San Luis Obispo City Council
June 6, 2023

Table of Contents ii
City of San Luis Obispo – Water Rate Study
4 Development of the Cost of Service Analysis

4.1 Objectives of a Cost of Service Study ....................................................................23

4.2 Determining the Customer Classes of Service ......................................................23

4.3 General Cost of Service Procedures......................................................................24

4.4 Development of Distribution Factors....................................................................25

4.5 Functionalization and Allocation of Plant in Service.............................................27

4.6 Functionalization and Allocation of Operating Expenses .....................................29

4.7 Major Assumptions of the Cost of Service Study..................................................29

4.8 Development of Cost-Based Water Rates.............................................................29

4.9 Development of the Unit Costs for Rate Designs..................................................32

4.10 Summary Results of the Cost of Service Analysis..................................................37

4.11 Consult’s Conclusions and Recommendations......................................................37

4.12 Summary of the Cost of Service Analysis..............................................................38 5 Development of the Rate Designs

5.1 Rate Design Criteria and Considerations...............................................................38

5.2 Overview of the Proposed Rate Structures...........................................................39

5.3 Summary of the Present and Proposed Water Rates...........................................40

5.4 Water Rate Study Recommendations...................................................................43

5.5 Summary of the Water Rate Study .......................................................................43 6 Water Technical Appendix

Executive Summary 1
City of San Luis Obispo – Water Rate Study
Introduction
HDR was retained by the City of San Luis Obispo (City) to conduct a water rate study (Study). The objective of the Study was to review the City’s water utility operating and capital costs in order to develop proposed water rates which are set in a proportional manner for the City’s water customers. The Study determined the adequacy of the existing water rates and provides the framework for cost-based and proportional proposed water rates.

The City owns and operates a water treatment, transmission, and distribution system. The costs associated with providing water supply, plus the costs of distributing water to customers served by the system has been developed based on City provided information and included within the development of the proposed water rates.

Overview of the Rate Study Process
A comprehensive water rate study uses three interrelated analyses to address the adequacy and proportionality of a utility’s rates. These three analyses are a revenue requirement analysis, a cost of service analysis, and a rate design analysis. These three analyses are illustrated below in Figure ES - 1.

Figure ES – 1
Overview of the Water Rate Analyses
The above framework for reviewing and evaluating the City’s water rates was utilized in the development of the comprehensive water rate study.

Revenue Requirement Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses of
the utility to determine the overall level of
rate adjustment required.

Distributes the revenue requirement to the
customer classes of service in a proportional
manner.

Considers both the revenue requirement
and cost of service results to develop the
proposed water rates.

Executive Summary

Executive Summary 2
City of San Luis Obispo – Water Rate Study
Key Water Rate Study Results
The technical analysis for the City’s water rate study was developed based on the operating and capital infrastructure costs necessary to provide water service to the City’s customers. The City’s comprehensive water rate study resulted in the following key findings, conclusions, and recommendations:
 The City’s FY 2022-23 budget was used as the starting point of the analysis  A revenue requirement analysis was developed for the projected period of FY 2023-24 through FY 2032-33
 The rate setting period for the Study was FY 2023-24 and FY 2024-25  Operation and maintenance expenses are projected to increase at inflationary levels  Additional staffing was included in FY 2023-24 to support water operations  Projected customer consumption levels have been developed based on recent customer consumption characteristics
 The proposed annual water rate (revenue) adjustments are 7.5% in FY 2023-24 and 7.5% in FY 2024-25
 A cost of service analysis was developed to proportionally distribute the revenue requirement between the City’s customer classes of service (i.e., rate schedules)  The results of the cost of service analysis provided average unit costs (i.e., cost-based rates) which were used to establish the final proposed water rates  The Study has proposed proportional and cost-based water rates by customer class of service (rate schedules)
Summary of the Water Revenue Requirement Analysis
A revenue requirement analysis is the first analytical step in the development of the water rate study. This analysis determines the overall adequacy of the City’s current water rate revenues.

From this analysis, a determination can be made as to the overall level of water rate revenue adjustments needed to provide adequate and prudent funding for both operating and capital infrastructure needs.

For the City’s Study, the revenue requirement was developed for FY 2022-23 to FY 2032-33. For purposes of establishing proposed water rates, and the Proposition 218 process, the rate setting period was identified as FY 2023-24 and FY 2024-25. Reviewing a multi-year time frame is recommended to better anticipate future financial requirements and allow the City to begin planning for these impacts sooner, thereby minimizing short-term rate impacts and overall longterm rates. The revenue requirement analysis was developed on a “cash basis” methodology (i.e., approach). The cash basis approach is the most commonly used methodology by municipal utilities to set their revenue requirement and it includes the cost components of annual O&M expenses, annual debt service payments, capital projects funded from rates(rate funded capital), and reserve funding. The primary financial inputs in the development of the City’s water revenue requirement analysis were the City’s FY 2022-23 budget, billed customer and consumption data, and the current water capital improvement plan. The O&M budget was then projected using assumed escalation (inflationary) factors from the City’s fund analysis. In addition to the O&M

Executive Summary 3
City of San Luis Obispo – Water Rate Study
budget, changes and additions to budgetary levels were made to reflect known changes that will occur in the future. Specifically, new (additional) staff is assumed in FY 2023-24 at an initial annual cost of $137,000.

Once the operating and maintenance (O&M) expenses have been projected, the next step is to develop the capital improvement funding plan. The proper and adequate funding of capital projects is important to maintain the City’s existing water infrastructure and service levels. At the same time, it is important to create a funding plan which maximizes the amount of funds available while attempting to minimize ratesimpacts over time by using an appropriate blend of long-term borrowing and rate funding. A general financial guideline states that, at a minimum, a utility should fund from user rates an amount equal to or greater than the utility’s annual depreciation expense. However, this level of funding is typically not sufficient to reflect replacement costs or fund all planned capital projects, but rather, is intended to provide a consistent annual funding source for the City’s existing infrastructure. Using annual depreciation expense as a financial guideline, the City’s annual water utility depreciation expense was approximately $2.9 million in FY 2022-23. Within the City’s proposed capital funding plan, the City is projected to annually fund through rates $2.8 million in FY 2022-23 increasing to $8.7 million by FY 2032-33 and averages $5.7 million per year over the period. It is assumed that, in addition to the rate funded capital improvements, the City will also need to utilize other funding sources (i.e., long-term debt, reserves), in order to fully fund the water utility’s planned capital projects over this time period.

Provided below in Table ES - 1 is a summary of the capital improvement funding plan over the review period (FY 2022-23 through FY 2027-28).

Table ES – 1
Summary of the Capital Improvement Plan ($000)
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 Total Capital Improvements $15,006 $7,182 $5,643 $13,090 $6,560 $6,922 Less: Outside Funding $12,176 $4,262 $2,418 $8,610 $1,410 $782 Rate Funded Capital $2,830 $2,920 $3,225 $4,480 $5,150 $6,140 As can be seen, the difference between annual capital improvement needs and rate funded capital is being funded through other funding sources. The City’s capital plan reflects the capital projects needed to maintain the existing system, repair or replace deteriorating infrastructure, and projects related to growth or redundancy. A more detailed discussion of the development of the capital improvement funding plan is provided in Section 3. The detailed capital improvement plan can be found on Exhibit 4 of the Technical Appendix.

The revenue requirement analysis for the City’s water system was developed to determine the rate projections based on the specific costs of the City’s water utility. Provided below, in Table ES – 2, is a summary of the revenue requirement analysis developed for the water utility. A more detailed analysis of the revenue requirements can be found in Section 3 of this report as well as in the Technical Appendix in Exhibit 3.

Executive Summary 4
City of San Luis Obispo – Water Rate Study
Table ES - 2
Summary of the Revenue Requirement Analysis ($000)
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 Revenues
Rate Revenues $22,680 $22,861 $23,044 $23,229 $23,414 $23,602 Misc. Revenues 3,798 3,295 2,680 2,781 2,983 3,093
Total Revenues $26,478 $26,156 $25,724 $26,009 $26,397 $26,695 Expenses
O & M $21,319 $23,684 $24,854 $25,956 $26,671 $27,426
Net Debt Service 2,043 1,470 1,469 1,466 1,838 1,837
Rate Funded Capital 2,830 2,920 3,225 4,480 5,150 6,140 Reserve Funding 287 26 10 4 3 7
Total Expenses $26,478 $28,100 $29,558 $31,906 $33,662 $35,410 Bal./(Def.) of Funds $0 ($1,943) ($3,834) ($5,897) ($7,265) ($8,715) Bal. as a % of Rate Rev. 0.0% 8.5% 16.6% 25.4% 31.0% 36.9% Proposed Rate Adj. 0.0% 8.5% 7.5% 7.5% 4.5% 4.5%
Add’l Rev. from Rate Adj. $0 $1,943 $3,834 $5,897 $7,265 $8,715 Total Bal./(Def.) of Funds $0 $0 $0 $0 $0 $0
* Table may not foot due to rounding
As can be seen, the revenue requirement analysis has summed O&M, net debt service (debt service less funding through development impact fees), rate funded capital, and reserve funding.

The total revenue requirement (i.e., expenses) are then compared to the total revenues of the City’s water utility. Total revenues are comprised of rate revenues (at present rate levels), and other miscellaneous revenues. From this comparison, a balance (+) or deficiency (-) of funds can be determined in each year. This balance or deficiency of funds is then compared to the rate revenues to determine the percentage level of rate revenue adjustment necessary to meet the revenue requirement as developed in each year of the projected time period. It is important to note, the “Bal./(Def.) of Funds” row is cumulative. Any adjustments in the initial years will reduce the deficiency in the later years. Over the period, and assuming no rate adjustments in the prior years, the total deficiency of rates by FY 2027-28 is 36.9%. To meet the overall revenue needs of the water utility, annual rate adjustments have been proposed (see blue band).

Based on the revenue requirement analysis developed, HDR has concluded that the City will need to adjust the level of water rate revenues as noted above to fund their projected operating and capital infrastructure needs and maintain cost-based water rates. HDR has reached this conclusion and recommendations:
 The revenue requirement analysis indicates an overall deficiency in rate revenues of

36.9% by FY 2027-28
 Propose adjusting rates by 8.5% in FY 2023-24 and 7.5% in FY 2024-25 through the rate setting process outlined in Prop 218

Executive Summary 5
City of San Luis Obispo – Water Rate Study
 Given the projected revenue deficiencies, rate adjustments are necessary to fully fund the City’s projected operating costs and fund the proposed capital improvement plan  The proposed rate revenue adjustments maintain the City’s financial health and integrity by providing consistent, long-term, and sustainable funding levels  Prior to the implementation of the second adjustment (FY 2024-25), the City should complete a comprehensive review of the water rates
In reaching this conclusion, HDR would recommend that the City adopt the proposed rate revenue adjustments in FY 2023-24 and FY 2024-25 to provide sufficient funding for the projected operating and capital needs of the water utility. A detailed discussion of the development of the revenue requirement analysis can be found in Section 3 of this report. Technical exhibits of the revenue requirement analysis have been included within the Technical Appendix in Exhibits 1 -

5. Summary of the Water Cost of Service Analysis
A cost of service analysis determines the proportional distribution of the revenue requirement to the City’s water customer classes of service. The objective of the cost of service analysis is different from determining the revenue requirement analysis. A revenue requirement analysis determines the utility’s overall financial needs whereas the cost of service analysis determines the proportional manner to collect the revenue requirement from each customer class of service.

The cost of service analysis developed as a part of the Study utilized generally accepted cost of service principles and industry standard methodologies as defined by the American Water Works Association (AWWA) to meet the requirements of Proposition 218.

In summary form, the cost of service analysis began by functionalizing the City’s revenue requirement. The functionalized revenue requirement was then allocated to the appropriate cost components (e.g., commodity-related, capacity-related, customer-related, fire protectionrelated). The individual allocation totals were then proportionally distributed to the water customer classes of service (e.g., rate schedules) based on distribution factors. The distributed expenses for each customer class were then aggregated to determine each customer class’s overall revenue responsibility. Table ES - 3 provides the summary of the cost of service analysis for the FY 2023-24 test year.

Table ES - 3
Summary of the Cost of Service Analysis ($000)
Class of Service
Present
Revenues
Distributed
Costs
$
Difference
%
Difference
Residential $11,042 $12,602 ($1,560) 14.1%
Multi-Family 3,879 4,399 ($521) 13.4%
Non-Residential 5,450 5,702 ($252) 4.6%
Irrigation 2,491 2,102 $389 -15.6%
Total $22,861 $24,805 ($1,943) 8.5%

Executive Summary 6
City of San Luis Obispo – Water Rate Study
The cost of service analysis distributes a proportional share of the revenue requirement to each customer class of service based on their respective usage characteristics (e.g., average day use, peak day use, customer) on the water system and the facilities required to provide service. The results of the analysis indicate that cost differences exist between the customer classes of service. It is important to understand that a cost of service analysis is based on a review of a specific point in time and that costs and customer usage characteristics changes over time, thus impacting the results.

The City’s cost of service analysis and resulting proposed water rates have been developed to meet the legal requirements of California constitution article XIII D, section 6 (Article XIII D), also known as Proposition 218. A major component of Article XIII D is the development of rates which reflect the cost of providing service and the proportional distribution of the costs between the customer classes of service. A key outcome of the cost of service analysis are the cost-based average unit costs (e.g., $/customer/month or $/hundred cubic feet [CCF]). Average unit costs from the cost of service analysis provide the cost-basis for the development of the City’s proposed water rates based on the cost of service results. Provided below in Table ES - 4 is a summary of the average unit costs derived in the cost of service analysis that were used to develop the City’s proposed water rate designs by customer class (e.g., rate schedule).

Table ES – 4
Summary of the Average Unit Costs
Residential Multi-Family Non-Residential Irrigation
Fixed - $ / mtr / mo $28.15 $28.15 $28.15 $28.15
Variable - $/CCF
Tier 1 $7.94 -- -- --
Tier 2 9.16 -- -- --
Tier 3 15.79 -- -- --
All Use -- $8.91 $9.43 $9.63
Section 4 of this report provides a detailed discussion of the cost of service analysis conducted for the City’s water utility and the development of the average unit costs shown in Table ES – 4.

The Technical Appendix to this report contains additional details associated with the cost of service analysis calculation and can be found on Exhibits 6 - 17.

Summary of the Water Rate Design
The final step of the comprehensive water rate study process is the design of the City’s proposed water rates to collect the required level of revenue, based on the results of the revenue requirement and cost of service analyses. The revenue requirement analysis provided a set of recommendations related to the level of annual rate revenue adjustments, or the level of total rate revenues necessary to provide sufficient funding. The cost of service analysis provided the

Executive Summary 7
City of San Luis Obispo – Water Rate Study
basis for how those costs should be proportionally collected from each of the customer classes of service (e.g., rate schedules).

As discussed above, the City’s proposed water rates have been developed with the intent of meeting the legal requirements of California constitution article XIII D, section 6 (Article XIII D).

While Article XIII D requires the development of cost-based rates, it does not prescribe a specific approach or methodology to assure meeting this legal requirement. At the same time, HDR would point out that there is no single methodology for equitably assigning costs to the various customer groups. Consequently, HDR has developed this report, along with the City’s proposed water rates, based on the principles and methodologies contained in the AWWA M1 manual, while tailoring the methodology to the City’s specific and unique system and customer characteristics, and requirements of Article XIII D (Proposition 218). HDR is of the opinion this approach meetsthe requirements of Article XIII D to provide an administrative record of the steps taken to establish the City’s water rates. HDR reaches this conclusion based upon the following:
 The revenue derived from water rates does not exceed the funds required to provide the property related service (i.e., water service). The proposed water rates are designed to collect the overall revenue requirement of the City’s water utility.  The revenues derived from water rates shall not be used for any purpose other than that for which the fee or charge is imposed. The revenues derived from the City’s water rates are used exclusively to operate and maintain the City’s water system.  The amount of a fee or charge imposed upon a parcel or person as an incident of property ownership shall not exceed the proportional costs of the service attributable to the parcel.

Section 4 of the Study, the cost of service analysis, focuses exclusively on the issue of the proportional assignment of costs to each customer class of service. The proposed rates have appropriately grouped customers into customer classes of service (single family, multi-family, non-residential, irrigation) that reflect the varying consumption patterns and system requirements of each customer class of service. The grouping of customers and rates into these classes of service creates the proportionality required under Article XIII D by having differing rates by customer classes of service which reflect both the level of revenue to be collected by the utility, but also the manner in which these costs are incurred and proportionally distributed to the customer classes of service based upon their proportional impacts and burdens on City’s the water system and water resources.

Given the requirements to develop water rates based on cost of service principles, the average unit costs in Table ES – 4 were used to design the proposed water rates for the City’s customer classes of service.

The City currently has four customer classes of service: Residential, Multi-Family, NonResidential, and Irrigation. The present residential rate structure includes a fixed monthly meter charge and a three-tier increasing block consumption charge. The first tier is usage from 0 to 5 CCF1 per month, the second tier is usage from 5 to 12 CCF, and All consumption over the second 1 A hundred cubic feet of water, or a CCF of water, is equal to 748 gallons of water

Executive Summary 8
City of San Luis Obispo – Water Rate Study
tier (i.e., > 12 CCF) is charged at a higher rate which reflects the increased costs associated with providing the additional capacity needed during peak use periods. As part of the Study, the tier sizes (e.g., amount of consumption in each tier) and residential consumption characteristics were reviewed and incorporated into the cost of service analysis. Section 5 of this report provides a more detailed discussion of the consumption analysis.

Currently, multi-family, non-residential, and irrigation customer groups utilize the same rate structure with a fixed meter charge by meter size, which is the same for all classes, and a uniform consumption charge that is unique rate for each customer class. The proposed rates for all customer classes are based on the results of the average unit costs shown in Table ES – 4 for FY 2023-24. Given the cost of service adjustments proposed in FY 2023-24, the proposed rates for FY 2024-25 were adjusted “across the board” based on the overall revenue adjustment as outlined in the revenue requirement analysis. Provided below in Table ES - 5 is a summary of the present and proposed water rates for the two-year rate setting period.

Table ES - 5
Summary of the Present and Proposed Water Rates
Present
Rate FY 2023-24 FY 2024-25
Fixed Charge $/Meter/Mo
3/4" & Less (Residential) $24.12 $28.15 $30.25
1" 40.28 47.00 50.50
1 1/2" 80.38 93.75 100.80
2" 128.61 150.05 161.30
3" 241.31 281.50 302.60
4" 402.24 469.25 504.45
6" 804.30 938.25 1,008.60
8" 1,286.92 1,501.25 1,613.85
Consumption Charge $ / CCF
Residential
0 – 5 CCF $6.90 $7.94 $8.54
5 – 12 CCF 8.04 9.16 9.84
12 CCF + 14.74 15.79 16.97
Multi-Family $7.88 $8.91 $9.58
Non-Residential $9.57 $9.43 $10.14
Irrigation $11.73 $9.63 $10.35
As can be seen, the proposed water rates contain minor changes to the rate levels for each customer class. In addition, each customer class has a specific rate based on the results of the cost of service analysis. As noted, the cost of service average unit costs is the basis for both the fixed monthly meter charges and consumption charges. In this way, the proposed rates reflect

Executive Summary 9
City of San Luis Obispo – Water Rate Study
the results of the revenue requirement analysis (overall system revenue needs) and cost of service analysis (proportional distribution / average unit costs).

Section 5 of this report provides a detailed discussion of the current and proposed water rates along with a component by component summary of the proposed water rates for FY 2023-24 and FY 2024-25.

Water Rate Study Recommendations
Based on the results of the water rate study, HDR recommends the following:
 Rate revenue adjustments are necessary to prudently fund operating expenses and necessary capital investment in renewal and replacement of the existing system  Water rate revenues should be adjusted 8.5% in FY 2023-24 and 7.5% in FY 2024-25  The City’s proposed water rates reflect the results of the cost of service analysis. The average unit costs derived from the cost of service analysis, and the basis for the City’s proposed water rates, reflect the proportional distribution of costs to the customer classes of service
 Prior to the implementation of the proposed set of rate adjustments the City should complete an update to the water rate study
Summary of the Water Rate Study
This completes the summary discussion of the development of the comprehensive rate study conducted for the City’s water utility. The focus of the Study has been the prudent and adequate funding of the annual water utility operation and maintenance expenses and capital funding needs. Furthermore, to meet the requirements of Proposition 218, the proposed water rates were developed based on the proportional distribution of costs through the cost of service analysis. A full and complete discussion of the development of the City’s comprehensive water rate study can be found in following sections of this report.

Introduction & Overview 10
City of San Luis Obispo – Water Rate Study
1 Introduction & Overview
HDR Engineering, Inc. (HDR) was retained by the City of San Luis Obispo (City) to conduct a comprehensive water rate study. The objective of a comprehensive water rate study is to develop proportional and cost-based water rates which are compliant with the requirements of Proposition 218. This is accomplished by first reviewing and analyzing the City’s water operating and capital costs and developing a projection of the overall revenue requirement of the water utility. Next, the City’s revenue requirement is proportionally distributed to the City’s customer classes of service (e.g., residential, multi-family, non-residential, irrigation). The findings and conclusions from the cost of service analysis are then used to develop the City’s proposed water rates which are reflective of how the City incurs costs to provide the water service to each class of service. The result of the comprehensive water rate study process is proportional water rates reflective of the water utility specific costs (i.e., cost-based rates).

The City owns and operates a water supply, treatment, transmission, and distribution system.

The determination of the total costs associated with providing water supply, treatment, transmission, and distribution of water to the City’s customers has been developed based on the City’s accounting, operating, and customer billing records along with other City specific information.

1.1 Goals and Objectives
The City had several key objectives in developing the water rate study. These key goals and objectives provide a framework for the technical analysis and policy decisions that are a part of this study. The City’s key goals and objectives for this study were as follows:
 Develop the study in a manner consistent with the principles and methodologies established by the American Water Works Association (AWWA), M1 Manual, Principles of Water Rates, Fees, and Charges to meet the requirement of Proposition 218  In financial planning and establishing the City’s proposed rates, review and utilize best industry practices, while recognizing and acknowledging the specific and unique characteristics of the City’s system and customers
 Utilizing generally accepted rate making methodologies review the City’s costs to determine the adequacy and equity of the water utility’s rates
 Meet the City’s financial planning criteria as it relates to legally required debt service coverage (DSC) ratios, adequate funding of capital infrastructure, and maintenance of adequate and prudent reserve levels
 Develop a final proposed rate transition plan which adequately supports the utility’s funding requirements, while attempting to minimize overall impacts to rates  Provide proposed water rates designed to meet the intent and legal requirements of California Constitution article XIII D, section 6 (commonly referred to as Proposition 218)

Introduction & Overview 11
City of San Luis Obispo – Water Rate Study

1.2 Overview of the Rate Study Process
The City’s water rates must be set at a level where the operating and capital expenses are met with the revenues received from customers. This is an important point, as failure to achieve this objective may lead to insufficient funds to maintain system integrity. To evaluate the adequacy of a utility’s existing rates, a comprehensive water rate study is often performed. A comprehensive water rate study consists of three interrelated analyses. Figure 1 - 1 below provides an overview of these analyses.

Figure 1 – 1
Overview of the Comprehensive Water Rate Analyses
The above framework was utilized for reviewing and evaluating the City’s water rates.

1.3 Organization of the Study
This report is organized in a sequential manner that first provides an overview of utility rate setting principles, followed by sections that detail the specific technical and analytical steps used to develop the City’s proposed water rates. The following sections comprise the City’s water rate study report:
 Section 2 – Overview of Water Rate Setting Principles  Section 3 – Revenue Requirement Analysis
 Section 4 – Cost of Service Analysis
 Section 5 – Rate Design Analysis
A Technical Appendix is attached at the end of this report, which details the technical analyses that were undertaken in the preparation of the City’s water study.

1.4 Summary
This report will review and discuss the water rate analyses prepared for the City. This report has been prepared utilizing generally accepted water rate setting methodologies and techniques to meet the requirements of Proposition 218.

Revenue Requirement Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses of
the utility to determine the overall level of
rate adjustment required
Distributes the revenue requirement to the
customer classes of service in a proportional
manner
Considers both the revenue requirement
and cost of service results to develop the
proposed rates

Overview of Water Rate Setting Principles 12
City of San Luis Obispo – Water Rate Study
2 Overview of Water Rate Setting Principles
This section of the report provides background information about the water rate setting process, including descriptions of generally accepted principles, types of utilities, and the methodologies used to develop the revenue requirement, cost of service, and rate design analyses. This information is useful for gaining a better understanding of the details presented in Sections 3 through 5 of this report. The use of these principles and methodologies lead to cost-based and equitable water rates for the City’s water customers.

