly more costly and disruptive. For electric, customers are allowed to contract for and install substructures which can help control project costs. For water, gas, and wastewater, the City reduces costs and disruption due to economies of scale by consolidating new services, laterals, meters, and abandonment under a single project.
Full description of connection fee changes can be found in attachments B-F. Outlined below are revisions to the new connection fees and to the more frequently utilized existing fees.
Rate Schedule E-15 (Electric Service Connection Charge) - (Table 1 and Attachment B): The updated electric connection fees reflect increased labor hours—particularly for underground installations and larger service panels—along with higher material costs and inflationary changes since 2019. Schedule E-15’s fees recover the cost of labor and material necessary to affect the customer’s request for new or upgraded electric services. Electric service connection charges increased ranging from -10.9% to 278.8% . Temporary power fees decreased due to fewer hours being required of typical5 temporary power services.
Table 1 - Summary of Electric Common Connection Fee Changes Type of Service Current Proposed Changes (%)
Underground 200 Amps, Single-Phase $1,040 $3,940 278.8% Underground 400 Amps, Single-Phase N/A $4,360 NEW
Overhead 200 Amps, Single-Phase $1,040 $2,910 179.8%
Overhead 400 Amps, Single-Phase N/A $3,540 NEW
Temporary Power - Overhead 200A or less $1,190 $1,040 -12.6% Temporary Power - Underground 200A or less $1,190 $1,060 -10.9% Rate Schedule G-5 (Gas Service Connection Charges) - (Table 2 and Attachment C): Revised gas service fees account for higher labor rates, longer installation times, traffic control requirements, and increased material costs such as concrete, pipe fittings, and imported backfill. New charges have been added for service abandonments and plan reviews for non- 5 The updated fee is applicable to 200 amp single-phase temporary power services within 50-feet of a suitable secondary system (having adequate size and capacity to serve the temporary load). Larger temporary services, a specific engineering estimate will be developed to recover the City’s cost to provide these services. electrification projects. On average, gas fees increased 35% over the past six years, or an average of 5.3% annually. For qualified electrification projects, customers may receive a refund for their gas service demolition from Gas Cap and Trade funds.
Table 2 – Summary of Common Gas Service Connection Fees Type of Service Current Proposed Changes
(%)
Plan review for new/remodel commercial building $2,557 $3,536 38% Install 1" PE gas service connection (directionally bored) $5,892 $8,636 47% Additional pipe for new gas svc 1"-2" $52/ft $69/ft 34% Gas service pe riser relocation $1,920 $2,791 45%
Additional gas meter (up to 630) with existing svc $1,412 $1,585 12% 400 cfh gas meter charge installation $1,191 $1,457 22% 630 cfh gas meter charge installation $1,602 $1,969 23% Demolition of gas services 1”-2” N/A $6,092 New
Rate Schedule W-5 (Water Service Connection Charges) - (Table 3 and Attachment D): The revised water connection and meter installation fees reflect increased labor and material costs, extended installation durations, and enhanced engineering requirements and updated construction standards. New commercial and residential utility installation and abandonment fees are being added, including commercial 3” water meter installation, 1” and 2” copper water service installation, and plan review for new or remodel single family residence.
Table 3 – Summary of Common Water Service Connection Fees Type of Service Current Proposed Changes (%)
Plan review for new /remodel single family residence N/A $635 NEW Plan review for new/remodel commercial building $3,369 $4,653 38% 1” Copper water service N/A $10,773 NEW
2” Copper water service N/A $11,965 NEW
Install 2" water service connection $7,671 $12,236 60%
Install 8" water service connection $13,170 $19,482 48% 1" water meter installation charge $1,002 $1,318 32%
2" water meter installation charge $1,945 $2,726 40%
3” water meter installation charge N/A $4,478 NEW
Additional 2 water meter manifold 1"-2" service $868 $1,037 19% Abandonment of 3/4"-2" water service $3,341 $6,593 97%
Abandonment of 3"-8" water service $4,439 $8,991 103%
Rate Schedule S-5 (Wastewater Service Connection Charges) - (Table 4 and Attachment E):
Wastewater connection fees have increased more than the other utilities due to deeper excavation needs, additional labor hours, and higher haul-away costs. New fees have been introduced for core drilling and manhole connections, along with updated inspection charges. A new core drilling and manhole connection fee is added to ensure the City’s manholes are not damaged when new connections are needed.