2.1 Generally Accepted Rate Setting Principles
As a practical matter, all utilities should consider setting their rates around some generally accepted or global principles and guidelines. That is, utility rates should be:
 Cost-based, proportional, and set at a level that meets the utility’s full revenue requirement
 Easy to understand and administer
 Designed to conform to generally accepted rate setting techniques and requirements of Proposition 218
 Stable in their ability to provide adequate revenues for meeting the utility’s financial, operating, and regulatory requirements
 Established at a level that is stable from year-to-year from a customer’s perspective

2.2 Determining the Revenue Requirement
Most public utilities use the “cash basis” 2 approach, or methodology, for establishing their revenue requirement and setting rates. This approach conforms to most public utility budgetary requirements and the calculation is easy to understand. A public utility totals its cash expenditures for a period to determine required revenues. The revenue requirement for a public utility is usually comprised of the following cost components or expenses:
• Total Operating Expenses: This includes a utility’s operation and maintenance (O&M) expenses, plus any applicable taxes or transfer payments. Operation and maintenance expenses include the materials, electricity, labor, supplies, etc., needed to keep the utility functioning.
• Total Capital Expenses: Capital expenses are calculated by adding annual debt service payments (principal and interest) to capital improvements financed with rate revenues.

In lieu of including capital improvements financed with rate revenues, a utility sometimes includes annual depreciation expense to stabilize the annual revenue requirement.

Using the cash basis approach, the sum of the total operating expenses plus the total capital expenses equals the utility’s revenue requirement during any selected time period (historical or projected).
2 “Cash basis” as used in the context of rate setting is not the same as the terminology used for accounting purposes and recognition of revenues and expenses. As used for rate setting, “cash basis” refers to the specific cost components to be included within the revenue requirement analysis as outlined in the AWWA M1 Manual.

Overview of Water Rate Setting Principles 13
City of San Luis Obispo – Water Rate Study
Note that the two portions of the capital expense component (debt service and capital improvements funded from rate revenues) are necessary under the cash basis approach because utilities generally cannot finance all their capital facilities with long-term debt. At the same time, it is often difficult to pay for all capital expenditures on a “pay-as-you-go” basis given that some major capital projects may have significant rate impacts upon the utility, even when financed with long-term debt. Many utilities have found that a combination of “pay-as-you-go” funding and long-term debt financing will often lead to minimization of rate increases over time.

As noted, public utilities typically use the cash basis methodology or approach to establish their revenue requirement. An exception may occur if a public utility provides service to a wholesale or large contract customer. In this situation, a public utility could use the “utility basis” approach (see Table 2 - 1) to earn a “fair” rate of return on the investment needed to serve the wholesale or large contract customer.

Table 2 – 1
Cash versus Utility Basis Comparison
Cash Basis Utility Basis (Accrual)
+ O&M Expenses + O&M Expenses
+ Taxes/Transfer Payments + Taxes/Transfer Payments
+ Capital Improv. Funded From Rates
(≥ Depreciation Expense) + Depreciation Expense
+ Debt Service (Principal + Interest) + Return on Investment = Total Revenue Requirement = Total Revenue Requirement

2.3 Analyzing Cost of Service
After the total revenue requirement is determined, it is proportionally distributed to the users of the service. The allocation and distribution process, as analyzed through a cost of service analysis, reflects the cost relationships for producing and delivering water services. A cost of service analysis requires three analytical steps:

1. Costs are functionalized, or grouped, into the cost categories related to providing service (supply, treatment, distribution, pumping, etc.). This step is largely accomplished by the utility’s accounting system.

2. The functionalized costs are then allocated to specific cost components. Allocation refers to the arrangement of the functionalized data into cost components. For example, a water utility’s costs – such as for the City - are typically allocated as commodity (average day), capacity (peak day), customer, or fire-protection-related costs.

3. Once the total costs are allocated to the cost components, they are proportionally distributed to each of the customer classes of service (e.g., residential, multi-family, nonresidential, irrigation) or rate schedule. The proportional distribution is based on each

Overview of Water Rate Setting Principles 14
City of San Luis Obispo – Water Rate Study
customer class’srelative contribution to the cost component (i.e., benefits received from, and burdens placed on the system and its resources). For example, customer-related costs are proportionally distributed to each class of service based on the total number of customers in that class of service, relative to all other customer classes of service. Once the total costs (i.e., revenue requirement) are proportionally distributed, the level or amount of revenues required from each customer class of service to achieve cost-based rates can be determined.

The City’s cost of service analysis was developed based on generally accepted water cost of service methodologies and approaches, while at the same time, tailoring the analysis to take into consideration and reflect the City’s unique customer and system characteristics. The water cost of service analysis developed for the City is discussed in more detail in Section 4 of this report.

2.4 Designing Water Rates
Water rates that meet the utility’s cost-based and proportional objectives are designed based upon the findings and conclusions from the revenue requirement and cost of service analyses.

Using the cost information from these two analyses provides rates that are strictly cost-based and proportional. The average unit costs (i.e., cost-based rates) from the cost of service analysis does not consider, or take into account, other non-cost based goals and objectives (e.g., conservation, economic development, ability to pay, revenue stability). In designing water rates, many utilities consider or incorporate other rate design objectives such as ability to pay, continuity of past rate philosophy, economic development, ease of administration, and customer understanding into their final water rate designs. However, the City’s proposed water rates must comply with the requirements of Proposition 218. They must take into consideration each customer class’s proportional share of costs distributed through the cost of service analysis to meet the requirements of Proposition 218. The development of the City’s proposed water rate designs is discussed in more detail in Section 5 of this report.

2.5 Economic Theory and Rate Setting
One of the major justifications for a comprehensive rate study is founded in economic theory.

Economic theory suggests that the price of a commodity must roughly equal its cost if equity among customers is to be maintained. This statement’s implications on utility rate designs are significant. For example, a water utility usually incurs capacity-related costs to meet summer outdoor or non-domestic watering needs. It is presumed, then, that the customers who create excessive peak demands on the system - and create the need for upsizing of the water system infrastructure - should pay their proportional share of the costs related to the over-sizing of facilities to meet peak use requirements. When costing and pricing techniques are refined, consumers have a more accurate understanding of what the commodity costs to produce and deliver. This price-equals-cost concept provides the basis for the subsequent analysis and comments. This basic pricing technique has been incorporated and used within this study.

2.6 Summary
This section of the report has provided a brief introduction to the general principles, techniques, and economic theory used to set water rates. These principles and techniques provide the theoretical and technical basis for the analysis used to develop the City’s water rate study.

Revenue Requirement Analysis 15
City of San Luis Obispo – Water Rate Study
3 Development of the Revenue Requirement
The development of the revenue requirement analysis is the first analytical step in the three-step comprehensive water rate study process. This section of the report describes the development of the revenue requirement analysis for the City’s water utility. The City provided HDR with detailed revenue, expense, and customer data for the water system that allowed for the development of the revenue requirement analysis.

The revenue requirement analysis, as developed for the City’s water utility, determines the adequacy of water rates at current rate levels. From this analysis, a determination can be made as to the overall level of rate revenue adjustment needed to provide adequate and prudent funding for both operating and capital expenses. HDR has developed an independent analysis based on the data and information provided by the City.

3.1 Determining the Revenue Requirement
In developing the City’s waterrevenue requirement, the water utility, as an enterprise fund, must financially “stand on its own” and be properly funded. That is, no transfers from other City of San Luis Obispo funds or enterprise funds occur to support the water utility. As a result, the revenue requirement analysis assumes the full and proper funding needed to operate and maintain the City’s water system on a financially sound and prudent basis.

3.2 Establishing a Time Frame and Approach
The first step in developing the revenue requirement for the City’s water utility was to establish a time frame for the revenue requirement analysis. For the Study, the City’s revenue requirement was developed for FY 2022-23 through FY 2032-33. This time frame was composed of the FY 2022-23 budget which was then projected using assumed escalation (inflationary) factors from the City’s fund analysis through FY 2032-33. While the revenue requirement was developed for a ten-year period, the focus for rate setting purposes was the immediate two-year period of FY 2023-24 and FY 2024-25. Reviewing a multi-year time period is always recommended in order to aide in identifying any major financial impacts that may be on the horizon. By anticipating future financial requirementssooner, the City can begin planning for these changes, thereby minimizing short-term rate impacts and likely overall long-term rate levels.

The second step in determining the revenue requirement was to decide on a method to accumulate water utility costs. In this case, a cash basis revenue requirement was utilized. As noted in Section 2, the cash basis approach is the most common methodology used by municipal utilities to establish their revenue requirement. Given a time period around which to develop the revenue requirement and a method to accumulate the costs, the focus shifts to the development and projection of the revenues and expenses of the City.

Presented below is a detailed discussion of the steps and key assumptions contained in the development of the City’s water revenue requirement analysis.

Revenue Requirement Analysis 16
City of San Luis Obispo – Water Rate Study

3.3 Projecting Rate and Other Miscellaneous Revenues
Once the method and time period for developing the revenue requirement was established, the next step is to develop a projection of the water rate revenues, at present rate levels. In general, this process involved developing projected billing units (i.e., meter size, metered consumption) for each customer group (e.g., residential, multi-family, commercial, irrigation) based on historical billing records as provided by the City. The billing units for each customer group were then multiplied by the current water rates for each customer group. This method of independently calculating revenues links the projected revenues used within the Study to the projected billing units. It also helps to confirm that the billing units used within the analyses are reasonable for purposes of projecting future revenues, proportionally distributing costs (Section 4), and developing the proposed water rates (Section 5).

A key aspect of the projection of water
rate revenues was to develop a
projection of consumption levels. The
consumption data from July 2021
through June 2022 was reviewed to
develop a projection of customer
consumption characteristics. Most the
City’s water rate revenues are derived
from the residential customer class which
is approximately 48.3% of the total rate
revenues which is typical of a municipal
utility. Including the other customer
classes, and at current rate levels, the City
is projected to receive approximately $22.7 million in rate revenue in FY 2022-23. The Study has assumed a conservative level of annual customer growth of 0.8%/year over the review period. In FY 2027-28, the rate revenues, given assumed customer growth and at current rate levels, are projected to be approximately $23.6 million.

In addition to water rate revenues, the water utility also receives miscellaneous revenues. There are various miscellaneous revenue sources which are related to fines and penalties, interest earnings, recycled water sales, and other miscellaneous revenues. In total, the City is projected to receive approximately $3.8 million in miscellaneous revenues in FY 2022-23. This amount is projected to decrease over the next five years due to grants falling off and reach approximately $3.1 million by FY 2027-28.

On a combined basis, summing the water rate revenues at current rate levels and the miscellaneous revenues, the City’s water utility has total projected revenues of approximately $26.5 million in FY 2022-23, which is projected to increase to approximately $26.7 million by 2027-28, absent any proposed rate adjustments.

3.4 Projecting Operation and Maintenance Expenses
Operation and maintenance (O&M) expenses are incurred by the City to provide water service, that is the supply, treatment, transmission, and distribution of water. This includes the daily

Revenue Requirement Analysis 17
City of San Luis Obispo – Water Rate Study
operation and maintenance of the existing infrastructure, as well as purchasing water. For the development of the revenue requirement, the City provided detailed budgeted O&M expenses and capital improvement needs(discussed in Section 3.5) for the water utility for FY 2022-23. The budgeted FY 2022-23 O&M expenses were then projected over the review period based on the City’s estimated cost increases from the Fund Analysis. The total FY 2022-23 O&M expenses for the City are budgeted at approximately $21.3 million. For FY 2023-24, addition staffing was added starting based on the City’s current assumptions at $137,000. Over the planning horizon, the total O&M expenses for the City is projected to increase to approximately $31.6 million by FY 2032-

33. 3.5 Capital Funding
A key component in the development of the water revenue requirement was properly and adequately funding capital improvement needs related to the infrastructure of the City’s water system. One of the major issues facing utilities across the U.S. is the amount of deferred capital projects and the funding pressure from growth/expansion and regulatory-related improvements.

The proper and adequate funding of capital projects is an important issue for all water utilities and is not just a local issue or concern of the City.

In general, there are three general types of capital projects that a utility may need to fund. These include the following types:
 Renewal and Replacement - A renewal and replacement project is essentially a project required for maintaining the existing system that is in place today. As the existing infrastructure becomes worn out, obsolete, etc., the utility should be making continuous (annual) investments to maintain the integrity of the facilities.  Growth / Capacity Expansion - A utility may make capital investments to expand the capacity of facilities to accommodate future capacity needs (customers).  Regulatory-Related - Another type of project may be a function of a regulatory (legal) requirement in which the Federal or State government mandates the need for an improvement to the system to meet a regulatory standard (e.g., water quality).

Understanding these different types of capital projects is important because it may aid in explaining any needed rate adjustments. As the need for capital investment increases, it often directly impacts needed rate revenue adjustments. In addition, and more importantly, the way in which projects are funded may vary by the type of capital project. For example, annual and ongoing renewal and replacement projects may be paid for through rates and funded on a “pay-asyou-go” basis. In contrast to this, growth or capacity expansion projects may be funded through the collection of development impact fees (i.e., growth-related charges) in which new development pays an equitable share of the cost of facilities necessary to serve their respective development (impact). Finally, regulatory projects may be funded by a variety of different means, which may include annual rate revenues, long-term borrowing, grants, etc.

While the above discussion appears to precisely divide capital projects into three clearly defined categories, the reality of working with specific capital projects may be more complex. For example, a water pipeline may be replaced, but while being replaced, it is up-sized to accommodate greater capacity to serve increasing demands or new development. There are

Revenue Requirement Analysis 18
City of San Luis Obispo – Water Rate Study
many projects that share these “joint” characteristics. At the same time, projects may not be “replacement” related, but rather “improvement” related.

For purposes of developing the capital funding plan for the revenue requirement analysis, the City provided its long-term capital improvement plan (CIP) to HDR. The CIP provides a listing of long-term capital projects that address deficiencies and improvements needed on the water system.

Provided below in Table 3 - 1 is a summary of the capital funding plan based on the overall capital plan as developed by the City based on current needs. As noted, the focus of the City’s water rate study was on the next five-year period for rate setting purposes. The capital plan detail has been simplified to the main categories for ease of reading. Exhibit 4 in the Technical Appendix provides details of the individual capital projects and identified funding sources.

Table 3 – 1
Summary of the Capital Improvement Plan ($000)
FY 2022-
23 FY 2023-
24 FY 2024-
25 FY 2025-
26 FY 2026-
27 FY 2027-
28 Total Capital Projects $15,006 $7,182 $5,643 $13,090 $6,560 $6,922 Less: Outside Funding Sources
Operating Fund $0 $0 $0 $0 $0 $0
Capital Fund 12,176 4,262 2,418 610 1,410 782
New Long-Term Borrowing 0 0 0 8,000 0 0
Total Outside Funding Sources $12,176 $4,262 $2,418 $8,610 $1,410 $782 Rate Funded Capital $2,830 $2,920 $3,225 $4,480 $5,150 $6,140 As can be seen in Table 3 - 1, the total cost of the capital projects to be funded varies from yearto-year. While the total amount required to fund projects may vary from year-to-year, the rate study capital funding plan has attempted to provide a consistent funding source from rates for capital improvements. In this case, rates will annually fund, on average, $4.1 million per year (as highlighted in Table 3 - 1). As a point of reference, the City’s annual depreciation expense was approximately $2.9 million for FY 2022-23. A desirable and recommended minimum funding target for rate funded capital is an amount equal to or greater than annual depreciation expense.

It is important to understand that annual depreciation expense is not the same as replacement cost, which can be 1.5 to 2.0 times the original cost of the project. Thus, funding an amount which exceeds annual depreciation expense is both prudent and appropriate.

This capital funding plan has assumed the need for additional long-term borrowing (debt financing) to fund a portion of the capital projects in FY 2025-26. This new long-term borrowing allows the City to complete the projects, while minimizing the direct impact to rates. In developing the capital plan, and reviewing the current and anticipated debt service, HDR is not acting as a municipal advisor or providing municipal advice as it relates to bonds, terms, or structures of debt issuances. Rather, this rate study is a financial planning document which has

Revenue Requirement Analysis 19
City of San Luis Obispo – Water Rate Study
identified projections of future funding needs and utilized general assumptions for long-term debt terms for modeling and projection purposes.

In summary, the capital funding analysis has established a level of annual rate funding which is greater than annual depreciation. Going forward, the City should continue to plan and monitor their annual renewal and replacement needs and, as appropriate, increase the level of rate funded capital over time to keep up with the cost escalation of these capital projects. In developing this financial plan, HDR and the City have attempted to minimize rate impacts while funding the planned capital improvement projects of the City’s water utility.

3.6 Projection of Debt Service
The City currently has four outstanding long-term debt issues for the water utility which totals $2.4 million in FY 2022-23. In addition, there is an anticipated to be new long-term debt service in FY 2025-26 in order to fund the planned capital projects. The impact of the assumed borrowing is approximately $382,000 in FY 2026-27. Additional long-term borrowing is also projected in FY 2028-29 which will add an additional $460,000 to the annual debt service requirement at that time.

3.7 Reserve Funding
The final component of the revenue requirement analysis is the reserve funding. It includes transfers to, or from, reserve funds to maintain prudent ending fund balances or for future funding of capital projects. The City has a target minimum fund balance for the Operating (reserve) Fund of 20% of annual O&M expenses, or approximately $4.3 million. In addition, the rate study has included a capital reserve that does not currently have a minimum target and a rate stabilization reserve target of 10% of rate revenues which for FY 2022-23 is $2.3 million. Any additional balance of funds after the transfers are made is transferred to the capital fund to maintain prudent levels of reserves to help pay for future capital needs of the water utility.

Funding from reserves may also be used to meet operating and capital needs in a deficient year.

3.8 Summary of the Revenue Requirement
Given the above projections of revenue and expense components, a summary of the City’s water revenue requirement analysis can be developed. In developing the revenue requirement analysis, consideration was given to the financial planning considerations of the City. More specifically, emphasis was placed on minimizing rates while adequately funding the operational and capital improvement needs throughout the review period. Presented below in Table 3 - 2 is a summary of the City’s water revenue requirement analysis based on projected expenses and current rates. Detailed exhibits of this analysis can be found in the Technical Appendices in Exhibits 1 - 5.

Revenue Requirement Analysis 20
City of San Luis Obispo – Water Rate Study
Table 3 - 2
Summary of the Revenue Requirement Analysis ($000)
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 Revenues
Rate Revenues $22,680 $22,861 $23,044 $23,229 $23,414 $23,602 Misc. Revenues 3,798 3,295 2,680 2,781 2,983 3,093
Total Revenues $26,478 $26,156 $25,724 $26,009 $26,397 $26,695 Expenses
O & M $21,319 $23,684 $24,854 $25,956 $26,671 $27,426
Net Debt Service 2,043 1,470 1,469 1,466 1,838 1,837
Rate Funded Capital 2,830 2,920 3,225 4,480 5,150 6,140 Reserve Funding 287 26 10 4 3 7
Total Expenses $26,478 $28,100 $29,558 $31,906 $33,662 $35,410 Bal. / (Def.) of Funds $0 ($1,943) ($3,834) ($5,897) ($7,265) ($8,715) Bal. as a % of Rate Rev. 0.0% 8.5% 16.6% 25.4% 31.0% 36.9% Proposed Rate Adjustment 0.0% 8.5% 7.5% 7.5% 4.5% 4.5%
Add’l Rev. from Rate Adj. $0 $1,943 $3,834 $5,897 $7,265 $8,715 Total Bal. / (Def.) of Funds $0 $0 $0 $0 $0 $0
As can be seen, the revenue requirement has summed the O&M, rate funded capital, net debt service, and change in working capital (i.e., net funding to and from reserves). The City’s total revenue requirement is then compared to the total revenues which include the rate revenues - at present rate levels - and other miscellaneous revenues. From this comparison, a balance or deficiency of funds in each year can be determined. This balance or deficiency of funds is then compared to the present rate revenues to determine the level of rate adjustment needed to meet the revenue requirement. It is important to note the “Bal. / (Def.) of Funds” row is cumulative. That is, any adjustments in the initial years will reduce the deficiency in the later years. In FY 2023-24, an 8.5% rate adjustment is proposed - which would be implemented July of 2023 (the first month of the fiscal year) - and 7.5% rate increase in FY 2024-25. Over the five-year period, the total deficiency in current water rates is 36.9%. It is important to note that only the proposed rate adjustments for the next two years – FY 2023-24 and FY 2024-25 – are proposed to be noticed through the Prop 218 process.

The deficiencies shown in Table 3 - 2 are primarily a function of three factors. First, the O&M expenses assume inflation assumptions for the projected time period, and the projection of O&M expenses has also assumed additional expenses beyond existing/budgeted levels. Next, the capital funding analysis includes the annual rate funding of capital projects along with the need for long-term borrowing, which translates in a new (additional) debt service payment. Taken together, the water utility’s current rates are projected to be deficient over the five-year time period.

Based on the revenue requirement analysis developed for the City’s water utility, HDR has concluded that the rate revenues will need to be adjusted to maintain prudent funding of

Revenue Requirement Analysis 21
City of San Luis Obispo – Water Rate Study
expenses and establish cost-based rates. Based on the rate transition plan (blue shaded line in Table 3 – 2), the proposed annual rate adjustments are designed and intended to meet the operating and capital needs of the City’s water utility, as well as maintain strong financial metrics.

3.9 Reserve Levels
Another key element of determining the financial health and sustainability of the City’s water utility is a review of the level of available reserve funds after the proposed rate adjustments.

Utilities can establish and maintain several different reserves. Each reserve has a specific and different purpose. The typical types of reserves that utilities often maintain are generally referenced as an operating reserve, a capital reserve, an impact fee reserve, and in some cases an emergency or rate stabilization reserve. Certain funds may establish a minimum ending balance that, if reached or falls below, is a signal that the City should review the revenue sources associated with that fund and take appropriate action. The minimum ending balances will vary depending on the purpose of the fund and the expected revenue sources.

For the City, there are three primary funds for the water utility rate study. These are the Operating Fund, Capital Fund, and Rate Stabilization. Each of these is discussed further below.  Operating Fund – The operating reserve is in place to meet the City’sfluctuating cash flow needs. The typical minimum ending balance for an operating reserve ranges from 90 – 365 days of annual O&M expenses. For the City, the minimum target was set at 20% of O&M expenses, or 73 days of O&M. This target results in a minimum ending balance of approximately $4.6 million in FY 2022-23. This minimum reserve level increases to $6.4 million by 2032-33.
 Capital Fund – The capital fund is used to track the collection of development impact fee revenues as well as provided funding for capital projects. There is currently no minimum target for the reserve. When capital reserve funds are available, this fund is used to pay for capital improvement projects and when there is a surplus of funds those funds are moved to the capital fund in order to fund future capital projects.  Rate Stabilization Fund – A rate stabilization reserve is maintained at a level equal to approximately 10% of the annual water rate revenue. These funds are unrestricted, but their intended use shall be limited to mitigating large or unanticipated rate impacts, or emergency/catastrophe situations.

3.10 Debt Service Coverage Ratios
When long-term debt is issued it may have certain rate covenants associated with the debt issue.

Currently, the City has 4 outstanding long-term debt issuances. Additionally, as mentioned previously, it is assumed within the capital funding plan that the City will need to issue long-term debt in order to fund capital improvement projects. The City will need to monitor the debt service coverage (DSC) as the debt is incurred and for planning purposes a minimum debt service coverage ratio of 1.30 is assumed. The City should strive for a coverage ratio which is greater than the minimum. Provided in Table 3 - 3 is a summary of the projected debt service coverage (DSC) ratio calculations for the City’s water utility before and after the proposed rate adjustments.

Revenue Requirement Analysis 22
City of San Luis Obispo – Water Rate Study
Table 3 - 3
Summary of the Debt Service Coverage Ratio (All Debt, w/DIF) FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28 Before Rate Adjustment 2.67 1.75 0.89 0.46 0.23 0.03
After Rate Adjustment 2.67 2.79 2.95 3.62 3.48 3.93
As can be seen in Table 3 - 3, with the proposed rate adjustments, the City is maintaining a strong debt service coverage ratio. In contrast, should the City not implement the proposed rate revenue adjustments, the DSC ratio would fall below 1.00 in FY 2024-25. It is prudent financial practice to target at least 1.30 for the DSC ratio. The 1.30 DSC means that the utility, after meeting its O&M expenses has sufficient funds available to pay the debt service payment. More specifically, an amount of funding available which is 30% greater than the actual debt service payment. With this minimum financial planning target set, Table 3 – 3 demonstrates that the City is above this minimum threshold after the proposed rate adjustments. The City is advised to continue to monitor revenues and expenses to maintain sufficient debt service coverage ratios.

3.11 Consultant’s Conclusions
The revenue requirement developed above for the City’s water utility has indicated the need for annual revenue (rate) increases to adequately fund the City’s operating and capital needs for the water utility. The proposed rate revenue adjustments are 8.5% in FY 2023-24 and 7.5% in FY 2024-25. HDR has reached the following conclusion and recommendations:
 Rate adjustments are necessary to adequately fund the water utility’s operating and capital expenses
 The proposed rate adjustments maintain the City’sfinancial health and provide long-term sustainable funding levels
 The rate adjustments are needed to maintain, and exceed, the minimum debt service coverage ratio requirements
 Prior to the implementation of the final proposed rate adjustment the City should complete a review of the water rates
In reaching the above conclusions, HDR would recommend that the City adopt the proposed annual rate adjustmentsto provide sufficient funding for the City’s projected operating expenses and capital improvement program.

Cost of Service Analysis 23
City of San Luis Obispo –Water Rate Study
4 Development of the Cost of Service Analysis
In the previous section, the revenue requirement analysis focused on the total revenuesrequired to adequately fund the City’s water utility. This section will provide an overview of the second step in a comprehensive water rate study; the cost of service analysis developed for the City’s water utility.

A water cost of service analysis determines the proportional distribution or assignment of the total revenue requirement to the customer classes of service (e.g., residential, multi-family, nonresidential, irrigation). The previously developed revenue requirement for FY 2023-24 was utilized in the development of the following cost of service analysis.

4.1 Objectives of a Cost of Service Study
There are two primary objectives in conducting a cost of service analysis:
• Proportionally distribute the City’s water revenue requirement among the customer classes of service, and
• Derive average unit costs (i.e., cost-based rates) for subsequent rate designs The objectives of the cost of service analysis are different from determining a revenue requirement. As noted in the previous section, a revenue requirement analysis determines the utility’s overall financial needs, while the cost of service analysis determines the proportional manner to collect the total revenue requirement from the customer classes of service.

The results of the cost of service analysis determine the average unit costs (cost-based rates) which are used in the development of the final step of the rate study process, the rate design analysis. The cost of service analysis provides a per unit cost of water consumption based on each customer class’s proportional share of costs. For example, a water utility incurs costs related to average day and peak day demands, fire protection, and customer-related cost components. A water utility must build sufficient capacity3 to meet summer peak capacity needs. Therefore, those customers contributing to those peak demands on the system should pay their proportionate (i.e., fair) share of the costs to provide the capacity in the system. The average unit costs derived from the cost of service analysis provides the relationship between these components which are then used to set cost-based rates. Similarly, the customer-related costs are totaled and distributed proportionately on an equivalent meter basis. 3 System capacity is the system’s ability to supply water to all delivery points at the time when demanded. Coincident peaking factors are calculated for each customer class at the time of greatest system demand. The time of greatest demand is known as a peak demand. Both the operating costs and capital asset related costs incurred to accommodate the peak demands are generally allocated to each customer class based upon the class’s contribution to the specific peak month, peak day, or peak hour event.

Cost of Service Analysis 24
City of San Luis Obispo –Water Rate Study

4.2 Determining the Customer Classes of Service
The first step in a cost of service analysis is to determine the customer classes of service. Based on a review of the customer and billing information, the current rate schedules, and discussion with City staff, the classes of service used within the cost of service analysis were:
 Residential
 Multi-Family
 Non-Residential
 Irrigation
In determining classes of service for cost of service purposes, the objective is to group customers together into similar or homogeneous groups based upon similar facility requirements and/or demand characteristics. HDR reviewed the current customer characteristics and facility requirements of each of the customer classes of service. In reviewing the customer classes of service, the City has appropriately grouped customers into customer classes of service. The grouping of customers and rates into these classes of service creates the proportionality expected under Proposition 218. This is accomplished by having differing rates, by customer classes of service, which reflect both the level of revenue to be collected by the utility, but also the manner in which these costs are incurred, and then assigning those costs to customer classes of service based upon their proportional impacts.

4.3 General Cost of Service Procedures
To determine the cost to serve each customer class of service on the City’s water system, a cost ofservice analysis is conducted. A cost of service analysis utilizes a three-step approach to review costs. These steps take the form of functionalization, allocation, and distribution. Provided below is a detailed discussion of the water cost of service study conducted for the City, and the specific steps taken within the analysis. The approach used for the City’s Study conforms to generally accepted and industry standard cost of service methodologies that are outlined in the AWWA M1 Manual to meet the proportionality requirements of Proposition 218.

4.3.1 Functionalization of Costs
The first analytical step in the cost of service process is called “functionalization”.

Functionalization is the arrangement of expenses and asset (i.e., infrastructure or plant) data by major operating functions (e.g., supply, treatment, transmission, distribution). Within the City’s Study there was a limited amount of functionalization of the cost data required since it was already largely accomplished within the City’s system of accounts.

4.3.2 Allocation of Costs
The second analytical task performed in a water cost of service study is the allocation of costs.

The allocation of costs examines why each expense identified in the revenue requirement was incurred or what type of need is being met. The following cost allocators were used to develop the City’s water cost of service analysis:
 Commodity-Related Costs: Commodity costs are those costs which tend to vary with the total quantity of water consumed by a customer. Commodity costs are those incurred

Cost of Service Analysis 25
City of San Luis Obispo –Water Rate Study
under average load (demand) conditions and are generally specified for a period such as a month or year. Chemicals or utilities (electricity) are general examples of commodityrelated cost as these costs tend to vary based upon the total volumes of water consumed.  Capacity-Related Costs: Capacity costs are those which vary with peak demand, or the maximum rates of flow to customers. System capacity is required when there are large demands for water placed upon the system (e.g., summer lawn watering). For water utilities, capacity-related costs are generally related to the sizing of facilities needed to meet a customer’s maximum water demand at any point in time. For example, portions of distribution storage reservoirs and mains (pipes) must be adequately sized to meet this type of requirement.
 Customer-Related Costs: Customer costs are those costs which vary with the number of customers on the water system. They do not vary with system output or consumption levels. These costs are also sometimes referred to as “readiness to serve” or availability costs. Customer costs may also sometimes be further allocated as either “actual” or “weighted”. Actual customer costs vary proportionally on a per customer basis, from customer to customer, with the addition or deletion of a customer regardless of the size of the customer. An example of an actual customer cost is postage for mailing bills. This cost does not vary from customer to customer, regardless of the size or consumption characteristics of the customer. In contrast, a weighted customer cost reflects a disproportionate cost, from customer to customer, with the addition or deletion of a customer. Examples of weighted customer costs are items such as meter maintenance expenses, where a large commercial customer requires a significantly more expensive meter than a typical residential customer or the greater capacity requirements of the larger meters.
 Fire Protection-Related Costs: Fire protection costs are those costs related to the public fire protection functions. Usually, such costs are those related to public fire hydrants and the over-sizing of mains and distribution storage reservoirs for fire protection purposes.

Even with the largest peak demands on the system, there still must be sufficient capacity available to meet fire protection-related needs. These costs are related to water service on property because public fire hydrants are designed to deliver water to property served by the water utility in sufficient quantities and pressures to fight a fire on the property.  Revenue-Related Costs: Some costs associated with the utility may vary with the amount of revenue received by the utility. An example of a revenue related cost would be a utility tax which is based on the gross utility revenue.

4.4 Development of Distribution Factors
Once the allocation process is complete, and the customer groups have been defined, the allocated costs are proportionally distributed to each customer group. The City’s allocated costs for the water utility were distributed to the identified customer groups using the following distribution factors.
 Commodity Distribution Factor: As noted previously, commodity-related costs vary with the total water consumption. Therefore, the commodity distribution factor was based on the projected total metered water consumption plus water losses for each class of service

Cost of Service Analysis 26
City of San Luis Obispo –Water Rate Study
for the projected test period FY 2023-24. For the
City’s Study the consumption for each customer
class of service was developed based on historical
metered consumption records.
 Capacity Distribution Factor: Capacity is related to
peak usage. The capacity distribution factor was
developed based on the estimated contribution to
the water system peak day use of each customer
class. Peak day use by customer class of service was
estimated using peaking factors for each customer
group. In this case, the peaking factor was defined as
the relationship between peak day contribution and
average day use and determined for each customer
group based on a review of the metered average
month to peak month usage. Given an estimated
peaking factor, the estimated peak day contribution
for each class of service was developed.
 Customer Distribution Factor: Customer costs vary
with the number of customers on the system. The
City’s customer costs were distributed on the
weighted customer distribution factor which is for
meters and services. This factor reflects the capacity
requirements of each customer class based on the
sum of the equivalent meters. For example, a 2-inch
meter has eight times the capacity of a 5/8” meter.

Therefore, a larger proportion of the capacity costs
of providing service is distributed to the larger meter sizes.
 Fire Protection Distribution Factor: The
development of the distribution factor for fire
protection expenses involved an analysis of each
class of service and their corresponding fire flow
requirements. The analysis considered the gallon
per minute (gpm) fire flow requirements in the
event of a fire, along with the duration of the
required flow. The fire flow rates used within the
distribution factor were based on industry standards
and similar experiences with other water cost of
service studies. The minimum fire flow requirements
are then multiplied by the number of customers in
each class of service, and the assumed duration of
Water Cost of Service Analysis
Terminology
Functionalization – The
arrangement of the cost data by
functional category (e.g., source of
supply, treatment, etc.).

Allocation – The assignment of
functionalized costs to cost
components (e.g., commodity,
capacity, customer and fire
protection related).

Distribution – Equitably
distributing the allocated costs to
each class of service based upon
each class’s proportional
contribution to that specific cost
component.

Commodity Costs – Costs that are
allocated as commodity-related
vary with the total volume of water
consumed (e.g., chemical use at a
treatment plant).

Capacity Costs – Costs allocated as
capacity-related are related to
meeting peak day or peak hour
usage. Facilities are often designed
and sized around meeting peak
demands.

Fire Protection Costs – Costs that
are related to fire protection
services (e.g., hydrants, oversizing
of storage and distribution mains).

Customer Costs – Costs allocated
as customer-related vary with the
number of customers on the
system (e.g., metering costs).

Revenue Related Costs – Costs
which vary with the amount of
revenue received by the utility
(e.g., income tax).

Cost of Service Analysis 27
City of San Luis Obispo –Water Rate Study
the fire, to determine each class’s prorated fire flow requirements.  Revenue Related Distribution Factor: The revenue related distribution factor was developed from the projected rate revenues for FY 2023-24 for each customer class of service. These same revenues were used within the revenue requirement analysis discussed previously.

The distribution factors are developed for each customer class of service. At the same time, the distribution factors for commodity and capacity-related costs must be developed to also calculate the average unit cost pricing. For example, the residential commodity and capacity distribution factor is broken down for each of the rate structure tiers; multi-family, non-residential, and irrigation is a single factor for each class. This level of distribution was provided within the analysis in order to demonstrate (i.e., calculate) the cost basis for the City’s tiered rates, and meet the requirements of Proposition 218. Further discussion related to the distribution of costs to a greater cost level is discussed in more detail in the rate design analysis provided in Section 5 of this report.

4.5 Functionalization and Allocation of Plant in Service As noted above, the first steps of the cost of service analysis are the functionalization and allocation of plant (infrastructure) in service. In performing the functionalization of plant in service, HDR utilized the City’s historical plant (asset) records. Once the plant assets were functionalized, the analysis shifted to the allocation of the asset. The allocation process included reviewing each group of assets and determining which cost allocators the assets were related to.

For example, the City’s assets were allocated as: commodity-related, capacity-related, customerrelated, revenue-related, fire protection-related, or a direct assignment. Provided below is a summary overview of the allocation process used for the City’s plant assets. The following approach is based on the methodology as described in the AWWA M1 Manual.

4.5.1 Source of Supply
Source of supply was allocated as both average day and peak day related. The City’s water system statistics from July 2021 through June 2022 were utilized to develop the average day and peak day calculation. The City’s source of supply assets was allocated on the basis of the relationship of system average day to peak day demands. This resulted in 60.0% of the source of supply plant assets allocated to commodity-related costs (average day) and 40.0% to capacity-related costs (peak day). These allocation percentages reflect the City’s specific system peak demand (capacity needs) in relation to the system average day use (base needs).

4.5.2 Treatment
Treatment plant assets were allocated in the same manner as the source of supply assets; 60.0% to commodity-related and 40.0% to capacity-related. Treatment plant is often considered to be an extension of the source of supply and this allocation also reflects the operation of the treatment facilities either as meeting average day and peak day needs on the system.

4.5.3 Pumping
Pumping was allocated as 100% capacity. Pumps must be sized to meet peak use requirements and this allocation assumes pumping plant is sized to meet peak use needs.

Cost of Service Analysis 28
City of San Luis Obispo –Water Rate Study

4.5.4 Storage
Distribution storage reservoirs are typically designed to meet at least two types of needs –peak use demands and fire protection. The total storage capacity of the City’s storage facilities was examined, while consideration is also given to the additional capacity required for fire protection under a fire event scenario. This additional amount of capacity, in relation to the total storage capacity, is considered fire protection-related. The balance of storage capacity is in place to meet average and peak use demands. Finally, the City has a component of the storage assets that are related to reservoirs that act more as a source of supply and were allocated as average day and peak day as the source of supply assets. This resulted in storage plant assets allocated 32.1% to commodity, 56.6% to capacity, and the remaining 11.3% assigned to the fire protection component.

4.5.5 Transmission and Distribution
Transmission and distribution lines (mains) are typically assumed to provide three types of costs.

First, a distribution system must be in place to meet a customer’s minimum use requirements for water. This portion of the distribution main plant investment is a function of the number of customers on the system and, thus, a customer-related cost. Next, a portion of the distribution system mains is considered a function of meeting peak flow (use) requirements on the system.

Distribution mains must be sized to adequately meet the maximum peak flows demanded by customers. This incremental portion of the distribution main plant investment is considered capacity related. Finally, even with sufficient capacity for meeting peak use demands, distribution mains must also be over-sized for fire flow demands. This final portion of over-sizing for distribution mains plant investment is classified as fire protection related. Based upon an analysis of the City’s distribution mains, the assignment of the distribution mains was allocated as 18.0% customer-related, 70.6% to capacity(i.e., peak use)-related, and 11.4% fire protection-related.

Table 4 - 1 provides a summary of the basic functionalization and allocation of the major water plant items. A more detailed exhibit of the City’s functionalization and allocation of plant investment can be found in the Technical Appendix Exhibit 11.1.

Table 4 - 1
Summary of the Allocation of Water Plant in Service
Category
Commodity
Related
Capacity
Related
Customer
Related
Equivalent
Meters
Fire
Protection
Source of Supply 60.0% 40.0% 0.0% 0.0% 0.0%
Pump Stations 0.0% 100.0% 0.0% 0.0% 0.0%
Storage 32.1% 56.6% 0.0% 0.0% 11.3%
Transmission & Distribution 0.0% 70.2% 0.0% 17.9% 11.8% General Plant 28.7% 55.9% 0.0% 8.9% 6.5%
Total Net Plant in Service 28.7% 55.9% 0.0% 8.9% 6.5%

Cost of Service Analysis 29
City of San Luis Obispo –Water Rate Study

4.6 Functionalization and Allocation of Operating Expenses As noted in the AWWA M1 Manual, operating expenses are generally functionalized and allocated in a manner similar to the corresponding plant account. For example, maintenance of distribution mains is typically allocated in the same manner (allocation percentages) as the plant account for distribution mains. This approach to allocation of the City’s water utility operating expenses was used for this analysis.

For the City’s water rate study, the revenue requirement for FY 2023-24 was functionalized, allocated, and distributed. As noted in Section 3, the City utilized a cash basis revenue requirement, which was comprised of operation and maintenance expenses, rate funded capital, net debt service, and reserve funding. A more detailed review of the functionalization and allocation of the revenue requirement can be found in the Technical Appendix in Exhibit 13.1.

4.7 Major Assumptions of the Cost of Service Study
Several key assumptions were used within the City’s water cost of service analysis. Below is a brief discussion of the major assumptions used.
 The test period used for the water cost of service analysis was FY 2023-24. The revenue and expense data were previously developed within the revenue requirement analysis  A cash basis methodology was utilized which conforms to generally accepted water cost of service approaches and methodologies and is consistent with the City’s previous cost of service analyses
 The allocation of plant in service was developed based upon generally accepted cost allocation techniques and the City’s specific system characteristics  Consumption by cost or class of service used within this study were developed for each class of service from historical usage information provided by the City  Peak day capacity distribution factors were estimated based upon each customer group’s average month to peak month relationship
 For residential customers, costs were distributed to consumption tiers to specifically address the requirements of Proposition 218

4.8 Development of Cost-Based Water Rates
While there are various rate study goals and objectives, a key consideration in developing water rates, meeting the legal requirements - and documenting the steps taken to meet the requirements - has been in the forefront with the recent legal challenges in the State of California on water rates. Given this, the City’s proposed water rates have been developed to meet the legal requirements of Article XIII D. A key component of Article XIII D is the development of rates which reflect the cost of providing service and which proportionally distributed such costs among the various customer classes of service. There is no single prescribed methodology for proportionally distributing costs to the customer classes of service. The AWWA M1 Manual clearly delineates various methodologies which may be used to establish cost‐based rates. Article XIII D does not prescribe a particular methodology for establishing cost-based rates, consequently, HDR developed the City’s proposed water rates based on the methodologies

Cost of Service Analysis 30
City of San Luis Obispo –Water Rate Study
provided in the AWWA M1 Manual to meet the requirements of Article XIII D to provide an administrative record of the steps taken to establish the City’s water rates.

HDR is of the opinion that the proposed rates comply with legal requirements of Article XIII D.

HDR reaches this conclusion based upon the following:
 The revenue derived from water rates does not exceed the funds required to provide the property related service (i.e., water service). The proposed rates are designed to collect the overall revenue requirement of the City’s water utility.  The revenues derived from water rates shall not be used for any purpose other than that for which the fee or charge is imposed. The revenues derived from the City’s water rates are used exclusively to operate and maintain the City’s water system.  The amount of a fee or charge imposed upon a parcel or person as an incident of property ownership shall not exceed the proportional costs of the service attributable to the parcel.

The cost of service analysis section of this study has focused exclusively on the issue of proportional assignment of costs to the customer classes of service. The proposed rates have appropriately grouped customers into customer classes of service (residential, multi-family, etc.) that reflect the varying consumption patterns and system requirements of each customer class of service. The grouping of customers and rates into these classes of service creates the proportionality expected under Article XIII D by having differing rates by customer classes of service which reflect both the level of revenue to be collected by the utility, but also the manner in which these costs are incurred and distributed to customer classes of service based upon their proportional impacts and burdens placed on the City’s the water system.

The above discussion provides an overview of the California legal requirements of setting rates.

The cost of service developed herein has developed a set of average unit costs which provide the cost-basis for the development of the proposed water rates for the City.

As a part of the Study, HDR has developed a water rate design discussion to demonstrate and support the proposed water rates. The following discussion provides a more detailed analysis of the costing techniques and methodologies used to support the City’s proposed rate design.

4.8.1 Determination of Sizing and Number of Tiers
As a part of the City’s water rate study, the residential customer class rate structure which is a 3- tiered structure. The City’s recent water consumption data was evaluated to aide in the evaluation of the current tiers and used as justification if any adjustments to tier sizes are appropriate. After reviewing the residential consumption profile, it was determined three rate tiers appeared to be appropriate given the level of consumption in each tier. The goal of the tiers was to target typical monthly customer average annual consumption levels in the first block and the City’s residential average annual water use is approximately 5.74 CCF per month. This means that almost all of the average annual usage for the residential class is captured in the first tier.

The first tier represents 63.0% of the total consumption. Tier 2 is designed to capture above average day use and the majority of outdoor use and in the City’s case the tier 2 usage captures

27.6% of the total annual water use for the residential customer class. The remaining 9.4% of

Cost of Service Analysis 31
City of San Luis Obispo –Water Rate Study
water consumption is then
be captured in tier 3. The
graph shows the residential
consumption, by month,
based on the current rate
structure.

The current consumption
rate structure for the multifamily, non-residential, and irrigation customers is a
uniform rate structure (i.e.,
all usage charged the same
per unit rate). The customer
characteristics of each of
these customer groups are
unique between customer classes as well as between the customers among each class of service.

The total consumptive use can vary significantly for these customers and it is difficult, if not impossible, to develop an equitable tier size that reflects the various types of customer consumption characteristics and needs.

After the number and size of tiers and rate structures have been identified, the pricing of the rate components is the next analytical step.

4.8.2 Establishing the Cost-Basis for Pricing Tiers
Given the requirements of Proposition 218, HDR has concluded that utilities have available to them at least three technical approaches to be able to justify tiered pricing of the rates. These technical approaches encompass the following areas:

1. Cost differences in water supply (i.e., stacking of water supply resources to tiers/seasons).

2. Cost differences from high peak use consumers (relationship of average use to peak use).

3. Direct assignment of costs to specific tiers/seasons (e.g., conservation program costs, etc.) In certain cases, the cost differences may be related to the cost of water supply when a utility has more than one source of water supply. Additionally, this water supply approach may also include the cost of alternative water supplies (i.e., recycled or reuse water). For example, reuse water may be assigned to higher tiers to reflect outdoor use or the need for additional/alternative water supply to meet the demands of the high use customers.

The second possible source of cost differences for the pricing of tiers is related to high-peak use (peak demand) customers. Customers that use more water in peak periods create greater demands and costs on the system. A water supply and distribution system must be sized to meet these peak use requirements. In other words, on the hottest day of the year when everyone is watering their lawn, the supply and distribution system must be sized to meet those peak use demands. Economic theory clearly states that equity is achieved when those that create the peak demand event, pay for the peak demand event. In this case, this has implications upon the

Cost of Service Analysis 32
City of San Luis Obispo –Water Rate Study
proportional distribution of capacity-related costs to the different usage tiers (low peak use vs. high peak use).

Finally, certain costs may be directly assigned to specific tiers. For example, a conservation program which focuses on outdoor water use may be directly assigned to the upper water tier, or summer season, which are most directly related to outdoor use. The direct assignment to a specific price tier will create a price differential for that tier.

For the City’s water rate study, the focus of the analysis was on the second method of determining the cost impacts and cost differences associated with high peak and seasonal use customers. The pricing of the consumption rate components was developed to provide the costbasis and meet the proportionality requirements of Proposition 218.

4.9 Development of the Unit Costs for Rate Designs
To begin the assignment of costs related to rate components, the results of the cost of service analysis are utilized. The cost of service analysis allocated the revenue requirement between the cost components of average use (commodity, peak use capacity), and customer (actual and weighted). Provided in Table 4 – 2 is a summary of the allocation of the FY 2023-24 revenue requirement from the cost of service analysis.

Table 4 - 2
Summary of the Allocation of the FY 2023-24 Revenue Requirement ($000) Total
Commodity
Related
Capacity
Related
Customer
Related
Fire
Prot.

Revenue
Related
Direct
Assign.

Revenue
Requirement $24,805 $6,562 $11,124 $5,936 $1,183 $0 $0
The total allocation of the FY 2023-24 revenue requirement, approximately $24.8 million, is then distributed to the various customer classes of service. Given the legal requirement to provide the cost-basis the rate structure components, the allocated costs are further distributed between the rate structure components based on the appropriate distribution factors. The costs in Table 4 – 2 are taken from Exhibit 13 in the Water Technical Appendix.

Provided below is a discussion of the approach used to proportionally distribute the revenue requirement between the various customer classes of service to the various rate components for each customer class of service.

4.9.1 Commodity Distribution Factor
The commodity distribution factor is based on the average annual use for each of the customer classes of service, and more importantly by tier for the residential customer class. For the development of the pricing of the proposed rates the following customer class distribution factors were used:

Cost of Service Analysis 33
City of San Luis Obispo –Water Rate Study
 Residential – Tier 1
 Residential – Tier 2
 Residential – Tier 3
 Multi-Family
 Non-Residential
 Irrigation
To develop the commodity distribution factor for each customer class, the usage for each class was divided by the total usage of the system. This produces the percent (proportion) of the system that each class is responsible for and, therefore, their contribution to commodity-related costs. After the responsibility of commodity-related costs have been identified, the total commodity-related costs can be distributed to each customer class tier based on the commodity distribution factor. The final step in developing the average unit commodity costs is to divide the distributed commodity costs for each customer class tier by the total amount of consumption used in determining their fair share of commodity-related costs. This produces an average unit commodity cost on a $/CCF basis.

Provided in Table 4 – 3 is a summary of the commodity distribution factor and average unit cost development and is taken from Exhibit 6 in the Water Technical Analysis.

Table 4 - 3
Summary of the Commodity Distribution Factor
Reference A B C D
Calculation D = C / A
Consumption
(CCF)
% of
Total
Distributed
Commodity
Costs
Unit Cost
($ / CCF)
Residential
0 – 5 CCF 573,827 29.7% $1,947,645 $3.39
5 – 12 CCF 251,684 13.0% 854,248 3.39
12 + CCF 85,716 4.4% 290,931 3.39
Residential Total 911,227 $3,092,823
Multi-Family 395,029 20.4% $1,340,781 $3.39
Non-Residential 448,770 23.2% 1,523,183 3.39
Irrigation 178,222 9.2% 604,909 3.39
Total 1,933,248 $6,561,696
As can be seen, the development of the commodity distribution factor is straightforward and based on metered consumption. As an example, consumption in tier 1 of the residential class of service represents 29.7% of the total consumption on the system. As a result, 29.7% of the total commodity related costs($3.1 million in total) is distributed to tier 1 of the residential customers which is approximately $1.9 million. The total commodity-related costs in Column C are taken

Cost of Service Analysis 34
City of San Luis Obispo –Water Rate Study
from Table 4 – 2. This approach then is used for each of the customer classes of service for each rate component and pricing tier. Finally, to develop the average unit cost for each component, the distributed costs in column C are divided by the consumption volumes shown in column A.