Table 4 - Summary of Common Wastewater Service Connection Fees Type of Service Current Proposed Changes (%)
Plan review for new/remodel commercial building $2,547 $3,520 38% Install 4" sewer lateral depth at6' and below $8,559 $15,615 82% Install 6" sewer lateral depth at 6' and below $9,846 $17,478 78% Rehabilitate existing 4" to 6" sewer lateral $5,861 $9,694 65% Abandonment of 4" or 6" lateral $3,261 $5,142 58%
Eng/inspection sewer lateral installation by other $2,564 $3,508 37% Eng/inspection abandon sewer lateral by other $1,603 $2,192 37% Core drill and manhole connection 8” shallow N/A $5,488 NEW Core drill and manhole connection 8” deep N/A $6,435 NEW Utility Miscellaneous Charges (Utility Rate Schedule C-1) - (Attachment F)” Updates to Service charges: Utility Rate Schedule C-1 covers flat rate charges for service calls related to service disconnection and restoration for non-payment, plus standalone engineering and inspection services. Utility hourly labor rates have been revised to reflect updated labor, benefits and overhead costs. The proposed C-1 hourly labor rate is increasing by 36% (an average increase of 6% annually) from $152 to $207 for miscellaneous services during regular business hours.
Equipment charges: These charges recover costs associated with vehicles and equipment used during the repair resulting from third-party damage, or other work performed at the request of the customer. Staff recommends applying the Caltrans Equipment Rental Rates and Labor Surcharge schedule7 for equal or comparable City equipment. These equipment rental fees would help offset the expenses for service and maintenance, which have not been previously billed.
Commonly used equipment involved includes the FSR Van, Service Truck, Backhoe, Dump Truck, and Hydro Excavator.
New cross-connection fees (Table 5): Staff recommends implementing non-compliance, inspection, and testing charges related to the City's Cross-Connection Control Program 8. This program is mandated by the California Health and Safety Code and the State's newly adopted Cross-Connection Control Policy. The proposed fees are intended to offset the labor and administrative costs associated with managing non-compliance, including field inspections, 7 Caltrans Equipment Rental Rates website: https://dot.ca.gov/programs/construction/equipment-rental-rates- and-labor-surcharge
8 Currently, the City oversees over 4,674 backflow prevention devices, which increases monthly. There are 334 non-compliant units, including 68 that have been out of compliance for over three years. testing, reporting, scheduling, and collections. These charges would apply only when the City must take additional action due to a customer’s failure to meet program requirements—such as missing testing deadlines, failing to submit passing test results, or not responding to official notices. In cases where customers fail to respond to multiple notices, requiring site inspections, City-initiated testing, and internal coordination, the total labor cost can reach approximately $735.56 per incident. The proposed fees aim to recover a portion of these costs while balancing fiscal responsibility and affordability for customers. The City's approach reflects a cost-of-service model that aligns with regulatory expectations and industry standards while prioritizing equity for compliant customers and supporting the long-term viability of the Cross-Connection Control Program.
Table 5 – Summary of proposed cross-connection non-compliance fees New Cross-Connection Control Non-Compliance Fees Per Unit
1. Delinquency Backflow Non-compliance Administration & Processing Fee $57.00
2. Test/certify 1/2”- 16" Reduced Pressure Principal Assemblies (RPPA); Double Check Valve Assemblies (DC); and Pressure Vacuum Breaker Assemblies (PVB) $310.00
3. Test/certify 2"- 16” Fire Service Reduced Pressure Principal Detector Assemblies (RPDA); Double Check Detector Assemblies (DCDA) $517.50
FISCAL/RESOURCE IMPACT
Based on the proposed connection fee and service charge changes and average number of customer service orders in prior years, below is a table of estimated annual (12 month) cost recovery and percentage increase of total connection fee revenues per rate schedule. Staff will monitor activity and bring forward budget adjustments as necessary.