The average unit costs are stated in $ / CCF.

4.9.2 Capacity Distribution Factor
The capacity distribution factor utilizes the same customer classes of service as the commodity distribution factor. Whereas commodity costs are related to the volume of water consumed by each class of service by consumption tier, capacity is related to how the class uses that water in each tier. Customers use water in different ways and at different times, thus creating different usage patterns and resulting in different peaking factors. These usage patterns drive how the City must size the system to meet the peak demands of customers, regardless of when they occur. To determine the distribution by rate component, peaking factors needed to be developed for each customer class and tier. The peaking factors for each class of service and tier must be reasonably estimated due to a lack of specific metered data related to peak day usage by individual customer or class of service. The method used to estimate a class’s peaking factor is to review the average monthly volume of water consumed and compare it to the maximum monthly usage of water.

By dividing the maximum month by the average month, a reasonable surrogate for a peak day peaking factor is calculated. This factor also provides a seasonal surrogate for the difference between the average use and peak day use in each rate component. For example, if a customer used 10 CCF per month on average and in the peak month 15 CCF was used, the peaking factor would be 1.50 (15.0 / 10.0 = 1.50). In this example, the peaking factor is stating that the maximum usage in a month is 1.50 times higher than the average usage per month. Using this same calculation for each customer class rate and tier, the distribution factor for capacity can be developed. Table 4 – 4 provides a summary of the capacity distribution factor for each customer class and is taken from Exhibit 7 in the Water Technical Analysis.

Cost of Service Analysis 35
City of San Luis Obispo –Water Rate Study
Table 4 - 4
Summary of the Capacity Distribution Factor
Reference A B C D E F G
Calculation C = A × B G = E / F
Average
Use
(MGD)
Peaking
Factors
Peak Day
Use
(MGD)
% of
Total
Distributed
Capacity Costs
2022-23
Consumption
(CCF)
Unit
Cost
(CCF)
Residential
0 – 5 CCF 1.35 1.31 1.77 23.5% $2,609,349 573,827 $4.55 5 – 12 CCF 0.59 1.66 0.98 13.0% 1,450,250 251,684 5.76
12 + CCF 0.20 3.57 0.72 9.5% 1,062,207 85,716 12.39
Res Total 2.15 3.48 $5,121,806 911,227
Multi-Family 0.93 1.59 1.48 19.6% $2,180,249 395,029 $5.52 Non-Residential 1.06 1.74 1.84 24.4% 2,710,519 448,770 6.04 Irrigation 0.42 1.80 0.75 10.0% 1,111,777 178,222 6.24
Total 4.56 7.55 $11,124,350 1,933,248
Table 4 – 4 provides the development of the capacity distribution factor. Like that of the commodity cost distribution to the tiers or seasons, the capacity-related costs are distributed in the same manner. For example, 23.5% of the total capacity costs are distributed to tier 1 of the residential customers based on column D in Table 4 - 4. That translates to a cost distribution to tier 1 residential of approximately $2.6 million. This cost, when divided by the corresponding first tier consumption results in an average unit cost for capacity of $4.55 / CCF. As can be seen in Table 4 - 4, the average unit costs for capacity vary by customer class of service and tier based upon the respective demands placed on the system by each class and/or tier.

Combining the calculated average unit costs from the commodity and capacity distribution factors provides the cost-basis of the consumption rate component. Table 4 – 5 below, shows the summation of the costs for each class and tier. This table sums the costs from Table 4 – 3 column D and Table 4 – 4 column G, along with the other additional costs.

Cost of Service Analysis 36
City of San Luis Obispo –Water Rate Study
Table 4 - 5
Summary of the Rate Component Cost Basis
Reference A B C D E
Commodity
Costs
($ / CCF)
Capacity
Costs
($ / CCF)
Other Costs
($ / CCF) [2]
Total Average
Unit Cost
($ / CCF)
Differential
($ / CCF)
Residential
0 – 5 CCF $3.39 $4.55 $0.00 $7.94
5 – 12 CCF 3.39 5.76 0.00 9.16 $1.21
12 + CCF 3.39 12.39 0.00 15.79 $6.63
Multi-Family $3.39 $5.52 $0.00 $8.91
Non-Residential $3.39 $6.04 $0.00 $9.43
Irrigation $3.39 $6.24 $0.00 $9.63
The results shown in Table 4 – 5 above provide the cost-basis for the City’s consumption charges for the proposed rates. The analysis and average unit costs shown above have been developed to comply with the proportionality requirements of Proposition 218 when developing cost-based water rates.

The final average unit cost development is the customer-related costs which are used to establish the monthly fixed meter charge which varies by meter size. A similar exercise as conducted above for the consumption components was completed for the customer costs. The total customer costs were divided by the number of equivalent meters on the system. An equivalent meter uses the capacity ratio of a 5/8-inch meter to the capacity of larger meter sizes to determine the pricing for each meter size. In this way the meter charge reflects the equitable proportion of fixed costs on the system based on the capacity demands the customer can place on the system based on the size of the meter. Shown below in Table 4 – 6 is a summary of the fixed meter charge unit cost development which is taken from Exhibits 15 and 17 from the Water Technical Analysis.

Table 4 - 6
Summary of the Fixed Meter Charge Cost Basis
Cost Component Rate Calculation
Total Customer Costs $7,118,504
# of Equivalent Meters 21,070
Average Unit Cost ($ / equivalent meter / month) – ¾” & Less $28.15

Cost of Service Analysis 37
City of San Luis Obispo –Water Rate Study

4.10 Summary Results of the Cost of Service Analysis
In summary form, the cost of service analysis began by functionalizing the City’s revenue requirement for FY 2023-24, which is the first year of the rate setting period. The functionalized revenue requirement was then allocated into the appropriate cost components based on industry standard cost of service methodologies. The individual allocated totals were then proportionally distributed to the customer classes of service based on the appropriate distribution factors. The distributed expenses for each customer class were then aggregated to determine each customer class’s overall revenue responsibility (i.e., cost to provide service).

Provided below in Table 4 - 7 is the summary results of the City’s water cost of service analysis and is found in Exhibit 16 in the Water Technical Appendix.

Table 4 - 7
Summary of the Water Cost of Service Analysis ($000)
Class of Service
Present Rate
Revenues
Distributed
Costs
$
Difference
%
Difference
Residential $11,042 $12,602 ($1,560) 14.1%
Multi-Family 3,879 4,399 (521) 13.4%
Non-Residential 5,450 5,702 (252) 4.6%
Irrigation 2,491 2,102 389 -15.6%
Total $22,861 $24,805 ($1,943) 8.5%
The cost of service study proportionally distributed the operating and capital costs for FY 2023- 24 to each customer class with their respective benefit received from and burdens placed on the water system (proportional distribution) based on the service requirements. The results of the analysis show that cost differences exist between the customer classes of service. Specifically, the rates for residential and multi-family can be increased greater than the system average (i.e.,

8.5%), the non-residential rates can increase slightly lower than the system average, and irrigation rates can be decreased. These results, and change in rate required, is primarily the result of changing consumption characteristics since the prior cost of service study.

It is important to understand that a cost of service analysis is based on one year’s O&M expense data and projected customer usage information, which can change from study to study. The analysis can be impacted by several variables such as budget structure changes or a change in consumption characteristics. Given this, the results of the cost of service analysis may change from year to year. As the City continues to monitor waterrates and cost of service results through future studies, future cost of service adjustments may be necessary to reflect changes in costs and consumption patterns at that time.

4.11 Consultant’s Conclusions and Recommendations
While cost differences exist, the overall allocation of costs between customers appears to be reasonable and reflect the impacts each customer class of service places on the system. However, given the requirements of Article XIII D, section 6, the results of the cost of service are used to

Cost of Service Analysis 38
City of San Luis Obispo –Water Rate Study
establish the proposed rate designs for each of the City’s water customer classes of service. More specifically, it is recommended that the unit costs derived from the cost of service results be utilized as the basis for the rate design for each water customer class in Section 5.

4.12 Summary of the Cost of Service Analysis
This section of the report has provided the recommendations resulting from the cost of service analysis developed for the City’s water utility. This analysis was prepared using generally accepted cost of service techniques as provided in the AWWA M1 Manual to meet the proportionality requirements of Proposition 218. The Technical Appendix shows the detail of the cost of service analysis in Exhibits 6 – 17. The following section of the report will provide a summary of the present and proposed rates for the City’s water utility.

Rate Design Analysis 39
City of San Luis Obispo – Water Rate Study
5 Development of the Rate Designs
The final step of the City’s comprehensive water rate study is the design of proposed rates to collect the appropriate levels of revenues, based on the results of both the revenue requirement and the cost of service analyses. In developing the City’s proposed water rates, consideration is given to the level of the rates as well as the structure of the rates. The level of rates reflects the amount of revenues that should be collected while the structure of the rates is how it is collected (i.e., component charges) from the customers.

The overall revenue level for the City’s has been established in the revenue requirement analysis (Section 3) while the proportional distribution of costs between the customer classes has been developed in the cost of service analysis (Section 4) which provides the revenue levels to be collected from each class of service based on cost causation and the average unit costs for each rate component.

5.1 Rate Design Criteria and Considerations
Prudent rate administration dictates that several criteria must be considered when setting utility rates. Some of these rate design criteria are listed below:
 Rates which are easy to understand from the customer’s perspective  Rates which are easy for the City to administer
 Consideration of the customer’s ability to pay
 Cost-based and proportional
 Continuity, over time, of the rate making philosophy
 Policy considerations (encourage efficient use, economic development, etc.)  Provide revenue stability from month to month and year to year  Promote efficient allocation of the resource
 Equitable and non-discriminatory (cost-based)
 Legally Defensible (Proposition 218 compliant)
It is important that the City provide its water customers with the proper and accurate price signal as to what their consumption and peaking (demand) requirements are costing. This goal may be approached through both rate level and structure. When developing the proposed rate designs, all the above listed criteria were taken into consideration. However, it should be noted that it is difficult - if not impossible - to design a rate that meets all the goals and objectives listed above.

A good example of this is that it may be difficult to design a rate that takes into consideration the customer’s ability to pay while also being cost-based. In designing rates, there are always tradeoffs between these various goals and objectives.

5.2 Overview of the Proposed Rate Structures
In discussion with City staff several of the above goals and objectives were highlighted as key elements to be included within the proposed rate structure. These were:

Rate Design Analysis 40
City of San Luis Obispo – Water Rate Study
 Proportional, and cost-based
 Revenue stability
The first goal was to provide the cost-basis, or justification, for the proposed rates to reflect the legal rate setting requirements in California. This was accomplished through the development of the cost of service analysis using industry standard approaches (AWWA M1 Manual). The cost of service analysis provided the proportional distribution of costs to the classes of service and tiers, and then provided the average unit costs for purposes of final proposed rates.

The second goal was to maintain the revenue stability of the current rate structure. This was incorporated into the proposed rates by reviewing the level of revenues collected through the monthly fixed meter charge and the consumption charge. In other words, the ratio of fixed revenue collected through the proposed rates would be based the results of the cost of service analysis and maintain a level of revenue stability as similar as possible to the current rate structure.

5.3 Summary of the Present and Proposed Water Rates
The proposed rates for the City’s water utility were designed to meet the total system revenue needs discussed in Section 3 and reflect the cost of service results, including the average unit cost development, shown in Section 4. The proposed water rates have been developed for each customer class of service based on the development of the pricing through the cost of service analysis and specifically the average unit costs.

5.3.1 Review of the Present and Proposed Residential Water Rates The City’s proposed residential customers’ rate structure maintains the current structure. The consumption tiers were reviewed as part of the Study and discussed in Section 4.8.1. The proposed rate structure consists of a monthly fixed charge and a consumption charge which is a three-tiered increasing block rate structure. Provided below in Table 5 - 1 is a summary of the present and proposed water rates for the City’s residential customers.

Table 5 - 1
Summary of the Monthly Single-Family Water Rates
Present
Rate FY 2023-24 FY 2024-25
$ / Acct / Month
Fixed Charge $24.12 $28.15 $30.25
Consumption Charge $ / CCF
0 – 5 CCF $6.90 $7.94 $8.54
5 – 12 CCF 8.04 9.16 9.84
12 + CCF 14.74 15.79 16.97

Rate Design Analysis 41
City of San Luis Obispo – Water Rate Study
The proposed rates in Table 5 – 1 for FY 2023-24 show the fixed charge for all customers based on the results of the average unit costs developed in the cost of service and previously summarized in Table 4 - 6. Also shown in the table are the proposed tiered rates for FY 2023-24 which is taken directly from column D in Table 4 – 5, or the calculated average unit costs from the cost of service analysis.

5.3.2 Review of the Present and Proposed Multi-Family Water Rates For multi-family customers, the existing rate structure is also maintained. Multi-family has the same fixed charge for as residential customers for a ¾” and Less but then it is ratioed by meter size based on the AWWA meter ratios for the larger meters. For multi-family, the proposed consumption charge is a uniform rate structure. The consumption charge was determined through the cost of service process whereby costs were distributed to the consumption charge based on the consumption characteristics for the multi-family customers (See Table 4 – 5). Table 5 – 2 provides a summary of the present and proposed multi-family rates.

Table 5 - 2
Summary of the Monthly Multi-Family Water Rates
Rate Component
Present
Rate FY 2023-24 FY 2024-25
Fixed Charge $ / Acct / Mth
3/4" & Less $24.12 $28.15 $30.25
1" 40.28 47.00 50.50
1 1/2" 80.38 93.75 100.80
2" 128.61 150.05 161.30
3" 241.31 281.50 302.60
4" 402.24 469.25 504.45
6" 804.30 938.25 1,008.60
8" 1,286.92 1,501.25 1,613.85
Consumption Charge $ / CCF
All Use $7.88 $8.91 $9.58
Just as in the residential rates, the multi-family fixed and consumption rates are based on the average unit costs as calculated and developed in the cost of service analysis. The average unit costs for multi-family the fixed charge and consumption charge can be referenced in Table 4 – 6 and Table 4 – 5, respectively.

5.3.3 Review of the Present and Proposed Non-Residential Water Rates Similar to the multi-family rates, the proposed non-residential rates were adjusted to reflect the overall revenue needs from the revenue requirement analysis and the calculated average unit costs from the cost of service analysis. The current rate structure is the same as multi-family with a fixed meter charge based on the size of meter and a uniform consumption charge on a per CCF basis. However, the current and proposed rates for the commercial customers are based on the specific costs distributed in the cost of service analysis for the commercial customer class of

Rate Design Analysis 42
City of San Luis Obispo – Water Rate Study
service. Presented below in Table 5 - 3 is a summary of the present and proposed non-residential water rates.

Table 5 - 3
Summary of the Monthly Non-Residential Water Rates
Rate Component
Present
Rate FY 2023-24 FY 2024-25
Fixed Charge $ / Acct / Mth
3/4" & Less $24.12 $28.15 $30.25
1" 40.28 47.00 50.50
1 1/2" 80.38 93.75 100.80
2" 128.61 150.05 161.30
3" 241.31 281.50 302.60
4" 402.24 469.25 504.45
6" 804.30 938.25 1,008.60
8" 1,286.92 1,501.25 1,613.85
Consumption Charge $ / CCF
All Use $9.57 $9.43 $10.14
As can be seen in Table 5 - 3, the commercial consumption charge is a uniform consumption charge. It should also be noted that the proposed fixed charge by meter size is identical as multifamily customers and the consumption charges for FY 2023-24 are based on the average unit costs as developed in the cost of service analysis and previously shown in Table 4-6 and Table 4 - 5 respectively.

5.3.4 Review of the Present and Proposed Irrigation Water Rates A similar approach was developed for the proposed irrigation rates as was used for multi-family and non-residential customer classes. The current irrigation rate structure was maintained with a monthly meter charge on a ¾-inch equivalency and the consumption charge is a uniform rate structure charged per CCF. It is important to note that the cost differences between the irrigation and all the other customers are due to the differing peak demands that are specific to irrigation customers and based on the best available and current data. Irrigation customers have higher peak demands with intermittent water requirements. Given these peak demands, the system must still be sized to provide that level of water availability at all times. Again, the proposed rates for this customer class of service are the direct output of the calculated average unit costs within the cost of service analysis as shown in Table 4 – 5 in column D and Table 4 - 6. Provided below in Table 5 - 4 is a summary of the present and proposed rates for the irrigation customers.

Rate Design Analysis 43
City of San Luis Obispo – Water Rate Study
Table 5 - 4
Summary of the Monthly Irrigation Water Rates
Rate Component
Present
Rate FY 2023-24 FY 2024-25
Fixed Charge $ / Acct / Mth
3/4" & Less $24.12 $28.15 $30.25
1" 40.28 47.00 50.50
1 1/2" 80.38 93.75 100.80
2" 128.61 150.05 161.30
3" 241.31 281.50 302.60
4" 402.24 469.25 504.45
6" 804.30 938.25 1,008.60
8" 1,286.92 1,501.25 1,613.85
Consumption Charge $ / CCF
All Use $11.73 $9.63 $10.35

5.4 Water Rate Study Recommendations
Based on the results of the City’s water rate study, HDR recommends the following:
 Rate revenues for the City’s water utility should be increased by 8.5% in FY 2023-24 and

7.5% in FY 2024-25
 The proposed rates should be implemented to reflect each customer class’s proportional distribution of costs as developed in this Study
 The rates are proposed to be implemented and effective each year on July 1  Prior to the implementation of the final proposed rate adjustment the City should complete another comprehensive review of the water rates

5.5 Summary of the Water Rate Study
This completes the comprehensive water rate study for the City of San Luis Obispo’s water utility.

The Study has provided a comprehensive review and development of proposed water rates for the City. The adoption of the proposed water rates will allow the City to meet their current and projected water system financial obligations for the time period reviewed based on the assumed customer growth, capital plan, and projected increases in operating costs. Should these assumptions change, the proposed rate adjustments may also need to be revised to reflect the changed conditions.

Water Technical Appendix

R ______
RESOLUTION NO. _____ (2023 SERIES)

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN LUIS

OBISPO, CALIFORNIA, ESTABLISHING THE WATER SERVICE RATES FOR FINANCIAL PLAN 2023-25
WHEREAS, it is the policy of the City of San Luis Obispo to review enterprise fund rates on an ongoing basis and to adjust them as required to ensure that they remain equitable and adequate to fully cover the cost of providing services; and WHEREAS, a comprehensive water rate study was completed in April 2023 by HDR Engineering, Inc. including analysis of Water Fund operating, capital, and debt service needs for fiscal years 2023-24 and 2024-25; and WHEREAS, on May 16, 2023, the City Council reviewed preliminary water rates based on updated revenue and expenditure information necessary to meet system operating, capital, and debt service requirements; and
WHEREAS, 27,175 notices regarding the proposed rates were sent out in April 2023 in compliance with Proposition 218 requirements; and WHEREAS, a public hearing was properly noticed and held on June 6, 2023; and WHEREAS, a majority protest, as contemplated by Article XIII D of the California Constitution, was not received by the conclusion of the public hearing.

NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo as follows:

SECTION 1. Water Rates and Water System Access Charges. The water rates and water system access charges set forth in Exhibit A are hereby adopted, establishing water rates and water system access charges effective July 1, 2023 and July 1, 2024.

The cost of service does not exceed the proportional cost of services provided to the correspondence customer parcel and the revenues derived from the fees will be used for the provision of water services.

SECTION 2. California Environmental Quality Act. Modification of rates and charges by public agencies is statutorily exempt from the California Environmental Quality Act (CEQA) under Public Resources Code 21083 and 21080(b)(8) and State CEQA Guidelines Section 15273 (Rates, Tolls, Fares, and Charges) because the change in rates and charges is for the purpose of:
a) Meeting operating expenses;
b) Purchasing or leasing supplies, equipment, or materials; c) Meeting financial reserve needs and requirements;
d) Obtaining funds for capital projects necessary to maintain service within existing service areas; and

Resolution No. _____ (2023 Series) Page 2
R ______
e) Obtaining funds necessary to maintain such intra-city transfers as authorized by City Charter.

The change in fees is not intended to fund expansion of capital projects not otherwise evaluated under CEQA. Therefore, no environmental review is required for this item.

SECTION 3. Resolution No. 11257 (2021 Series) is hereby rescinded effective 11:59 p.m. June 30, 2023.

Upon motion of Council Member ___________, seconded by Council Member ___________, and on the following roll call vote:

AYES:

NOES:

ABSENT:

The foregoing resolution was adopted this _____ day of _______________ 2023. ___________________________
Mayor Erica A. Stewart
ATTEST:
______________________
Teresa Purrington
City Clerk
APPROVED AS TO FORM:
______________________
J. Christine Dietrick
City Attorney
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of the City of San Luis Obispo, California, on ______________________. ___________________________
Teresa Purrington
City Clerk

Resolution No. _____ (2023 Series) Page 3
R ______
EXHIBIT A: 2023-25 WATER RATES
Usage (per unit cost) Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family Residential
Tier 1: 0 to 5 units
$7.94 $8.54
Single Family Residential
Tier 2: 6 to 12 units
$9.16 $9.84
Single Family Residential
Tier 3: 13+ units
$15.79 $16.97
Multi-Family $8.91 $9.58
Non-Residential $9.43 $10.14
Landscape Irrigation $9.63 $10.35
Base Fees Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family Residential
Monthly Base Fee
$28.15 $30.25
Multi-Family, Non-Residential, and Landscape Irrigation by Water Meter Size

0.75-inch or less meter $28.15 $30.25
1-inch meter $47.00 $50.50

1.5-inch meter $93.75 $100.80
2-inch meter $150.05 $161.30
3-inch meter $281.50 $302.60
4-inch meter $469.25 $504.45
6-inch meter $938.25 $1,008.60
8-inch meter $1,501.25 $1,613.85
Water System Access Charge $100.93 $108.50

879 Morro Street, San Luis Obispo, CA 93401
The protest form provided below is your official protest form. This form can be mailed or personally delivered to the City of San Luis Obispo, City Clerk Office, 990 Palm Street, San Luis Obispo, CA 93401, or personally delivered to the City Clerk at the noticed hearing prior to close of the hearing. For owners of multiple properties, additional protest forms are available at the City Clerk Office.

If the City timely receives (prior to close of the noticed public hearing) written protests to the proposed rates or rate in excess of 50 percent of the parcels receiving water and/or sewer services from the City, City Council will not adopt the proposed rates or rate. Only one protest per parcel will be counted. Mailed or delivered protests received after the close of the noticed public hearing are not valid and won’t be counted, even if postmarked prior to the date of the noticed hearing.

1. Only the property owner on record of a parcel subject to the proposed rate increase or any tenant directly liable for payment of water and sewer service fees (i.e. customer of record) may protest the proposed rate increases.

2. The protest must be in writing.3. The protest must be submitted to and received by the City Clerk prior to the close of the public hearing that is the subject of this Notice that will begin at 5:30 p.m. on Tuesday, June 6, 2023. Written protests must be mailed or personally delivered to the City of San Luis Obispo, City Clerk Office, 990 Palm Street, San Luis Obispo, CA 93401, or personally delivered to the City Clerk at the noticed hearing prior to close of the hearing. Protests submitted orally or by email, fax, or text will not be valid and will not be counted.

4. The written protest must state that the signer opposes the proposed increase in water rates, sewer rates, or both. If a written protest form is used, the box(es) identifying that you are protesting the water and/or sewer rates must be checked.

5. The written protest must contain the service address. 6. The protest must be signed by either the account holder or the property owner of the service address.

Para acceder este aviso en español, por favor visite www.slocity.org/waterandsewerrates.

FOR PROPOSED RATE INCREASESFOR WATER AND SEWER SERVICES This notice is provided to all property owners and customers who currently receive water and sewer services from the City of San Luis Obispo. The San Luis Obispo City Council will be holding public hearings to consider proposed increases to water and sewer rates as further described in this notice. The hearings will be held on:

DATE: June 6, 2023TIME: 5:30 PMPLACE: City of San Luis Obispo, Council Chambers 990 Palm Street, San Luis Obispo, CA 93401
The public hearings will cover proposed rate increases over two years (one increase to take effect from July 1, 2023 to June 30, 2024, and one increase to take effect from July 1, 2024 to June 30, 2025) for water and sewer services provided to users by the City of San Luis Obispo. If adopted, the proposed rate increases will become effective on July 1, 2023 and on July 1, 2024, respectively.

In November 1996, California voters approved Proposition 218, which added Article XIII D to the California Constitution to regulate the imposition of assessments, fees, and charges imposed by local governments. As a result, California agencies must comply with the requirements of California Constitution Article XIII D when setting utility rates. One provision requires an agency to hold a noticed public hearing on proposed utility rate increases, to be held not less than 45 days after notice of the hearing is mailed to each recorded owner of each identified parcel upon which the proposed rates will be imposed, and that rates not be increased if a majority of affected parcels protest the proposed increased rates in writing. Please see the last page of this notice regarding the protest process.

The City’s records indicate that you are an account holder and/or owner of a parcel receiving water and sewer services from the City of San Luis Obispo. As an account holder and/or owner of an identified parcel, you have the right to participate in the City’s rate setting process and, if you choose, to submit a written protest to the proposed increase(s) in rates.

The City’s water and sewer operations rely on rate revenue to pay for operation, maintenance, and replacement of public water and sewer infrastructure, and debt service. General funds (such as property tax or sales tax) do not support these essential services.

Rates for both water and sewer service support maintaining and replacing critical infrastructure, meeting public health regulations, and purchasing and maintaining necessary equipment. Water rates pay for all costs associated with bringing water from surface water reservoirs to the City’s water treatment plant and distributing drinking water to approximately 16,400 service connections. Sewer rates pay for all costs associated with the conveyance of wastewater from each connection to the Water Resource Recovery Facility where the wastewater is treated and valuable resources, such as energy, recycled water, and compost are recovered.Pursuant to California Constitution Article XIII D, the City may not collect more revenue from water and sewer charges than is necessary to recover the costs of providing water and sewer services, and may not use collected revenues for any purpose other than that for which the fee or charge was imposed.

Proposed Water and/or Sewer Rate Protest Form
Name (please print): _______________________ Date: ____________ Service Address (please print):
______________________________________________
□ I am protesting the proposed Sewer Rate (check the box) □ I am protesting the proposed Water Rate (check the box)______________________________ □ Property Owner □ Account Holder
Signature
This Notice of Public Hearing provides information about proposed increases to the City’s water and sewer rates pursuant to the requirements of California Constitution Article XIII (commonly referred to as Proposition 218). This Notice provides information on (1) the amount of the proposed rates to be imposed, (2) the reasons for the rate adjustments, (3) how water and sewer rates are calculated, (4) how customers can receive more information on the effect of the proposed changes to their water and sewer bills, and (5) how to file a protest against the proposed rate increases.

Para acceder este aviso en español, por favor visite www.slocity.org/waterandsewerrates.

1. One Unit = 748 gallons

2. Current rates effective July 1, 2022

1. One Unit = 748 gallons2. Current rates effective July 1, 20223. Water System Access Charge applies where the city provides fire protection only to businesses that utilize a private well for domestic purposesThe proposed water and sewer rate structures recognize different customer classes and their proportionate costs associated with the system. To derive the proportionality, the City completed a comprehensive Cost of Services Study in 2023. Based on the analysis, the water rates are proposed to increase revenues by 8.5 percent in 2023-24 and 7.5 percent in 2024-25. The sewer rates are proposed to increase revenues by 4 percent in both 2023-24 and 2024-25. If approved, the proposed water and sewer rates would become effective on July 1 of each fiscal year. Proposed increases for specific customer classes are shown in the tables below.

While most operations have not changed substantially, cost of commodities and support services related to water and sewer services have increased significantly over the past two years. Some of the primary drivers of increased costs of operations are:x Increase in construction costs for replacement of utility assets like aging water and wastewater pipelines and treatment plantsx Increase in electricity costs related to the treatment and conveyance of water and wastewaterx Cost of salaries and benefits to remain competitive in the recruitment and retention of qualified and licensed personnelx Increase in chemical costs for the treatment of water and wastewater These costs are essential for high quality water and wastewater services that are compliant with State and Federal regulations.

Usage (per unit cost) Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single Family Residential
Tier 1: 0 to 5 units $6.90 $7.94 $8.54Tier 2: 6 to 12 units $8.04 $9.16 $9.84Tier 3: 13+ units $14.74 $15.79 $16.97 Multi-Family, Non-Residential, and Landscape Irrigation Multi-Family $7.88 $8.91 $9.58Non-Residential $9.57 $9.43 $10.14Landscape Irrigation $11.73 $9.63 $10.35 Base Fees Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single-Family Residential Monthly Base Fee $24.12 $28.15 $30.25 Multi-Family, Non-Residential, and Landscape Irrigation by Water Meter Size

0.75-inch or less meter $24.12 $28.15 $30.251-inch meter $40.28 $47.00 $50.501.5-inch meter $80.38 $93.75 $100.802-inch meter $128.61 $150.05 $161.303-inch meter $241.31 $281.50 $302.604-inch meter $402.24 $469.25 $504.456-inch meter $804.30 $938.25 $1,008.608-inch meter $1,286.92 $1,501.25 $1,613.85Water System Access Charge $93.02 $100.93 $108.50 For single-family and multi-family residential customers, a winter water use average is the three-month average of water used during the December, January, and February billing periods. This is also referred to as a “sewer cap” and is the basis of the usage portion of the customer’s monthly sewer charges. For non-residential customers, all “usage” is based on monthly water consumption. For more on how sewer cap is calculated, visit www.slocity.org/ub and click on “Sewer Cap Info”.

Usage (per unit cost) Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single-Family and Multi-Family Residential Per Unit Cost (Up to Sewer Cap) $9.19 $9.44 $9.82Non-Residential Per Unit Costs (for All Water Consumption) $9.19 $9.88 $10.27 Base Fees Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single-Family Residential Monthly Base Fee $21.89 $23.58 $24.52 Multi-Family and Non-Residential by Water Meter Size

0.75-inch or less meter $21.89 $23.58 $24.521-inch meter $36.55 $39.37 $40.951.5-inch meter $72.86 $78.51 $81.652-inch meter $116.63 $125.67 $130.703-inch meter $218.83 $235.78 $245.214-inch meter $364.78 $393.04 $408.766-inch meter $729.34 $785.85 $817.288-inch meter $1,166.99 $1,257.40 $1,307.7010-inch meter $1,677.72 $1,807.71 $1,880.02 Under the proposed rate changes, a typical single-family home using six units of water per month can expect the water portion of their monthly bill to increase from $66.66 to $77.01 in July 2023, and to $82.79 in July 2024. A typical single family home with a sewer cap of five units can expect the sewer portion of their monthly bill to increase from $67.84 to $70.78 in July 2023, and to $73.62 in July 2024. For information on financial assistance programs, please visit https://www.slocity.org/cap.

To calculate how the proposed water and sewer rates affect your bill, visit www.slocity.org/waterservice and click on “Calculate My Bill”. If you keep your monthly water and sewer bill, you can look back at the units of water used and your residential sewer cap to determine how the proposed rate will impact your bill. Look up your bill online by logging into your online payment portal at www.slocity.org/paywaterbill. Please call the City of San Luis Obispo Utilities Department at 805-781-7133 for assistance.

Average Monthly Residential Bill Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Water (base fee + six units) $66.66 $77.01 $82.79Sewer (base fee + five units) $67.84 $70.78 $73.62Total Monthly Bill $134.50 $147.79 $156.41 2 1
1 2
3

City of San Luis Obispo, Council Memorandum
City of San Luis Obispo
Council Agenda Correspondence
DATE: June 6, 2023
TO: Mayor and Council
FROM: Aaron Floyd, Utilities Director
VIA: Derek Johnson, City Manager
SUBJECT: ITEM 7A AND 7B – CONSIDERATION OF 2023-25 WATER AND SEWER RATES
Staff received the following questions, regarding the Consideration of the 2023-25 Water and Sewer Rates. There are also two minor typographical errors that staff wish to clarify following the questions received.

The questions are below with staff’s response shown in italics:

1. A significant decrease was noted in both water and sewer reserve funding projected over the next few years in the study documents. See highlighting here from water study, but similar reduction in sewer:

Overall, Table 3-2 shows the existing revenue with no rate increases compared to the increasing expenses in the outer years for the purpose of identifying the proposed rate adjustment need. Part of the calculation of overall revenue need comes from maintaining Reserve Levels. In this situation, with Reserve Funding under the Expenses column, it shows a need to add more funds to meet the targeted Reserve Level minimums. The current year’s $287,000 is a payment from revenues needed to retain adequate reserves. As it is only in the $10,000 or less in the outer years, it is showing that the anticipated revenues are meeting expenditures as budgeted, including maintenance of reserves. By comparison, if there was an increasing need to add funds to the Reserves in the future, it would demonstrate that the revenues proposed were not sufficient to maintain operating expenditures or healthy reserve levels.

Agenda Correspondence on Items 7A and 7B Page 2

2. This table is on Agenda Packet Page 311. Where does the “outside funding” come from?
For some smaller projects like pipeline replacements, the City pays directly. For larger projects like the WRRF and Pump stations, it’s not feasible to be able to save enough money to pay in cash in the timeframe the infrastructure is needed. For those projects, the City uses “Outside Funding”, which comes from development impact fees (if the project is identified and approved in the impact fee collection study), grants (where possible), and loans (like the WRRF). Staff will raise the suggestion to the City’s rate consultants that it be called “Outside Rates Funding” in future iterations.

3. It was noted that single family and multi-family sewer rates are the same, but we charge a different sewer rate to commercial customers. Yet, staff are proposing different rates for these two types of units when it came to recommended water rates, and even a third rate for commercial water customers. Why would we charge the same sewer rates, no matter what the housing type is, when it comes to sewer, but different rates for water? The main reason that the City charges multi-family water customers a different rate than single family residential has to do with the tiered rate structures in the single family residential. A multi-family housing development is typically served off of just one meter and the rates to individual tenants are usually worked out as part of the rent, if the facilities are not individually metered. Hypothetically, in a 10-unit multifamily building all sharing the same primary water meter, the bill would likely be around 60 units per month even though individually each of the units would be using only around 6 or so units. This would be a significantly higher bill due to the higher cost for Tier 3 rates (13+ units) in the single-family residential rates. To make this equitable, the rates for multi-family are around the cost per unit that the average user of 6 units per month would pay under the single-family residential rates. There is also a smaller part of this that ties back into the proportionality costs across water and sewer customer classes and strengths of flow among the different sewer user classes. This proportionality will need to be periodically revisited and adjusted to ensure compliance with Proposition218.

Agenda Correspondence on Items 7A and 7B Page 3

4. A question about the footnote on this table in the staff report. What are the “investments” referenced here? Also, does the ~$4m difference between the rate revenues generated with the proposed increase and the total revenue requirement get made up completely by the items in the footnote? In other words, we get almost $4m from those three sources: Cal Poly, penalties, and investments?
The City hires PFM to manage the City’s cash reserves which are invested via our adopted investment policies and consistent with the Government Code. The overall strategy is Safety Liquidity Yield (SLY) and the framework is restricted following the Orange County investment scandal. The Investment Oversight Committee reviews the progress of the City’s investment portfolio and the Council is copied on a quarterly basis on the status of City investment via a comprehensive report.

Revenues from Cal Poly, penalties, and investments contribute to the ~$3.3 million difference shown in the table above. Below is a breakdown of staff's anticipated revenues from non-rate sources in FY2023-24 for the Water Fund:

Revenue Source Amount
Sales to Cal Poly $1.1 million
Recycled Water Sales $1.1 million
Grants and Subventions $700,000
Cal Poly Capacity Interest
Payments $250,000
Miscellaneous
Revenues (includes interest on
investments, miscellaneous
penalties, credit collections,
development review fees, etc.)
$200,000

Agenda Correspondence on Items 7A and 7B Page 4

5. The following typographical error was discovered on Packet Page 310 in the Water Rate Study. The sixth bullet point should state 8.5% in FY 2023-24. The correct figures are used in all other materials and most importantly, the Proposition 218 notice is correct.

6. The following typographical error was discovered on Packet Page 384 of the Wastewater Rate Study. The assumed customer growth rate for both water and wastewater are 0.8% per year. The error was limited to only a typographical error and the correct percentage (0.8) was utilized for all calculations within the documents.

Item 7b
Department: Utilities
Cost Center: 6101
For Agenda of: 6/6/2023
Placement: Public Hearing
Estimated Time: 20 minutes
FROM: Aaron Floyd, Utilities Director
Prepared By: Shane Whittington, Utilities Business Manager SUBJECT: CONSIDERATION OF THE 2023-25 SEWER RATES

RECOMMENDATION

1. Receive and file the Comprehensive Sewer Rate Study, April 2023; and

2. Adopt a Draft Resolution entitled “A Resolution of the City Council of the City of San Luis Obispo, California, establishing the Sewer Service Rates for Financial Plan 2023- 25” provided there is no majority protest against the proposed sewer rates; and

3. Find the action statutorily exempt from the California Environmental Quality Act (CEQA) under Public Resources Code 21083 and 21080(b)(8) and State CEQA Guidelines Section 15273 (Rates, Tolls, Fares, and Charges).

REPORT-IN-BRIEF
The City is proposing a sewer rate increase consistent with the process requirements of Proposition 218, the City’s Charter and Municipal Code, and City Financial Plan fiscal policies. The goal of the rate-setting process is to provide sustainable funding to the City’s Sewer Fund for operation, maintenance, and capital project needs. The sewer rates are proposed to increase revenues by 4 percent in both fiscal years 2023-24 and 2024-25. If approved, the proposed sewer rates would become effective on July 1 of each fiscal year.

This report provides the constitutional, regulatory, and policy basis for the proposed sewer rates, identifies the rate setting methodology and protest procedures, summarizes the public outreach conducted to ensure our customers are provided information regarding the process and opportunities to engage with Staff and submit comments, questions, and written protests, and identifies the proposed rates for Council’s consideration.

POLICY CONTEXT
The City’s Sewer Fund is an Enterprise Fund. Enterprise Funds utilize rates and fees paid for services rendered to fund operating, capital, and debt service expenditures. Sewer rates pay for all costs associated with transporting 1.1 billion gallons of wastewater to the City’s Water Resource Recovery Facility from 16,561 service connections. General funds (such as property tax or sales tax) do not support these essential services.

Item 7b
Rates must be developed in compliance with California Constitution Article XIII C and D, commonly referred to as Proposition 218 (Prop 218). When proposing increased rates, some Prop 218 requirements include:

1. Hold a noticed public hearing on proposed utility rate increases, to be held not less than 45 days after notice of the hearing is mailed to each recorded owner of each identified parcel upon which the proposed rates will be imposed.

2. The cost of the service shall not exceed the proportional cost of services provided to the corresponding customer parcel.

3. Revenues derived from the fees must be used for the service that is provided.

4. Rates shall not be increased if a majority of affected parcels protest the proposed increased rates in writing.

In addition to Prop 218 requirements, the City aims for rates that promote the stability and predictability of sewer services. No changes to the current rate structure are recommended or proposed, and the proposed rates are consistent with rate structure prioritized goals previously established by the City Council (Water and Wastewater Rate Structure Review, August 15, 2017 and January 9, 2018). These prioritized goals include:
revenue stability and predictability; discourage wasteful use; stability and predictability of the rates; fair allocation of total cost of service among customer classes; and reflect all present and future costs.

The proposed rates are consistent with policies identified under Financial Plan Enterprise Fund Fees and Rates, which states that the “City will set fees and rates at levels which fully cover the total direct and indirect costs including operations, capital overlay, and debt service” and consistent with this policy the rate setting process has been conducted in “accordance with Proposition 218 and its notification requirements.” In addition, the fiscal evaluation includes identification of community needs for essential services (provision of drinking water and treatment of wastewater) and integration of climate risk, climate action, and Diversity, Equity, and Inclusion (DEI) considerations throughout all financial decisions including identification and implementation of resilient capital projects that equitably provide water and sewer service to the community,1 consistent with Financial Plan Objectives.

1 Financial Plan Purpose and Organization, Financial Plan Objectives and Long-term Financial Planning, C. Consideration of Climate Risk and Climate Action and D. Consideration of Diversity, Equity, and Inclusion (DEI).

Item 7b

DISCUSSION
Rate Setting Methodology
The goal of the rate-setting
process is to provide sustainable
funding to the City’s Sewer Fund
for operation, maintenance, and
capital project needs. Rates
must be developed that are
stable, equitable, and costbased in compliance with
California Constitution Article
XIII C and D, commonly referred
to as Proposition 218 (Prop.
218).

In October 2022, the City hired
HDR Engineering, Inc. (HDR) to
assist with this process and prepare the Comprehensive Sewer Rate Study (Attachment A). For the Comprehensive Sewer Rate Study, HDR utilized industry-standard methods consistent with the M1 Manual, Principles of Water Rates, Fees, and Charges published by the American Water Works Association (AWWA). The Comprehensive Sewer Rate Study provides the necessary documentation and an administrative record of the cost basis for the City’s proposed sewer rates in compliance with Prop. 218 Section 6, which regulates property-related fees and charges to which sewer is bound [California Supreme Court in Bighorn-Desert View Water Agency v. Verjil (2006)]. In accordance with the provisions of Prop. 218, sewer rates are designed based on a cost-of-service methodology that fairly apportions costs to all customers.

The methodology used for sewer rate setting includes a revenue requirement analysis, a cost-of-service analysis, and rate design analysis, as outlined in the graphic below, consistent with Financial Plan Enterprise Fund Fees and Rates policies for ongoing rate review and cost of service fee assessment.2

2 Financial Plan Fiscal Policies Section 3 Enterprise Funds Fees and Rates. C. Ongoing Rate Review.

The City will review and adjust enterprise fees and rate structures as required to ensure that they remain appropriate and equitable.

D. Cost of Service Fees. The City will treat the water and sewer funds in the same manner as if they were privately owned and operated. This means assessing reasonable cost of service fees in fully recovering service costs.

Revenue Requirements to
Operate the Wastewater Sytem
Proposition 218
City Policy/
Rate Structure
Cost of Services/
Proportionality
Rates

Item 7b
This rate setting methodology is consistent with rate structure goals established by Council, the City Charter, and the City Municipal Code, including:

1. The requirement of Council resolution to establish rates for service (Section

13.04.090)

2. Restriction of rate revenues for funding operations, construction, and debt service. related to wastewater services (Section 13.08.410 and City Charter Section 806).

Proposed Sewer Rates
Based on the results of the Comprehensive Sewer Rate Study, the City’s proposed sewer rates for 2023-25 are provided in Table 1, below. The Resolution for adoption of the sewer rates is provided in Attachment B.

Table 1: 2023-25 Proposed Sewer Rates
Usage (per unit
cost)
Current Rates Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family and
Multi-Family
Residential Per Unit
Cost
(Up to Sewer Cap)
$9.19 $9.44 $9.82
Non-Residential Per
Unit Cost
(For all Water
Consumption)
$9.19 $9.88 $10.27

Item 7b
Table 1: 2023-25 Proposed Sewer Rates (continued)
Base Fees Current Rates Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family
Residential Monthly
Base Fee
$21.89 $23.58 $24.52
Multi-Family and Non-Residential by Water Meter Size

0.75-inch or less
meter
$21.89 $23.58 $24.52
1-inch meter $36.55 $39.37 $40.95

1.5-inch meter $72.86 $78.51 $81.65
2-inch meter $116.63 $125.67 $130.70
3-inch meter $218.83 $235.78 $245.21
4-inch meter $364.78 $393.04 $408.76
6-inch meter $729.34 $785.85 $817.28
8-inch meter $1,166.99 $1,257.40 $1,307.70
10-inch meter $1,677.72 $1,807.71 $1,880.02
Protest Procedures
The City sent out 27,175 notices (see Attachment C, Water and Sewer Rate Notice) in April 2023 in compliance with Prop. 218. Under Prop. 218, property owners and/or customers directly responsible for the payment of the fee subject to the proposed rate increase may submit a written protest against the proposed rate increases. The protest must be submitted on the form provided by the City, received by the City Clerk at or before the June 6, 2023 public hearing, identify what is being protested, and contain the service address. The party signing the protest must be listed on the account as the person responsible for payment of the sewer bill or the property owner. In the event that a protest is submitted by the owner and by the tenant responsible for payment of the sewer bill, then one valid protest is counted for the account.

If written protests are filed by a majority (50% + 1), the proposed sewer rates may not be imposed. A majority of the City’s 16,561 sewer customers is 8,280 plus one. As of May 25, 2023 at 12:00 PM, a total of 1,184 written protests were received by the Office of the City Clerk. All protests will need to be validated regarding property ownership and duplicate addresses. The City Clerk will provide an updated summary of the protests received at the conclusion of the public hearing on June 6, 2023.

Previous Council or Advisory Body Action
The City Council received the Strategic Budget Direction from Staff on April 18, 2023, highlighting the proposed rate increases and a presentation from Staff on the proposed Water Rates and Sewer rates during the City Council meeting on May 16, 2023.

Item 7b
Public Engagement
The City is committed to helping the public understand the recommended sewer rates.

Information is provided on the City Utilities Department’s website, and online calculators were made available at the Utilities Department’s website to assist customers’ understanding of the proposed rate structure and rate changes. The Water and Sewer Rate Notice was mailed to all property owners and customers; a copy of the notice is provided as Attachment C.

Staff has responded to questions by phone and email on how customers’ bills would be affected. A Water and Sewer Rate Community Forum was held on May 18, 2023 at the San Luis Obispo Library, where Staff provided a presentation and responded to questions raised by the two attendees from the community. Information was provided to the public via radio ads, digital advertisements were posted on social media and on the City’s web page, and printed information was shared at the Utilities Department booth at the Thursday night Farmers Market to get the word out to the public regarding the Forum, public hearing, and opportunities for protest. In addition, Miguel Barcenas, Utilities Deputy Director, Engineering and Planning, participated in interviews and provided information in Spanish regarding the proposed rates on two local Spanish radio stations, KLMM (94.1) and KIDI (105.1). The two interviews were conducted in Spanish and the first aired on Friday May 25, 2023. Significant outreach on Customer Assistance Programs has also occurred in both English and Spanish. Outreach efforts will continue until the City Council’s final consideration of the rates on June 6, 2023.

CONCURRENCE
The City Attorney has approved as to form, and the City Finance Department and City Clerk concur with the proposed sewer rate increase and associated adherence to Prop. 218 required procedures.

ENVIRONMENTAL REVIEW
Modification of rates and charges by public agencies is statutorily exempt from the California Environmental Quality Act (CEQA) under Public Resources Code 21083 and 21080(b)(8) and State CEQA Guidelines Section 15273 (Rates, Tolls, Fares, and Charges) because the change in rates and charges is for the purpose of:
a) Meeting operating expenses;
b) Purchasing or leasing supplies, equipment, or materials; c) Meeting financial reserve needs and requirements;
d) Obtaining funds for capital projects necessary to maintain service within existing service areas; and
e) Obtaining funds necessary to maintain such intra-city transfers as authorized by City Charter.

The change in fees is not intended to fund expansion of capital projects not otherwise evaluated under CEQA. Therefore, no environmental review is required for this item.

Item 7b

FISCAL IMPACT
In order to meet the rate revenue requirement of the Sewer Fund detailed in the Comprehensive Sewer Rate Study, the proposed sewer rates are projected to generate a total of $19.3 million dollars during FY 2023-24. This is an increase in total rate revenues of 4 percent over FY 2022-23. The Sewer Fund’s projected total revenue requirement for 2023-24 is $21.2 million when other revenue is included. This is further summarized in Table 2.

Table 2: 2023-25 Rate Revenues and Revenue Requirements Comprehensive Sewer Rate
Study (in thousands)
FY2023-24 Forecast FY2024-25 Forecast
Rate Revenues
Without Proposed Rate Increase
$18,589 $18,738
Rate Revenues
With Proposed Rate Increase
$19,333 $20,267
Total Revenue
Requirement
Includes Non-rate Revenues1
$21,207 $22,131
1Non-rate revenues included in Total Revenue Requirements consist of all other revenues obtained by the Utilities Department. These revenues can include investments, capacity interest payments from Cal Poly, and miscellaneous penalties assessed by the Utilities Department.

The proposed rate increases would be implemented on July 1 of the corresponding fiscal year.

ALTERNATIVES

1. Deny the Recommended Sewer Rates. The proposed sewer rates were prepared in alignment with City Council rate structure goals established in January 2018 and Financial Plan objectives and policies. The proposed sewer rates were identified through the preparation of the Comprehensive Sewer Rate Study to meet the needs of the City’s Sewer Fund in providing sewer service for the community.

The proposed sewer rates were also prepared in compliance with Prop. 218. Staff believes that the services, operating programs, and Capital Improvement Plan components of the Sewer Fund represented by the recommended rates are necessary, consistent with Financial Plan objectives and policies, prior policy/program direction of the City Council (Water and Wastewater Rate Structure Review, August 15, 2017 and January 9, 2018), the City Charter and Municipal Code, and required for compliance with state and federal laws. If the City Council does not approve the recommended rates, the City would not have enough funding to implement the proposed Capital Improvement Plan and would not be able to construct essential capital projects, and the City’s bond rating may decrease, which may hinder the City’s ability to obtain low-interest loans for capital projects.