Annual increases to applicable fees and charges will be based on the California Construction Cost Index (CCCI) as published by Department of General Services (DGS), in years without a formal cost-of-service study. CCCI-based automatic increases for applicable fees and charges will be effective annually on July 1st. Staff anticipates adding all utilities connection fees to the municipal fee schedule beginning in FY 2027.
Staff was unable to identify comparable connection fee charges from other publicly owned utilities and investor- owned utilities. Most of the agencies did not list standard connection fees Rate Schedules Number of fees
Expected Cost
Recovery
Percentage Increase of
Total Customer
Connection Revenue
E-15 (Electric) 6 $190,000 8%
G-5 (Gas) 42 $196,000 31%
W-5 (Water) 40 $668,000 45%
S-5 (Sewer) 20 $169,000 29%
2019 Hourly Rate Proposed Hourly Rate
C-1 (Misc.) 14 $152 $207
because they charge individually for each connection. Some agencies provided standard connection fees but those fees were for material only. The fees and charges set by the Utilities Department includes labor, materials, off-hauling, and overhead charges. Setting these fees for standard activities provides greater transparency for customers planning infrastructure changes compared with relying on individual charge calculations per project.
STAKEHOLDER ENGAGEMENT
Public Noticing
Staff developed the proposed charges in accordance with the Mitigation Fee Act (California Government Code Section 66000 – 66008), which governs water and wastewater utility connection and capacity charges. The Act sets forth notice and hearing procedures and requires that charges be cost-based. Although the City’s gas and electric connection fees and service call charges are not covered by the Act, the City has followed its procedural and substantive requirements with respect to these cost-based fees, for transparency and ease of administration.
Government Code 66016 requires that prior to levying a new or increased fee or service charge; the City Council must hold at least one public meeting to listen to any oral or written presentations of the charges. Following the Finance Committee’s review and recommendation to Council, Council will consider approval of these revised utilities connection charges and service fees. The requested effective date of January 1, 2026 will be more than 60 days after any Council action.
The Finance Committee reviewed staff’s proposals for the Utilities connections fee and service charge changes at its September 1, 2025 meeting and the Finance Committee unanimously approved the five rate schedules. The Finance Committee asked for further details of the large percentage increases in the electric connection fee schedule. Staff performed a detailed cost analysis of the rate structure and realized there were functions such as permit review and inspection services which were unaccounted for in the prior rate schedule. The increase in the number of labor hours for existing and unaccounted staff functions plus the increase in the C-1 hourly rate of $152 to $207 were the primary reasons for the electric connection fee increases.
Staff also noted the standard connection fees for the electric utility represents a smaller subset or 8% of total connection fee revenues compared to water-gas-wastewater connection fees. The majority of the electric connection fees are based on engineering estimates. The Finance Committee asked about the risk of the 402 non-compliant cross connections throughout the City.
Staff is monitoring these non-compliant cases and acknowledged the risk is minimal. The new cross connection fees will enable staff and customer to bring some of these cases into compliance.
ENVIRONMENTAL REVIEW
The adoption of a resolution amending charges set forth in Utility Rate Schedule E-15, W-5, S-5, and G-5 to meet operating expenses and provide service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the staff report and all attachments presented to Council, the Council incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption.
ATTACHMENTS
Attachment A: Resolution
Attachment B: Rate Schedule E-15_effective_2026-01-01_redline Attachment C: Rate Schedule G-5_effective_2026-01-01_redline Attachment D: Rate Schedule W-5_effective_2065-01-01_redline Attachment E: Rate Schedule S-5_effective_2026-01-01_redline Attachment F: Rate Schedule C-1_effective_2026-01-01_redline APPROVED BY:
Alan Kurotori, Utilities Director
Staff: Anna Vuong, Senior Business Analyst