Item 7b

2. Reduce the Recommended Rates. Council could reduce recommended rates and the impact because the majority of system costs are fixed would be to reduce the level of capital which would likely impact the system with potential failures and could impact Sewer Fund rating due to less than market expectations in terms of infrastructure replacement.

ATTACHMENTS
A - Comprehensive Sewer Rate Study (HDR; April 2023)
B - Draft Resolution establishing the Sewer Service Rates for Financial Plan 2023-25 C - Water and Sewer Rate Notice

City of San Luis Obispo
Comprehensive Wastewater Rate Study
April 2023
Draft Report

hdrinc.com
April 21, 2023
Mr. Aaron Floyd
Director of Utilities
City of San Luis Obispo
879 Morro Street
San Luis Obispo, CA 93401‐2710
Subject:  Wastewater Rate Study Draft Report
Dear Mr. Floyd:

HDR Engineering, Inc. (HDR) is pleased to present to the City of San Luis Obispo (City) the draft report  for  the  City’s  comprehensive  wastewater  rate  study  (Study).  The  City’s  Study  was developed  to  provide  cost‐based  wastewater  rates  that  generate  sufficient  revenue  to adequately  fund  the operation and maintenance costs and capital infrastructure needs of  the City’s wastewater utility. More specifically, the Study was designed to develop cost‐based and proportional wastewater rates for the City’s customers. This report outlines the overall approach used to achieve these objectives, along with our findings, conclusions, and recommendations.

The  costs  associated  with  providing  wastewater  service  to  the  City’s  customers  has  been developed based on City specific information and customer characteristics and is included within the development of the proposed wastewater rates. This update was developed using generally accepted rate setting principles and industry standard methodologies as outlined in the Water Environment  Federation’s Manual  of  Practice  No.  27,  Financing  and  Charges  for Wastewater Systems  to  develop  cost‐based  and  proportional  rates.  This  report  provides  the  basis  for developing and implementing wastewater rates which are cost‐based, proportional, and legally defensible for the City’s customers.

We appreciate  the assistance  provided  by  the  City’s  project  team  in  the  development  of  this study  and  this  report.  More  importantly,  HDR  appreciates  the  opportunity  to  provide  these technical and professional services to the City of San Luis Obispo.

Sincerely yours,
HDR Engineering, Inc.

Shawn Koorn
Associate Vice President

Table of Contents   i
City of San Luis Obispo – Wastewater Rate Study
Table of Contents
Executive Summary
Introduction ........................................................................................................................... 1 Overview of the Rate Study Process ...................................................................................... 1 Key Wastewater Rate Study Results ...................................................................................... 2 Summary of the Wastewater Revenue Requirement Analysis ............................................... 2 Summary of the Wastewater Cost of Service Analysis ........................................................... 5 Summary of the Wastewater Rate Design ............................................................................. 6 Summary  7
Introduction and Overview  8

1.1 ..... Goals and Objectives ................................................................................................... 8

1.2 ..... Overview of the Rate Study Process ............................................................................ 8

1.3 ..... Organization of the Study ............................................................................................ 9

1.4 ..... Summary ..................................................................................................................... 9 Overview of Rate Setting Principles  10

2.1 ..... Generally Accepted Rate Setting Principles ............................................................... 10

2.2 ..... Determining the Revenue Requirement .................................................................... 10

2.3 ..... Analyzing Cost of Service ........................................................................................... 11

2.4 ..... Designing Utility Rates ............................................................................................... 12

2.5 ..... Economic Theory and Rate Setting ............................................................................ 12

2.6 ..... Summary ................................................................................................................... 12 Wastewater Revenue Requirement  13

3.1 ..... Determining the Revenue Requirement .................................................................... 13

3.2 ..... Establishing a Time Frame and Approach .................................................................. 13

3.3 ..... Projecting Rate and Other Miscellaneous Revenues ................................................. 14

3.4 ..... Projecting Operation and Maintenance Expenses ..................................................... 15

3.5 ..... Projecting Capital Funding Needs .............................................................................. 15

3.6 ..... Projection of Debt Service ......................................................................................... 17

3.7 ..... Reserve Funding ........................................................................................................ 17

3.8 ..... Summary of the Wastewater Revenue Requirement ................................................ 18

3.9 ..... Consultant’s Conclusions ........................................................................................... 20

3.10 ... Summary ................................................................................................................... 20

Table of Contents   ii
City of San Luis Obispo – Wastewater Rate Study
Wastewater Cost of Service  21

4.1 ..... Objectives of a Cost of Service .................................................................................. 21

4.2 ..... Determining the Customer Classes of Service ........................................................... 21

4.3 ..... General Cost of Service Procedures .......................................................................... 22

4.3.1 Functionalization of Costs ............................................................................ 22

4.3.2 Allocation of Costs........................................................................................ 22

4.3.3 Development of Distribution Factors ........................................................... 23

4.4 ..... Summary of the Wastewater Cost of Service Analysis .............................................. 24

4.5 ..... Consultant’s Conclusions ........................................................................................... 28

4.6 ..... Summary ................................................................................................................... 28 Wastewater Rate Design  29

5.1 ..... Introduction .............................................................................................................. 29

5.2 ..... Rate Design Criteria and Considerations ................................................................... 29

5.3 ..... Development of Cost‐Based Wastewater Rates ........................................................ 29

5.4 ..... Overview of the Current Wastewater Rate Structure ............................................... 30

5.5 ..... Development of the Proposed Wastewater Rates .................................................... 31

5.6 ..... Summary ................................................................................................................... 31 Technical Appendix  32

Executive Summary   1
City of San Luis Obispo – Wastewater Rate Study
Executive Summary
Introduction
HDR  Engineering,  Inc.  (HDR)  was  retained  by  the  City  of  San  Luis  Obispo  (City)  to  conduct  a comprehensive wastewater rate study (Study). The main objectives of the wastewater rate study were:

Develop a projection of wastewater revenues to support the City’s operating and capital costs
Provide a proportional distribution of the costs for providing wastewater service to those customers receiving service
Propose cost‐based wastewater rates for a multi‐year time period that are in compliance with State law
The  City  owns,  operates,  and maintains  the  wastewater  system  which  provide  service  to  the customers within the City’s service area. The City’s wastewater system plays a leading role in the protection of public health and the environment to the local community. Maintaining this system requires  a  proactive  commitment  to  investing  in  the  capital  infrastructure  and  resources necessary  to  keep  this  vital  system  operating  24  hours  a  day,  365  days  per  year.  The  costs associated with providing wastewater service to the City’s customers have been developed based on the information provided by City staff and incorporated and included within the development of the proposed wastewater rates.

Overview of the Rate Study Process
A  comprehensive  rate  study  is  completed  through  three  interrelated analyses  to address  the adequacy  and  proportionality  of  the  wastewater  rates.  These  three  analyses  are  a  revenue requirement analysis, a cost of service analysis, and a rate design analysis. These three analyses are illustrated below in Figure ES – 1.

Figure ES – 1
Overview of the Comprehensive Wastewater Rate Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses of the
utility to determine the overall revenue adjustment
required
Proportionally distributes the revenue requirement
to the customer classes of service
Considers both the revenue requirement and cost
of service results to develop cost‐based rates
Revenue Requirement Analysis

Executive Summary   2
City of San Luis Obispo – Wastewater Rate Study
The above analytical framework was utilized in the development of the City’s Study for reviewing and evaluating the City’s wastewater rates.

Key Wastewater Rate Study Results
The  technical  analysis  was  developed  based  on  the  operation  and  maintenance  (O&M)  and capital infrastructure costs necessary to provide wastewater service to the City’s customers. The Study resulted in the following findings, conclusions, and recommendations.  A revenue requirement analysis was developed for the time period of FY 2022‐23 through FY 2032‐33
 The City’s adopted FY 2022‐23 wastewater utility budget was used as the starting point of the analysis
 Operation and maintenance (O&M) expenses are projected to increase at inflationary levels  A cost of service analysis was developed, for test year FY 2023‐24, to review the cost‐basis of the existing wastewater rates and to distribute the revenue requirement proportionally among the customer classes of service
 The results of the cost of service analysis provided average unit costs (i.e., cost‐based rates) which were used to establish the proposed wastewater rates  The Study has developed proposed rates for a two year period of FY 2023‐24 through FY 2024‐25, by customer class of service
 Based  upon  the  findings  and  conclusions  from  the  revenue  requirement  analysis,  the proposed  wastewater  rate  revenue  adjustments  (not  customer  bill  impacts)  are  4.0% annually in FY 2023‐24 and 2024‐25. The rate adjustments are proposed to be effective July 1 of each year
Summary of the Wastewater Revenue Requirement Analysis
The City’s wastewater utility revenue requirement analysis is the first analytical step in the rate study process. The revenue requirement analysis determines the adequacy of the City’s current wastewater  rates  to  fund  budgeted  and  projected  costs  related  to  both  O&M  and  capital infrastructure expenses. From this analysis, a determination can be made as to the overall level of wastewater revenue adjustments needed to provide adequate and prudent funding for the wastewater utility.

The revenue requirement was developed from the City’s adopted FY 2022‐23 budget and then projected forward for a ten‐year review period of FY 2023‐24 through FY 2032‐33. As a practical matter,  reviewing  a  multi‐year  time  frame  is  recommended  in  an  attempt  to  identify  major expenses that may be on the horizon. By anticipating future financial requirements, the City may begin  planning  for  these  changes  sooner,  thereby  minimizing  short‐term  rate  shock  and smoothing long‐term rate adjustments. The  focus of this Study was on the next two‐year rate

Executive Summary   3
City of San Luis Obispo – Wastewater Rate Study
setting period of FY 2023‐24 through FY 2024‐25 while considering the long‐term rate needs of the wastewater utility.

For the City’s wastewater revenue requirement analysis, a “cash basis” methodology or approach was utilized, which is the approach historically used by the City. The cash basis approach is the most commonly used methodology by municipal utilities to set their revenue requirement. Under this approach, the revenues of the utility must be at a sufficient level to pay for O&M expenses, annual debt service payments, rate  funded capital, and reserve funding. The primary  financial inputs  in  the  development  of  the  revenue  requirement  were  the  City’s  adopted  FY  2022‐23 budget documents, historical billed customer and consumption data, and the City’s wastewater capital  improvement  plan.  The  budgeted  O&M  expenses  were  projected  from  FY  2023‐24 through FY 2032‐33 using assumed escalation (inflationary) factors from the City’s fund analysis.

In addition to the budged O&M, the Study assumed additional staff totaling $113,000 in FY 2023‐

24. In total, the City’s O&M expenses are $11.6 million in FY 2022‐23 and increase to $15.3 million by FY 2027‐28 due to additions in O&M as well as inflationary projections.

The proper and adequate funding of capital projects is important to help minimize rate increases over time. General financial guidelines state that, at a minimum, a utility should annually fund from  rates  an  amount  equal  to,  or  greater  than,  annual  depreciation  expense.  The  annual depreciation  expense  reflects  the  City’s  current  investment  in  plant  in  service (infrastructure/facilities) being depreciated or “losing” their useful life. Over time, and as facilities become worn out or depleted, plant investment needs to be replaced to maintain the existing level of infrastructure (and service levels). However, it must be kept in mind that simply funding an amount equal to annual depreciation expense will not be sufficient to fund the replacement of an existing or depreciated facility. Therefore, consideration should be given to funding within rates at some amount greater than, typically 1.5 to 2.0 times, the annual depreciation expense for renewal and replacement capital projects.

A key element of the Study was the establishment of prudent levels of renewal and replacement funding to meet future capital improvement needs. The City has a number of significant capital improvement  projects  at  the  wastewater  treatment  plant,  as  well  as  annual  capital  needs throughout the collection system, over the next ten‐year period. Over the rate setting period, the City anticipates rate funding of capital of $7.2 million from FY 2022‐23 to $4.8 million in 2032‐

33. This decrease is due to the debt service from the Water Resource Recovery Facility (WRRF) upgrade that begins in FY 2024‐25 which hinders the ability of the City to invest in wastewater capital until it future rate adjustments can restore this capacity. As a point of reference, the City’s annual  depreciation  expense  is  approximately  $3.6  million  (FY  2021‐22).  In  developing  this financial plan, HDR and the City have attempted to minimize rate impacts while funding the City’s capital  improvement  plan  projects.  HDR  has  worked  closely  with  City  staff  to  develop  the proposed capital funding plan.

Provided below in Table ES ‐ 1 is a summary of the capital funding plan over the next five years.

A more detailed discussion of the capital funding plan is included in Section 3 of this report.

Executive Summary   4
City of San Luis Obispo – Wastewater Rate Study
Table ES – 1
Summary of the Capital Improvement Plan (000’s)
FY 2022‐23  FY 2023‐24  FY 2024‐25  FY 2025‐26  FY 2026‐27  FY 2027‐28 Total Capital Projects  $76,343   $10,212   $3,852   $8,621   $2,390   $9,102 Less: Non‐Rate Funding  69,148   2,787   2,002   6,746   0   6,302 Rate Funded Capital $7,195   $7,425   $1,850   $1,875   $2,390   $2,800 Given  a  projection  of  O&M  and  capital  expenses,  a  summary  of  the  wastewater  revenue requirement analysis was developed. Provided below in Table ES – 2 is a summary of the revenue requirement analysis for the City’s wastewater utility.

Table ES ‐ 2
Summary of the Wastewater Revenue Requirements (000’s)
FY 2022‐
23 FY 2023‐
24 FY 2024‐
25 FY 2025‐
26 FY 2026‐
27 FY 2027‐
28 Revenues
Rate Revenues  $18,441   $18,589   $18,738   $18,887   $19,039   $19,191 Miscellaneous Revenues          1,609           1,874           1,864            1,840            1,827           1,802 Total Revenues  $20,050   $20,463   $20,602   $20,728   $20,865   $20,993 Expenses
Total O&M  $11,620   $12,547   $13,417   $14,259   $14,766   $15,291 Rate Funded Capital  7,195   7,425   1,850   1,875   2,390   2,800 Debt Service  1,231   1,232   6,856   6,949   6,940   6,938 Reserve Funding                 4                  2                   8                 3                  4                  9 Total Revenue Requirement  $20,050   $21,207   $22,131   $23,086   $24,099   $25,038 Bal./(Def.) of Funds $0   ($744)  ($1,529)  ($2,358)  ($3,234)  ($4,046) Bal. as a % of Rate Rev. 0.0% 4.0% 8.2% 12.5% 17.0% 21.1% Proposed Revenue Adjustment  0.0%  4.0%  4.0%  4.0%  4.0%  3.5% Add’l Rev. from Rev Adj  $0   $744   $1,529   $2,358   $3,234   $4,046 Bal. / (Def.) After Rate Adj.  $0   $0   $0   $0  $0   $0 As can be seen, the revenue requirement has summed the annual O&M expense, rate funded capital, debt service, and reserve funding. The total revenue requirement is then compared to the  total  sources  of  funds  which  include  the  rate  revenues,  at present  rate  levels,  and  other miscellaneous revenues. From this comparison, a balance or deficiency of funds in each year can be determined. This balance or deficiency of funds is then compared to the current level of rate revenues to determine the level of adjustment needed to meet the revenue requirement. It is important  to  note  the  “Bal.  /  (Def.)  of Funds”  row  is  cumulative. That  is  to  say  that any  rate revenue adjustments in the initial years will reduce the deficiency in the later years.

Executive Summary   5
City of San Luis Obispo – Wastewater Rate Study
Based on the revenue requirement analysis developed herein, HDR has concluded that the City will need to adjust the level of wastewater revenues received over the next two fiscal years (FY 2023‐24 through FY 2024‐25). HDR has reached this conclusion for the following reasons:
 Adjustments are necessary to fund the City’s capital needs, of which a substantial portion is  driven  by  the  planned  issuance  of  long‐term  debt  to  fund  the  wastewater  capital improvement projects
 Adjustments  are  necessary  to  maintain  prudent  funding  of  annual  renewal  and replacement of the wastewater utility
 The proposed adjustments will positively position  the City’s  financial health  (e.g., debt service coverage ratios) and provide long‐term, sustainable funding levels for the City In reaching this conclusion, HDR would recommend that the City adopt the proposed wastewater rate revenue adjustments for FY 2023‐24 through FY 2024‐25 to provide sufficient funding for all the O&M and capital improvement needs over the next five fiscal years. A detailed discussion of the development of the revenue requirement is provided in Section 3 of this report.

Summary of the Wastewater Cost of Service Analysis
A cost of service analysis determines the proportional distribution of the revenue requirement to the various customer classes of service. The objective of the cost of service analysis is different from  determining  the  revenue  requirement.  Whereas  the  revenue  requirement  analysis determines  the  utility’s  overall  revenue  needs,  the  cost  of  service  analysis  determines  the proportional manner in which  to distribute costs and collect  the  revenue  requirement  for  the proposed time period. In this case, the revenue requirement developed for FY 2023‐24 was used for establishing the cost of service analysis.

In summary form, the cost of service analysis began by functionalizing the revenue requirement for  the  wastewater  system.  As  explained  in  more  detail  in  this  report  (Section  4),  the functionalized  revenue  requirement  was  then  equitably  allocated  to  the  appropriate  cost component(s). The individual functional allocation totals were then proportionally distributed to the various customer class of service based on each customer class’s use of or demand placed on the system. The distributed expenses for each customer class were then aggregated to determine each customer class’s overall revenue responsibility. Table ES – 3 provides the summary of the cost of service analysis completed for the City’s wastewater utility customers.

Executive Summary   6
City of San Luis Obispo – Wastewater Rate Study
Table ES ‐ 3
Summary of the Wastewater FY 2023‐24 Cost of Service Analysis ($000) Class of Service
Current
Rate Revenues
Distribution
of Costs
$
Difference
%
Difference
Residential  $9,868   $10,229   ($361)  3.7%
Multi‐Family  3,644   3,812   (168)  4.6%
Non‐Residential           5,077               5,291              (214)  4.2% Total  $18,589  $19,332  ($744) 4.0%
The results of the cost of service analysis indicate minor cost differences between the customer classes  of  service.  These  customer  classes  reflect  the  various types  of  wastewater  customers served by  the City as well as  the current  rate schedules. Given  the  requirements of California Constitution Article  XIII D, Section  6  (commonly  referred  to as  Proposition  218),  the  results – specifically the unit costs ‐ of the wastewater cost of service analysis are used to establish the proposed wastewater rates. As noted in the cost of service section (Section 4) of this report, the implementation of cost of service adjustments will impact the overall customer bill and revenue generation  for the wastewater utility. A detailed discussion of the development of the cost of service analysis is provided in Section 4 of this report.

Summary of the Wastewater Rate Design
The  final  step  of  the  comprehensive  wastewater  rate  study  process  is  the  design  of  the wastewater rates to collect the appropriate levels of revenue, based on the results of the revenue requirement and cost of service analyses. The revenue requirement analysis provided a set of recommendations related to the level of annual revenue adjustments whereas the cost of service results are related to implementing interclass adjustments to reflect the proportional distribution of costs.

It is important to understand that each customer class has a separate rate given the different characteristics as outlined in the cost of service analysis. The City currently has a rate structure for each of the customer classes of service. The single family customers are charged a monthly flat fixed charge per account and a uniform volumetric charge based on the water use up to the winter water average. Multi‐family are charged a  fixed charge based on  the meter  size and a uniform  volumetric  charge  on  water  use  up  to  the  winter  water  average.  For  commercial customers, they are charged a fixed charge based on the meter size and a uniform volumetric charge on all metered water use. After discussion with City staff, and a review of the current rate structure and customer characteristics, no rate structure changes are recommended at this time.

Given the result of the prior analyses, the revenue requirement and cost of service, the proposed wastewater rates can be developed that reflect the cost‐based allocation of the costs of providing service. Provided below in Table ES – 4 is a summary of the current and proposed wastewater rates.

Executive Summary   7
City of San Luis Obispo – Wastewater Rate Study
Table ES – 4
Summary of the Present and Proposed Wastewater Rates
Present
Rates  FY 2023‐24  FY 2024‐25
Base Charge
Residential  $21.89   $23.58   $24.52
Multi‐Family / Non‐Residential
3/4" or Less  $21.89   $23.58   $24.52
1"  36.55   39.37   40.95

1.5"  72.86   78.51   81.65
2"  116.63   125.67   130.70
3"  218.83   235.78   245.21
4"  364.78   393.04   408.76
6"  729.34   785.85   817.28
8"  1,166.99   1,257.40   1,307.70
10”  1,677.72   1,807.71   1,880.02
Consumption Charge
Residential  $9.19   $9.44   $9.82
Multi‐Family  9.19   9.44   9.82
Non‐Residential  9.19  9.88   10.27
The proposed wastewater rates are based on the calculated average unit costs within the cost of service  analysis.  Average  unit  costs  were  calculated  for  both  the  base  charges  and  the consumption  charges  for  each  customer  class.  The  development  of  the  City’s  proposed  rate designs is outlined in detail in Section 5 of this report.

Summary
This wastewater rate study is the culmination of the technical analyses undertaken for the City’s wastewater utility. The recommendations contained within this study are intended to adequately fund and maintain the City’s wastewater utility with cost‐based and proportional rates.

Introduction and Overview 8
City of San Luis Obispo – Wastewater Rate Study
Introduction and Overview
HDR was retained by the City of San Luis Obispo (City) to conduct a comprehensive wastewater cost of service study (Study). The objective of the City’s comprehensive wastewater rate study was to review the City’s wastewater operating and capital costs and develop proportional rates that  are  in  compliance  with  Proposition  218.  The  City’s  Study  reviewed  the  adequacy  of  the existing wastewater rates and provides the framework and cost‐basis for the proposed rates.

The City owns and operates  the wastewater utility  system in San Luis Obispo, California. This system  includes  and  provided  for  the  collection,  conveyance,  treatment,  and  disposal  of  the wastewater flows generated by its customers. The costs associated with providing wastewater service to the City’s customers has been developed based on the  financial and operating data and information provided by the City and included/incorporated within the development of the Study.

1.1 Goals and Objectives
The  City  had a  number  of  key  objectives  in  developing  their  comprehensive  wastewater  rate study. These key objectives provided a framework for the policy decisions in the analyses that followed. These key objectives were:
 Develop  the  City’s  Study  in  a  manner  that  is  consistent  with  the  principles  and methodologies  established  by  the  Water  Environment  Federation  (WEF),  Manual  of Practice No. 27, Financing and Charges for Sewer Systems (WEF MOP #27) and applicable law,  including  the  requirements  of  California  Constitution  Article  XIII  D,  Section  6 (commonly referred to as Proposition 218)
 In financial planning ‐ and when establishing the City’s rates ‐ review and utilize industry standard  practices,  while  recognizing  and  acknowledging  the  specific  and  unique characteristics of the City’s wastewater system
 Meet the City’s financial planning criteria and goals such as debt service coverage ratios, adequate  funding  of  capital  infrastructure  replacement,  and  maintenance  of  prudent reserve levels
 Develop  a  financial  plan  which  adequately  supports  the  wastewater  utility’s  funding requirements, while attempting to minimize overall impacts to rates

1.2 Overview of the Rate Study Process
User rates must be set at a level where a utility’s O&M and capital expenses are met with the revenues received from customers. This is a crucial point, as failure to achieve this objective may lead  to  insufficient  funds  to  maintain  system  integrity.  To  evaluate  the  adequacy  and proportionality  of  the  existing  wastewater  rates,  a  comprehensive  wastewater  rate  study  is performed.  A  comprehensive  rate  study  consists  of  three  interrelated  analyses.  Figure  1  ‐  1 provides an overview of these analyses.

Introduction and Overview 9
City of San Luis Obispo – Wastewater Rate Study
Figure 1 – 1
Overview of the Comprehensive Wastewater Rate Analyses
The  above  analytical  framework  for  reviewing  and  evaluating  rates  was  utilized  for  the development of the City’s wastewater rate study. It is important to understand that the City’s wastewater utility was reviewed on a financially stand‐alone basis. That is, no funding from other City departments or the City’s general fund was assumed or utilized in determining the level of adequate funding needed by the City from its wastewater utility rate revenues.

1.3 Organization of the Study
This  report  is  organized  in a  sequential manner  that  first  provides an  overview  of  utility  rate setting principles, followed by sections that detail the specific steps used to review and develop the City’s proposed wastewater rates. The following sections comprise the City’s wastewater cost of service study report:

Section 2 – Overview of Rate Setting Principles
Section 3 – Revenue Requirement Analysis
Section 4 – Cost of Service Analysis
Section 5 – Rate Design Analysis
Technical Appendices are attached at the end of this report, which detail the technical analyses that were undertaken in the preparation of the Study.

1.4 Summary
This report will review the comprehensive wastewater cost of service study prepared for the City.

This  report  has  been  prepared  utilizing generally accepted and  industry  standard  rate  setting techniques and methodologies, while also taking into consideration meeting the requirements for establishing rates pursuant to the California Constitution.

Revenue Requirement Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses
of the utility to determine the overall
revenue adjustment required
Distributes the revenue requirement to the
customer classes of service in a
proportional manner
Considers both the level and structure of
the rate design to collect the target level of
revenues through cost based rates.

Overview of Rate Setting Principles 10
City of San Luis Obispo – Wastewater Rate Study
Overview of Rate Setting Principles
This section of the report provides background information about the wastewater rate setting process,  including  descriptions  of  generally  accepted  principles,  types  of  utilities, methods  of determining a revenue requirement, cost of service, and rate design. This information is useful for gaining a better understanding of the details presented in Sections 3 through 5 of this report.

2.1 Generally Accepted Rate Setting Principles
As  a  practical  matter,  all  utilities  should  consider  setting  their  rates  around  some  generally accepted or global principles and guidelines. Utility rates should be:
 Cost‐based,  proportional,  and  set  at  a  level  that  meets  the  utility’s  full  revenue requirement
 Easy to understand and administer
 Designed to conform to generally accepted rate setting techniques  Stable  in  their  ability  to  provide  adequate  revenues  for meeting  the  utility’s  financial, O&M, and regulatory requirements
 Established at a level that is stable from year‐to‐year from a customer’s perspective

2.2 Determining the Revenue Requirement
Most public utilities use the “cash basis” methodology or approach for establishing their revenue requirement  and  setting  rates.  This  approach  conforms  to  most  public  utility  budgetary requirements  and  the  calculation  is  easy  to  understand.  A  public  utility  totals  its  cash expenditures for a period of time to determine its required revenues. The revenue requirement for a public (i.e., municipal) utility is usually comprised of the following costs or expenses:

Total Operating  Expenses: This  includes  a  utility’s  operation  and maintenance  (O&M) expenses,  plus  any  applicable  taxes  or  transfer  payments.  O&M  expenses  include  the materials, electricity, labor, supplies, etc., needed to keep the utility functioning.

Total  Capital  Expenses: Capital  infrastructure  expenses  are  calculated  by  adding  debt service payments (principal and interest) to capital improvement projects financed from rate  revenues.  In  lieu  of  including  capital  improvement  projects  financed  from  rate revenues,  a  utility  sometimes  includes  annual  depreciation  expense  to  stabilize  the annual revenue requirement. In addition, a utility may fund future capital improvements through  transfers  to  capital  reserves  that  are  used  in  future  years  for  capital improvements.

Under  the cash basis approach,  the sum of  the  total operating expenses plus the total capital expenses  equals  the  utility’s  total  revenue  requirement  during  any  selected  period  of  time (historical or projected).

Overview of Rate Setting Principles 11
City of San Luis Obispo – Wastewater Rate Study
Note  that  the  two  portions  of  the  capital  expense  component  (debt  service  and  rate  funded capital projects) are necessary under the cash basis approach because utilities generally cannot finance all of their capital facilities with long‐term debt. At the same time, it is often difficult to pay for capital expenditures on a “pay‐as‐you‐go” basis given that some major capital projects may have significant rate impacts on a utility, even when financed with long‐term debt. Many utilities  have  found  that  some  combination  of  “pay‐as‐you‐go”  (rate)  funding  and  long‐term financing will often lead to minimization of rate increases over time.

As  noted,  public  utilities  typically  use  the  cash  basis1  approach  to  establish  their  revenue requirements. An exception occurs if a public  utility provides service  to a major wholesale or contract customer. In  this situation, a public utility could use  the “utility basis” approach  (see Table 2 ‐ 1) regarding earning a fair return on its investment. As a point of reference, the City’s Study is based on the cash basis approach.

Table 2 – 1
Cash versus Utility Basis Comparison
Cash Basis  Utility Basis (Accrual)
+  O&M Expenses    +  O&M Expenses
+  Taxes / Transfer Payments    +  Taxes/Transfer Payments +  Rate Funded Capital Proj. (≥ Depr. Expense)    +  Depreciation Expense +  Debt Service (Principal + Interest)    +  Return on Investment =  Total Revenue Requirement    =  Total Revenue Requirement

2.3 Analyzing Cost of Service
After the total revenue requirement is determined, proportionally distributed to the customers benefitting from the service. The distribution, analyzed through a cost of service analysis, reflects the cost relationships for providing wastewater services. A cost of service analysis requires three analytical steps:

1. Costs are functionalized or grouped into the various cost categories related to providing service.  For  the  wastewater  utility,  this  typically  includes  collection,  pumping,  and treatment. This step is largely accomplished by the utility’s accounting system.

2. The functionalized costs are then allocated to specific cost components. Allocation refers to  the  arrangement  of  the  functionalized  data  into  cost  components.  For  example, 1 “Cash basis” as used in the context of rate setting is not the same as the terminology used for accounting purposes and the recognition of revenues and expenses. As used for rate setting, “cash basis” simply refers to the specific cost components to be included within the revenue requirement analysis.

Overview of Rate Setting Principles 12
City of San Luis Obispo – Wastewater Rate Study
wastewater  costs  are  typically  allocated  as  volume‐2,  strength‐(BOD,  TSS,  etc.)3,  and customer‐related.4

3. Once  the costs are allocated  to  the appropriate component(s),  they are distributed to each customer class of service. The distribution is based on each customer class’s relative (proportional)  contribution  to  the  cost  component  (i.e.,  benefits  received  from,  and burdens placed on the system and its resources). For example, customer‐related costs are distributed to each class of service based on the total number of customers in that class of service. Once costs are distributed, the revenues from each customer class of service required to achieve cost‐based rates can be determined.

2.4 Designing Utility Rates
Proposed rates are designed based on the results from both the revenue requirement and the cost of service analysis. This approach results in rates that are cost‐based and proportional. In designing  the  final  proposed  rates,  factors  such  as  ability  to  pay,  continuity  of  past  rate philosophy, economic development, ease of administration, and customer understanding may be  taken  into  consideration. However,  the  proposed  rates must  take  into  consideration each customer class’s proportional share of the costs distributed through the cost of service analysis to meet Proposition 218 requirements.

2.5 Economic Theory and Rate Setting
One of the major justifications for a comprehensive rate study is founded in economic theory.

Economic  theory suggests  that  the price of a commodity must  roughly equal its cost if equity among customers is to be maintained. This statement’s implications on utility rate designs are significant.  For  example,  a  wastewater  utility  incurs  additional  costs  to  treat  higher  strength wastewater. It follows that the customers who create and discharge higher strength wastewater into the system create additional operating costs and should pay for the costs associated with treating  higher  strength  waste  and  any  other  maintenance  costs associated with their discharges. When costing and pricing techniques are refined, consumers have a more accurate understanding of what the service costs to collect and treat wastewater. This price‐equals‐ cost concept provides  the basis for  the  subsequent analysis. This is further  reflected  in  the  requirements  of  Proposition  218  which references the need for cost‐based and proportional rates.

2.6 Summary
This section of the report has provided a brief introduction to the general principles, techniques, and approach used to develop cost‐based wastewater rates. These principles and techniques are the basis for the City’s Study reviewed and discussed in this report. 2 “Volume” refers to the amount of wastewater discharged 3 “Strength” refers to the concentration of dissolved and suspended matter in sewage, as indicated, for example, by biochemical oxygen demand or suspended solids.
4 “Customer‐related” refers to such costs as billing and collections “Economic theory
suggests that the price
of a commodity must
roughly equal its cost if
equity among customers
is to be maintained.”

Wastewater Revenue Requirement 13
City of San Luis Obispo – Wastewater Rate Study
Wastewater Revenue Requirement
This section of the report details the development of the revenue requirement analysis for the City’s wastewater  system. The  revenue  requirement analysis is  the  first analytical  step in  the comprehensive wastewater rate study process. From this analysis, a determination can be made as  to  the overall level of  rate  revenue adjustments needed  to provide adequate and prudent funding for both O&M and capital infrastructure needs of the utility. The primary objective of the rate study was to develop cost‐based and proportional wastewater rates that comply with the California Constitution, while attempting  to minimize  the long‐term  rate impacts  to  the City’s customers.

3.1 Determining the Revenue Requirement
In developing the City’s wastewater revenue requirement, a key objective is that the utility must financially  stand  on  its  own  and  be  properly  funded.  That  is  to  say,  no  revenues  are  being transferred from other City departments or funds to support the wastewater utility. As a result, the revenue requirement analysis assumes the full and proper funding needed to operate and maintain the wastewater system on a financially sound and prudent basis for the long‐term.

3.2 Establishing a Time Frame and Approach
To begin calculating the revenue requirement for the City’s wastewater utility, a time frame was established for the analysis (i.e., the Study time period). The budget year for FY 2022‐23 was the starting point and costs were then projected for the 10‐year review period of FY 2023‐24 through FY 2032‐33. The costs  from  the City’s budget were projected over  the 10‐year projected  time period based on estimated escalation (inflation) factors. Reviewing a multi‐year projected time period is recommended in an attempt to identify major expenses that may be on the horizon. By anticipating future financial requirements, the City can begin planning for these changes sooner, thereby minimizing short‐term rate impacts and overall long‐term rates.

The  second  step  in  determining  the  revenue  requirement  was  to  decide  on  the  basis  for accumulating costs. As discussed in Section 2 of this report, the revenue requirement analysis was developed using the “cash basis” approach. The cash basis approach is the most commonly used  methodology  by  municipal  utilities  to  set  their  revenue  requirement.  This  is  also  the methodology that the City has historically used to establish its wastewater revenue requirement.

Given  a  time  period  around  which  to  develop  the  revenue  requirement  and  a  method  to accumulate the costs, the focus shifts to the development and projection of the revenues and expenses of the City’s wastewater utility.

The  primary  financial  inputs  in  the  development  of  the  revenue requirement  were  the  City’s adopted FY 2022‐23 budget documents,  recent 12‐months of customer billing data as well as historical  customer  characteristics,  historical  financial  reports,  and  the  City’s  Capital Improvement  Plan  (CIP).  Presented  below  is  a  detailed  discussion  of  the  steps  and  key

Wastewater Revenue Requirement 14
City of San Luis Obispo – Wastewater Rate Study
assumptions  contained  in  the  development  of  the  City’s  wastewater  revenue  requirement analysis.

3.3 Projecting Rate and Other Miscellaneous Revenues
The first step in developing a projection of the wastewater rate revenues, at present rate levels, was to determine the projected billing units  (fixed and volumetric charges)  for each customer class  of  service  (single‐family  residential, multi‐family,  commercial).  The  billing  units  for each customer  class  were  based  on  the  most  recent  12‐month  period  to  determine  the  current customer usage and billing units. These billing units were then multiplied by the current adopted wastewater  rates. This method of independently calculating  rate  revenues links  the projected revenues used within the analysis to the projected billing units. It also helps to confirm that the billing units used within  the Study are  reasonable  for purposes of projecting  future  revenues, distributing costs and, ultimately, establishing the proposed wastewater rates. The rate revenues are  also  shown  in  Exhibit  3  of  the
Technical  Appendix,  under  “Rate
Revenues” for FY 2022‐23.

As  can  be  seen  in  the  graph,  the
majority  of  the  City’s  rate  revenues
are  derived  from  residential  and
multi‐family customers. The City also
serves  a  variety  of  commercial
customers  of  varying  levels  of
wastewater strength. In total, and at
adopted present rate levels, the City’s wastewater system is projected to receive approximately $18.4 million in  rate  revenues in FY  2022‐23.  Based  on  current City  planning  documents,  the projection  of  rate  revenues  has  assumed  minimal  customer  growth  at  0.5%  per  year.  The projection of rate revenues by FY 2027‐28, ‐ assuming no rate adjustments – is projected to be approximately  $19.2  million  based  on  the  growth  assumptions  noted  above.  The  detailed calculation of the revenues at present rates can be found on Exhibit 5 of the Technical Appendix.

In addition to the rate revenues collected, the City also receives other miscellaneous revenues.

These are revenues related to other utility charges, industrial charges, miscellaneous penalties, interest  income,  etc.  In  total,  the  City  is  projected  to  receive  approximately  $1.6  million  in miscellaneous revenues in FY 2022‐23. The majority of this is derived from Cal Poly for providing wastewater  conveyance  and  treatment  service.  Miscellaneous  revenues  were  estimated  to increase slightly over the study time period and are anticipated to increase to $1.8 million by FY 2027‐28.

On a combined basis, and taking into account the rate revenues and the miscellaneous revenues, the City’s wastewater utility has total projected revenues of approximately $20.1 million in FY 2022‐23, which increases to approximately $21.0 million by FY 2027‐28. The projection of rate and miscellaneous revenues can be found on Exhibit 3 of the Technical Appendix.

Wastewater Revenue Requirement 15
City of San Luis Obispo – Wastewater Rate Study

3.4 Projecting Operation and Maintenance Expenses
Operation and maintenance (O&M) expenses are incurred by the City to maintain the wastewater collection, conveyance, treatment, and disposal system at a consistent service level. The starting point of the projection of O&M expenses was the City’s adopted FY 2022‐23 budget. Budgeted O&M expenses were projected over the rate study time period based on estimated escalation, or inflationary,  factors  from the City’s  fund analysis. These factors took into consideration the City’s recent cost trends and increases, along with any anticipated future increases. Additional O&M  expenses  were  also  added  for  future  staffing  needs  which  are  projected  to  be approximately $113,000 in FY 2023‐24. The total operation and maintenance expenses for the wastewater  utility  are  budgeted  to  be  approximately  $11.6  million  in  FY  2022‐23.  Based  on assumed escalation of costs, the total O&M expenses are projected to increase to approximately $15.3 million by FY 2027‐28. A summary of the O&M expenses is shown as a line item on Table 3 – 2 and detailed in Exhibit 3 of the Technical Appendix.

3.5 Projecting Capital Funding Needs
A key component in the development of the wastewater revenue requirement was to properly and adequately fund capital improvement needs in the near‐, and long‐, term. One of the major issues  facing many utilities across  the U.S. is  the amount of deferred capital projects and  the funding pressure  from  regulatory‐related improvements. The proper and adequate  funding of capital  projects  is  an  important  issue  for  all  wastewater  utilities  and  not  just  a  local  issue  or concern of the City. To accomplish this, the City has an adopted Capital Improvement Plan (CIP) to address both the near‐ and long‐term needs of the wastewater utility. The City’s CIP will help guide and prioritize capital projects over time and the capital investments that may be needed to expand the capacity of facilities to accommodate future customers.

In general, there are three types of capital projects that the City may need to fund. These include the following types:
 Renewal and replacement projects
 Growth/capacity expansion projects
 Regulatory‐related projects
A renewal and replacement project is essentially a project to maintain the existing system that is in place today. Existing  facilities become worn out, obsolete, etc. The City should be investing continuously  in  order  to maintain  the  integrity  of  its  facilities  with  renewal  and  replacement projects. In contrast, growth / capacity expansion projects are related to providing service (i.e., capacity)  to  new  customers.  This  may  be  through  expansion  of  the  existing  system  or construction  of  new  facilities  to  provide  service  to  customers  within  the  City’s  service  area.

Finally, certain projects may be a function of a regulatory requirement in which the Federal or State  government mandates  the  need  for an  improvement  to  the  system  to meet  regulatory standards. Understanding these different types of capital projects is important because it may help to explain why costs are increasing and the cost drivers for any needed rate adjustment.

Wastewater Revenue Requirement 16
City of San Luis Obispo – Wastewater Rate Study
The way in which projects are funded may also vary by the type of capital project. For example, renewal and replacement projects should be funded through annual rates on a “pay‐as‐you‐go basis”. In  contrast  to  this, growth  or  capacity expansion  projects may  be  funded  through  the collection of development impact fees (i.e., growth‐related charges) in which new development pays a proportional share of the cost of improvements required as a result of their connection (impact). Finally, regulatory projects may be funded by a variety of different means, which may include one or more sources such as rates, long‐term debt, grants, etc.

While the above discussion appears to neatly divide capital projects into three clearly defined categories,  the  reality  of  working  with  specific  capital  projects  may  be  more  complex.  For example, a pump may be replaced, but while being replaced, it is up‐sized to accommodate the need for greater capacity. There are many projects that share these “joint” characteristics. At the same time, projects may not be “replacement” related, but rather “improvement” related.

As a specific part of this Study, the City wanted to maintain an adequate level of funding as “pay‐ as‐you‐go”  (rate) as part of the City’s capital  funding plan to maintain  the wastewater system (e.g.,  renewal  and  replacement  needs).  In  addition  to  the  annual  renewal  and  replacement needs, the City is also making very significant upgrades to the treatment plant. As a result, there are significant capital improvement needs over the next 10‐year period. Over the 5‐year review period, FY 2023‐24 through FY 2027‐28, the City anticipates funding their capital infrastructure needs of $84.2 million in reserve funding (the majority being through existing borrowed funds), $2.8 million in grant funding, and $23.5 million in rate funding. The rate funding of capital ranges from $7.2 million in FY 2023‐24 reducing to $2.8 million in FY 2027‐28 as long‐term debt service is added due to the funding of the treatment plant. In conducting the Study and developing this capital funding plan, HDR is not acting in a municipal advisory role to the City.

Provided below in Table 3 – 1 is a summary of the wastewater capital funding analysis.

Table 3 – 1
Summary of the Capital Funding Plan (000’s)
FY 2022‐23  FY 2023‐24  FY 2024‐25  FY 2025‐26  FY 2026‐27  FY 2027‐28 Total CIP $76,343 $10,212 $3,852 $8,621 $2,390 $9,102
Other Funding Sources
Operating Fund Reserves  $0   $0   $0   $0   $0   $0
Capital Fund Reserves  67,761   1,401   2,002   6,746   0   6,302 Grants  1,386   1,386   0   0   0   0
WRRF Upgrade Debt  0  0  0  0  0  0
Assumed Low Interest Loan  0   0   0   0   0   0
Additional Revenue Bonds               0                 0                  0                  0                   0                   0 Total Funding Sources $69,148  $2,787  $2,002  $6,746  $0  $6,302 Rate Funded Capital  $7,195   $7,425   $1,850   $1,875   $2,390   $2,800

Wastewater Revenue Requirement 17
City of San Luis Obispo – Wastewater Rate Study
While the total amount of capital projects may vary from year to year, the wastewater capital funding  plan  has  attempted  to  provide  a  consistent  funding  source  for  the  replacement  of deteriorating system assets when possible. As a point of reference, the City’s annual depreciation expense was approximately $3.6 million in FY 2021‐22. A desirable minimum funding target for rate funded CIP is an amount equal to or greater than annual depreciation expense in order to fund the amount of assets in the system which are annually deteriorating. In FY 2022‐23, the City is  funding  through  rates  significantly  higher  than  the  annual  depreciation  expense  but  that number  decreases  substantially in FY  2024‐25 which is  due  to  the  debt  service  for  the WRRF capital  project.  Although  the  funding  starting  in  FY  2024‐25  is  less  than  annual  depreciation expense, the investment is increased steadily over the review period until it is projected to be $4.8 million by FY 2032‐33 (not shown in Table 3 – 1).

In  discussing  the  use  of  rate  funding  and  annual  depreciation  expense,  it  is  important  to understand that annual depreciation expense is not the same as replacement cost. Thus, funding an amount which exceeds the annual depreciation expense is both prudent and appropriate to address the difference in cost between annual depreciation expense and replacement cost of an asset. As noted, to help establish a prudent level of annual replacement funding through rates, HDR worked with City staff to develop a funding plan for the CIP. In developing this financial plan, HDR and  the City have attempted  to minimize  rate impacts while funding  the planned capital projects of the City.

3.6 Projection of Debt Service
The City currently has four outstanding long‐term debt issues or annual debt service payments with total $1.4 million in FY 2022‐23. As noted above in the capital funding plan (Table 3 – 1), the City is not anticipated to issue any new long‐term debt to fund capital improvement projects over the period. However, the WRRF related SRF loan was secured in 2019 but the full debt service is not  scheduled  to  impact  the  City’s  wastewater  utility  until  FY  2024‐25.  Based  on  these assumptions, the City is projected to have a debt service payment schedule that is estimated at $7.1 million per year by FY 2027‐28.

3.7 Reserve Funding
The  final  component  of  the  revenue  requirement  analysis  is  reserve  funding.  This  can  be described  as  transfers  of  revenue  to/from  reserve  funds  to  maintain  prudent  ending  fund balances or  for  future  funding of specific or unanticipated projects/emergencies. Additionally, any balance of funds after the expenses are paid is maintained within the wastewater utility and transferred  to  the operating  fund  to  fund/manage cash  flow variances. As will be  shown,  the overall financial plan and proposed rate levels are at sufficient levels and the reserve funds are being maintained to meet or exceed minimum target levels.  Operating Fund: The operating fund reserve primarily serves to manage cash flow of the City’s wastewater utility. Typically, an operating reserve will have a minimum target of between 30 and 180 days depending on the intended use and a number of other factors.

Wastewater Revenue Requirement 18
City of San Luis Obispo – Wastewater Rate Study
For  the  City’s  Study,  a  target  minimum  was  set  at  20%  of  O&M  which  equals approximately $2.3 million for FY 2022‐23.
 Capital Fund: The capital fund reserve is used to provide funding of capital projects. The main source of funding is through development impact fee revenues, but funds may also be transferred to this reserve when funds are available. As the City maintains the funds in the capital reserve, they can be utilized for capital improvement projects in order to lessen the rate impact to the City’s wastewater customers. This is currently no minimum target for the capital fund, however, a prudent level is at least an annual amount of capital projects which would be in the $8 million to $10 million range. Over the review period, the City’s capital fund exceeds this target.
 Rate  Stabilization  Fund:  A  rate  stabilization  fund  reserve  shall  be  established  and maintained at a level equal to approximately 5% of the annual rate revenue derived from the  wastewater  utility.  For  FY  2022‐23  this  equates  to  $922,000.  These  funds  are unrestricted,  but  their  use  shall  be  limited  to  mitigating  large  or  unanticipated  rate impacts, or emergency/catastrophe situations.

3.8 Summary of the Wastewater Revenue Requirement
Given  the  above  projections  of  revenues  and  expenses,  a  summary  of  the  City’s  wastewater revenue  requirement  analysis  can  be  developed.  In  developing  the  revenue  requirement analysis, consideration was given to the financial planning considerations of the City. Presented below  in  Table  3  –  2  is  a  summary  of  the  City’s  wastewater  revenue  requirement.  Detailed exhibits of this analysis can be found in the Technical Appendix (Exhibits 1 through 5).

Table 3 ‐ 2
Summary of the Wastewater Revenue Requirements (000’s)
2022‐23  2023‐24 2024‐25 2025‐26 2026‐27 2027‐28
Revenues
Rate Revenues  $18,441   $18,589   $18,738   $18,887   $19,039   $19,191 Miscellaneous Revenues         1,609          1,874          1,864          1,840           1,827          1,802 Total Revenues  $20,050   $20,463   $20,602   $20,728   $20,865   $20,993 Expenses
Total O&M  $11,620   $12,547   $13,417   $14,259   $14,766   $15,291 Rate Funded Capital  7,195   7,425   1,850   1,875   2,390   2,800 Debt Service  1,231   1,232   6,856   6,949   6,940   6,938 Reserve Funding                4                  2                  8                  3                  4                  9 Total Revenue Requirement  $20,050   $21,207   $22,131   $23,086   $24,099   $25,038 Bal./(Def.) of Funds $0  ($744) ($1,529) ($2,358) ($3,234) ($4,046) Bal. as a % of Rate Rev. 0.0% 4.0% 8.2% 12.5% 17.0% 21.1% Proposed Revenue Adj.  0.0%  4.0%  4.0%  4.0%  4.0%  3.5% Add’l Rev. from Adj.  $0   $744   $1,529   $2,358   $3,234   $4,046 Total Bal. / (Def.) of Funds  $0   $0   $0   $0  $0   $0

Wastewater Revenue Requirement 19
City of San Luis Obispo – Wastewater Rate Study
As can be seen in Table 3 ‐ 2, the revenue requirement has summed the O&M expenses, rate funded  capital,  debt  service,  and  reserve  funding.  The  total  revenue  requirement  is  then compared to the total sources of funds which include the rate revenues, at present rate levels, and other miscellaneous revenues. From this comparison, a balance or deficiency of funds in each year can be determined. This balance or deficiency of funds is then compared to the current level of  wastewater  rate  revenues  to  determine  the  level  of  rate  adjustment  needed  to  meet  the revenue requirement. It is important to note the “Bal. / (Def.) of Funds” row is cumulative. That is,  any  adjustments  in  the  initial  years  will  reduce  the  deficiency  in  the  later  years. Over  the period, the total deficiency is projected to be $4.0 million by FY 2027‐28.

Table  3 –  2 has also included a set of proposed  revenue adjustments  (blue highlighted band) which are sufficient  to meet  the annual revenue requirement over  the projected  time period, based on the assumptions and data used within this analysis. As noted above, the proposed rate adjustments are primarily a function of the need to adequately fund the capital improvements.

However, it is also a function of assumed inflation/escalation of operating costs over this time period.  This  financial  plan  strengthens  the  City’s  funding  for  capital  infrastructure,  while  also meeting  minimum  reserve  levels,  funding  annual  debt  service  payments,  and  meeting  or exceeding legally required minimum debt service coverage ratios. If the proposed wastewater rate adjustments are  not  implemented,  the  City  will  not  have  sufficient  funding  to  prudently operate and maintain the wastewater system. In addition, the City’s existing wastewater rates are not sufficient to support the issuance of long‐term debt to fund the planned capital projects.

It is important to note that the overall revenue adjustments shown in Table 3 ‐ 2 may not reflect the final rate adjustments, or bill impacts, incurred by the City’s individual customers as the cost of service analysis will proportionally distribute the revenue requirement among the customer classes. The overall revenue adjustment reflects the needed revenues for the system as a whole.

A more detailed revenue requirement is included in Exhibit 3 of the Technical Appendix.

3.9 Debt Service Coverage Ratios
When long‐term debt is issued it may have certain rate covenants associated with the debt issue.

Currently,  the  City  has  4  outstanding  long‐term  debt  issuances.  Additionally,  as  mentioned previously, it is assumed within the capital funding plan that the City will need to issue long‐term debt in order to fund capital improvement projects. The City will need to monitor the debt service coverage (DSC) as the debt is incurred and for planning purposes a target debt service coverage ratio of 1.30 is assumed. The City should strive  for a coverage  ratio which is greater  than  the minimum. Provided in Table 3 ‐ 3 is a summary of the projected debt service coverage (DSC) ratio calculations for the City’s wastewater utility before and after the proposed rate adjustments.

Wastewater Revenue Requirement 20
City of San Luis Obispo – Wastewater Rate Study
Table 3 ‐ 3
Summary of the Debt Service Coverage Ratio (All Debt, w/DIF) FY 2022‐23  FY 2023‐24  FY 2024‐25  FY 2025‐26  FY 2026‐27  FY 2027‐28 Before Rate Adjustment  6.97   6.16   1.11   1.00   0.94   0.89 After Rate Adjustment  6.97  6.70  1.33  1.33  1.40  1.46 As can be seen in Table 3 ‐ 3, with the proposed rate adjustments, the City is maintaining a strong debt  service  coverage  ratio.  In  contrast,  should  the  City  not  implement  the  proposed  rate revenue adjustments, the DSC ratio would fall below 1.00 in FY 2026‐27. It is prudent financial practice to target at least 1.30 for the DSC ratio. The 1.30 DSC means that the utility, after meeting its  O&M  expenses  has  sufficient  funds  available  to  pay  the  debt  service  payment.  More specifically, an amount of  funding available which is 30% greater  than  the actual debt service payment. With this minimum financial planning target set, Table 3 – 3 demonstrates that the City is above  this minimum  threshold after  the  proposed  rate adjustments. The  City  is advised  to continue to monitor revenues and expenses to maintain sufficient debt service coverage ratios.

3.10 Consultant’s Conclusions
Based on the revenue requirement analysis developed herein, HDR has recommended that the City adjust wastewater revenues 4.0% annually in FY 2023‐24 and FY 2024‐25. HDR has reached this conclusion for the following reasons:
 Revenue adjustments are necessary to fund the City’s capital needs, of which a significant portion is driven by the funding of substantial treatment plant improvements  Revenue adjustments are necessary to support the City’s planned issuance of long‐term debt. Absent the proposed revenue adjustments, the City will be unable to meet overall debt service coverage ratios and issue long‐term debt to fund necessary capital projects.  The  revenue  adjustments  also  reflect  the  need  to  fund  the  estimated  cost  impacts  of inflation or cost escalation to the operation and maintenance expenses of the wastewater utility
 The proposed revenue adjustments position the City’s wastewater utility to strengthen its  financial  health  and  provide  long‐term  sustainable  funding  levels  for  the  City’s wastewater utility

3.11 Summary
This section of the City’s comprehensive wastewater rate study report has provided a discussion of  the  City’s  wastewater  revenue  requirement  analysis.  The  revenue  requirement  analysis developed a rate/revenue transition plan to support the City’s O&M and capital needs. The next section of this report will discuss the cost of service analysis developed for the City’s wastewater utility which is the basis for establishing cost‐based and proportional wastewater rates.

Wastewater Cost of Service 21
City of San Luis Obispo – Wastewater Rate Study
Wastewater Cost of Service
In  the  previous  section,  the  revenue  requirement  analysis  focused  on  the  total  sources  and application  of  funds  (i.e.,  revenues  vs.  expenses)  required  to  adequately  fund  the  City’s wastewater utility. This section will provide an overview of the cost of service analysis developed for the City’s wastewater utility.

The wastewater cost of service analysis is concerned with  the proportional distribution of the total revenue requirement among the customer classes of service (residential, multi‐family, non‐ residential)  to meet  the  requirements  of  Proposition  218.  The  previously  developed  revenue requirement  analysis  for  FY  2023‐24  was  utilized  in  the  development  of  the  cost  of  service analysis.

4.1 Objectives of a Cost of Service
There are two primary objectives in conducting a wastewater cost of service analysis:
 Proportionally distribute the City’s revenue requirement among the customer classes of service; and
 Derive average unit costs (i.e., cost‐based rates) for subsequent rate designs.

The primary objective of  the cost of service analysis is  the proportional manner  to collect  the revenue requirement from the City’s various customer classes of service. The second rationale for conducting a cost of service analysis is to allow for the development of proposed wastewater rates  that  properly  reflect  the  costs  incurred  by  the  City  and  impacts  customer  place  on  the wastewater  system.  For  example,  a  wastewater  utility  typically  incurs  costs  related  to  flow (wastewater volumes), strength, and customer cost components. Each of  these  types of costs may be collected in a slightly different manner to allow for the development of rates that collect costs in the same manner as they are incurred.

4.2 Determining the Customer Classes of Service
The  first  step  in  a  cost  of  service  analysis  is  to  determine  the  customer  classes  of  service.

Customers  are  grouped  together  in  similar  or  homogenous  groups  based  upon  the  type  of customer,  their  usage  characteristics,  strength  characteristics  or  facility  requirements.  The classes of service used within the cost of service analysis were as follows:
 Residential
 Multi‐Family
 Non‐Residential
HDR reviewed the current customer characteristics and facility requirements to determine the classes of service, which were the City’s current customer classes (i.e., rate schedules) and are consistent with typical industry practices.

Wastewater Cost of Service 22
City of San Luis Obispo – Wastewater Rate Study

4.3 General Cost of Service Procedures
In  order  to  determine  the  proportional  cost  to  serve  each customer class of service on the City’s wastewater system, a cost of service analysis is conducted. A cost of service analysis utilizes a three‐step approach to review costs. These steps are outlined and  discussed  in  Chapters  6  and  7  of  the  Water  Environment Federation  Manual  of  Practice  No.  27  (WEF  MOP  #27).  These steps  take  the  form  of  functionalization,  allocation,  and distribution.  Provided  below  is  a  detailed  discussion  of  the wastewater cost of service analysis conducted for the City, and the specific steps taken within the analysis.

4.3.1 Functionalization of Costs
The  first  analytical  step  in  the  cost  of  service  process  is  called functionalization.  Functionalization  is  the  arrangement  of expenses  and  asset  (plant)  data  by  major  operating  functions (e.g.,  collection,  pumping,  treatment).  Within  this  Study,  the City’s  accounting  records  functionalized  a  majority  of  the expenses and assets. For those costs or assets that were not fully functionalized,  HDR  worked  with  City  staff  to  review  and functionalize the expense or asset

4.3.2 Allocation of Costs
The  second  analytical  task  performed  in  a  wastewater  cost  of service study is the allocation of the costs. Allocation determines why a specific expense is incurred or what type of need is being met.  The  following  cost  allocators  were  used  to  develop  the City’s cost of service analysis:
 Volume‐Related  Costs:  Volume‐related  costs  are  those costs  which  tend  to  vary  with  the  total  quantity  of wastewater collected and treated. A majority of collection system costs are included in this component. An example of a volume‐related cost is electricity used for pumping or treating wastewater.
 Strength‐Related  Costs:  Strength‐related  costs  are  those costs  associated  with  the  additional  handling  and  the treatment  of  high  “strength”  wastewater.  For  the  City’s study,  strength  was  differentiated  between  biochemical oxygen  demand  (BOD),  total  suspended  solids  (TSS),  and ammonia  (AMN).  These  constituents  represent  the
strength  factors  that  drive  the  City’s  treatment‐related costs.  Increased  strength  levels  equate  to  increased treatment costs for wastewater treatment systems.

Terminology of a
Wastewater Cost of Service
Analysis
Functionalization –  The
arrangement  of  the  cost  data  by
functional  category  (e.g.,
collection, pumping, treatment).

Allocation –  The  assignment  of
functionalized  costs  to  cost
components  (e.g.,  volume,
strength, and customer related).

Distribution –  Distributing  the
allocated  costs  to  each  class  of
service  based  upon  each  class’s
proportional  contribution  to  that
specific cost component.

Volume  Costs –  Volume‐related
costs  vary  with  the  total  flow  of
wastewater  (e.g.,  power  for
pumping).

Strength  Costs –  Strength‐
related  costs  refer  to  the
constituent  characteristics  of  the
wastewater  and  the  treatment
function.  Typically,  strength‐
related  costs  are  further  defined
as  biochemical  oxygen  demand
(BOD), suspended solids (SS), and
Ammonia  (A).  Customers  may
have  high  level  wastewater  (i.e.,
greater  than  domestic  strength
characteristics), which costs more
to  treat.  Components  of  the
treatment  process  are  designed
and  sized  around  treating
wastewater strength.

Customer  Costs –  Customer‐
related  costs  vary  with  the
number  of  customers  on  the
wastewater  system,  e.g.,  billing,
collecting, and accounting costs.

Direct  Assignment –  Costs  that
can  be  clearly  identified  as
belonging  to  a  specific  customer
or group of customers.

Wastewater Cost of Service 23
City of San Luis Obispo – Wastewater Rate Study
 Customer‐Related  Costs: Customer‐related  costs vary with  the addition  or  deletion  of a customer  or  a  cost  which  is  a  function  of  the  number  of  customers  served.  Customer‐ related  costs  typically  include  the  costs  of  billing,  collecting,  and  accounting.  Customer‐ related costs can be further defined as either actual or weighted. An actual customer cost is not disproportionate between customers (i.e., postage for billing). In contrast, a weighted customer  costs  have  a  disproportionate  cost  per  customer  associated  with  it  (e.g., wastewater sampling for strength).
 Capacity‐Related  Costs:  The  WEF  MOP  #27  also  discusses  a  capacity  component  as  an allocation  component.  For  the  City’s  Study  the  capacity  allocation  reflects  the  capacity placed on the system by a customer in comparison to a residential equivalent (e.g., flow per account in terms of the number of residential customers) and is reflected through the sizing of the system to meet volume requirements of the system.  Revenue‐Related Costs: Some costs associated with the utility may vary with the amount of revenue received by the utility. An example of a revenue‐related cost would be a utility tax which is based on gross utility revenue.

The  basis,  or  methodology,  for  the  allocation  process  is  outlined  in  the  WEF  MOP  #27.  The methodology  provided  in  the  manual  was  then  applied  to  the  City’s  specific  and  unique circumstances,  facilities,  customers,  costs,  and  system  operation  to  develop  the  appropriate allocation approach.

4.3.3 Development of Distribution Factors
Once  the  allocation  process  is  complete,  and  the  customer  groups  have  been  defined,  the allocated costs were proportionally distributed to each customer class of service. The City’s costs were distributed to the customer classes of service using the following distribution factors.  Volume‐Distribution Factor: Volume‐related costs are generally distributed on the basis of contribution  to  wastewater  flows.  In  order  to  develop  this  distribution  factor,  some knowledge  of  the  contribution  to  flows  must  be  determined.  Wastewater  flows  were estimated based on billed usage and winter water consumption plus assumed I&I5 for each class of service for the projected test period, FY 2023‐24. Winter water consumption is used as a surrogate for wastewater flows as wastewater flows are not metered. Winter water reasonably reflects the “indoor consumption” and the amount that is discharged into the wastewater system. The calculation of the volume distribution factor is shown in Exhibit 6 of the Technical Appendix.
 Customer  Distribution  Factor:  Customer  costs  within  the  cost  of  service  analysis  are distributed  to  the  customer  classes  of  service  based  upon  their  respective  number  of customer accounts. Two types of customer distribution factors were developed: actual and weighted  customer  service  and  accounting.  The  actual  customer  distribution  factor assumes  that  there is no disproportionate cost associated with serving a customer  (e.g., postage  for  bills  is  the  same  regardless  of  the  size  or  usage  of  the  customer)  and  the 5 I&I the inflow and infiltration of water into the wastewater system. This can be from rainwater, groundwater, or other sources of water that make it into the wastewater system.

Wastewater Cost of Service 24
City of San Luis Obispo – Wastewater Rate Study
proportional distribution to each class is based on the number of accounts in each class of service. In contrast, a weighted customer distribution  factor assumes  that  there is some disproportionality associated with serving different types of customers This factor attempts to  reflect  the  different  capacity  demands  and  costs  associated  with  meeting  varying wastewater flows of customers. This difference in capacity demands is best viewed from the perspective of the customer’s water meter. For example, there is a significant difference in  the  resulting  volumetric  flows  associated  with  a  customer  with  a  6”  water  meter  as compared to one with a 5/8” water meter. This difference in potential capacity is reflected within the distribution factor. The proportion or distribution of capacity demands is based on the capacity demands the customer can place on the system based on the size of their water meter. Exhibit 7 of the Technical Appendix provides the calculation of the customer distribution factors.
 Strength‐Distribution Factor: Strength‐related costs are distributed between BOD, TSS, and Ammonia.  These  costs  are  distributed  to  each  of  the  classes  of service  based  upon  the estimated strength levels from industry standards as well as limited data from the City. The strength levels in  total,  for each customer class of service, were utilized  to calculate  the pounds  removed  for each  constituent. Exhibit  8  in  the Technical  Appendix  provides  the calculation of the strength‐distribution factors.
 Revenue‐Related  Distribution  Factor:  The  revenue‐related  distribution  factor  was developed  from  the  projected  rate  revenues  for  FY  2023‐24  for  each  customer  class  of service as developed in Exhibit 3. A summary of the revenue distribution factor is provided in Exhibit 9 of the Technical Appendix.

The development of the distribution factors is based on generally accepted principles as outlined in the WEF MOP #27.

4.4 Summary of the Wastewater Cost of Service Analysis
In summary,  the cost of service analysis began by  functionalizing the City’s wastewater assets (infrastructure) and O&M expenses. The functionalized asset and expense accounts were then allocated into their various cost components. Provided below is a summary of the allocation of the City’s FY 2023‐24 test period revenue requirement using the above described methodology and  tailoring  that  methodology  to  the  City’s  specific  facility  requirements  and  operations.

Provided in Exhibits 10 and 11 of the Technical Appendix is a detailed summary of the allocation of the City’s infrastructure and revenue requirement. Provided below in Table 4 – 1 is a summary of the plant in service allocation.

Table 4 – 1
Summary of the Allocation of the Plant in Service
Volume  BOD  AMN  SS  AC  WCMS  RR

60.2%  12.4%  7.4%  12.4%  0.0%  7.6%  0.0%

Wastewater Cost of Service 25
City of San Luis Obispo – Wastewater Rate Study
Table 4 – 1 shows the relationship of the functional categories and based on the allocated totals.

This can then be used to allocate the costs from the revenue requirement that are shown in Table 4 – 2.

Table 4 – 2
Summary of the Allocation of the FY 2023‐24 Revenue Requirement ($000’s) Total  Volume  BOD  AMN  SS  AC  WCMS  RR
$19,332   $7,459  $2,436  $1,461  $2,436  $0  $5,541  $0 Based on generally accepted methodologies and approaches, and  the City’s specific operating and capital costs associated with their wastewater collection and treatment system, the City’s revenue  requirement  of  approximately  $19.3  million  was  allocated  between  the  functional components.

Once  the  total  costs  are  allocated,  they  are  then  proportionally  distributed  to  the  customer classes of service based on the distribution factors previously developed. The distributed costs are  then summed  to develop  the  total distribution of costs  to each customer class of service.

Provided in Table 4 – 3 is a summary of the distribution of costs to the customer classes of service.

Table 4 – 3
Summary of the Distribution of the FY 2023‐24 Revenue Requirement ($000’s) Classes of
Service  Volume  BOD  AMN  TSS  Customer  RR / DA  Total Residential  $3,589   $1,127   $703   $1,129   $3,681   $0   $10,229 Multi‐Family  1,683   528   330   529   742   0   3,812 Non‐Residential           2,187             780            428             778          1,118                   0            5,291 Total  $7,459   $2,436   $1,461   $2,436   $5,541   $0   $19,332 As  shown  in  Table  4  –  2  the  total  revenue  requirement  for  FY  2023‐24  has  been  equitably allocated between the various cost components based on generally accepted methodologies and the  City’s  system  characteristics.  Next,  the  individual  allocation  totals  were  distributed proportionally  to  the  customer  groups  based  on  the  corresponding  distribution  factors.  For example, volume‐related costs were proportionally distributed based on each customer class’s share of total wastewater flows. By using generally accepted methodologies (i.e., WEF MOP #27) and tailoring the analysis to the City’s specific system and customer characteristics, provides the basis to meet the requirements of Proposition 218.

The total distributed costs are summed for each class of service and then compared to the current revenues of each class of service to determine the overall change in revenues needed from each

Wastewater Cost of Service 26
City of San Luis Obispo – Wastewater Rate Study
class of service to reflect the proportional distribution of costs. Provided below in Table 4 ‐ 4 is the summary of the City’s wastewater cost of service analysis.

Table 4 ‐ 4
Summary of the Wastewater Cost of Service Analysis ($000) Class of Service
Current
Rate Revenues
Distributed
Costs
$
Difference
%
Difference
Residential  $9,868   $10,229   ($361)  3.7%
Multi‐Family  3,644   3,812   (168)  4.6%
Non‐Residential           5,077            5,291            (214)  4.2% Total  $18,589  $19,332  ($744) 4.0%
The results of the cost of service analysis indicate minor cost differences between the customer classes of service. When reviewing the results of the cost of service analysis, it is important to understand  that  the  results will  not  be  “exact” each  time  the  City  updates its  cost  of  service analysis. This is due to changing customer wastewater characteristics, external impacts such as a drought impacts on winter water average use, and changes over time in how the City incurs costs.

To  comply  with  the  requirements  of  article  XII  D,  section  6  (b)  of  the  California  Constitution (Proposition 218), HDR recommends that cost of service adjustments be made in accordance with the results of the Study. To accomplish this, the distributed costs shown in the prior tables are used to develop average unit costs (i.e., cost‐based rates) which become the proposed rates. In this way, the proposed rates are proportional and cost‐based and reflect the results of the Study.

Provided below in Table 4 – 5 is the development of the monthly fixed charge average unit cost calculation. For the City, the fixed charge is the same for all customers with residential customers assumed to have the equivalent impact as a ¾” and less meter. The equivalent meter calculation incorporates the potential demand or capacity of each meter according to the size of the meter.

In this way, it is possible to review each customers impact on the system given a different meter size. The  costs  were  taken  from Table  4 –  3. These  unit  costs  then  become  the  basis  for  the proposed wastewater rates under the rate design section.

Table 4 – 5
Summary of the Fixed Charge Average Unit Costs
Total Costs
Billing
Units
Unit
Cost
Actual Customer  $0  15,884   # of meters  $0.00
Weighted Customer      $5,540,962  19,584   # of equivalent meters          23.58 Total  $5,540,962  $23.58

Wastewater Cost of Service 27
City of San Luis Obispo – Wastewater Rate Study
The approach to establishing the average unit costs is similar for the variable charges, although, the  costs  are  developed  for  each  customer  class  individually.  The  current  rate  structure  is maintained  for all customers with  the variable charge as uniform volumetric  rate. Table 4 – 6 shows  the  development  of  the  variable  charge  unit  cost  calculation.  The  costs  shown  were derived from Table 4 – 3 and the calculated average unit costs will become the basis for the rate designs for the City’s customers.

Table 4 – 6
Summary of the Variable Charge Average Unit Costs
% Distribution
of Total  Total Costs
Billing
Units
Unit
Cost
Residential
Volume  48.1%  $3,589,169   693,440   $5.18
BOD  46.3%  1,126,999   693,440   1.63
AMN  48.1%  703,233   693,440   1.01
TSS  46.3%  1,128,885  693,440  1.63
RR  53.1%  0  693,440  0.00
DA                       0  693,440         0.00
Total  $6,548,286     $9.44
Multi‐Family
Volume 22.6%  $1,682,755   325,114   $5.18
BOD 21.7%  528,385  325,114  1.63
AMN 22.6%  329,706  325,114  1.01
TSS 21.7%  529,269  325,114  1.63
RR 19.6%  0  325,114  0.00
DA                      0  325,114          0.00
Total  $3,070,115     $9.44
Non‐Residential
Volume 29.3%  $2,186,778  422,493  $5.18
BOD 32.0%  780,282  422,493  1.85
AMN 29.3%  428,460  422,493  1.01
TSS 31.9%  777,510  422,493  1.84
RR 27.3%  0  422,493  0.00
DA                      0  422,493             0.00
Total  $4,173,030     $9.88
The distributed costs for each customer class of service are used to develop the proposed rates for the test period, in this case, FY 2023‐24. The total costs are divided by the billing units (e.g., number  of  equivalent meters  and  water  consumption  in  CCF),  to  develop  average  unit  costs

Wastewater Cost of Service 28
City of San Luis Obispo – Wastewater Rate Study
which  become  the  rates.  The  development  of  the  cost  of  service  and  average  unit  costs  are provided in Exhibit 14 of the Technical Appendix.

4.5 Consultant’s Conclusions
The  results  of  the  cost  of  service analysis  show  that minor  cost  differences exist, and HDR  is recommending  that  the  City  implement  cost  of  service  adjustments  and  realign  the  rate structures at this time. This realignment is a natural progression in designing rates as the results of the calculation may change between analyses based on customer characteristics, the manner in  which  costs  are  incurred,  system  design  or  operation,  etc.  Given  this  the  proposed  rates presented in the next section of this report will reflect the results of the cost of service analysis and specifically the average unit costs developed in Tables 4 ‐ 5 and 4 ‐ 6.

4.6 Summary
This section of the report has provided a summary of the cost of service analysis developed for the City’s wastewater utility. This analysis was prepared using generally accepted cost of service methodologies, techniques and principles along with the City’s specific costs, and customer and system  characteristics,  to meet  the  requirements  of  Proposition  218. The  next  section  of  the report will review the present and proposed wastewater rates for the City.

Wastewater Rate Design 29
City of San Luis Obispo – Wastewater Rate Study
Wastewater Rate Design

5.1 Introduction
The third and final step of the City’s wastewater rate study is the design of proposed rates. The rates are designed  to collect a specific level of  revenues, based on  the  results of  the  revenue requirement and cost of service analyses. In reviewing the City’s rates, consideration is given to both the level of the rates and the structure of the rates.

5.2 Rate Design Criteria and Considerations
Prudent rate administration dictates that several criteria must be considered when setting utility rates. Some of these rate design criteria are listed below:
 Rates which are easy to understand from the customer’s perspective  Rates which are easy for the utility to administer
 Consideration of the customer’s ability to pay
 Continuity, over time, of the rate making philosophy
 Policy considerations (encourage efficient use, economic development, etc.)  Provide revenue stability from month to month and year to year  Promote efficient allocation of the resource
 Equitable and non‐discriminatory (cost‐based)
 Compliance with State law
It is important that the City provide its customers with a proper price signal as to what their usage or  volumetric  contributions  are  costing.  This  goal may  be approached  through  rate  level  and structure. When developing the proposed rate designs, all the above‐listed criteria can be taken into consideration. However, it should be noted that it is difficult, if not impossible, to design a rate that meets all the goals and objectives listed above. For example, it may be difficult to design a  rate  that  takes into consideration customers’ ability  to pay, and one which is cost‐based. In designing  rates,  there  are  always  trade‐offs  between  these  various  goals  and  objectives.

However, Proposition 218 requires the implementation of proportional rates as developed in the cost of service analysis (i.e., average unit costs) as such, the above goals and objectives must be considered as part of the development of the cost of service analysis.

5.3 Development of Cost‐Based Wastewater Rates
As  mentioned,  developing  cost‐based  and  proportional  rates  is  of  paramount  importance  in developing the City’s proposed wastewater rates. While always a key consideration in developing rates,  meeting  the  legal  requirements,  and  documenting  the  steps  taken  to  meet  the requirements, has been in the forefront with the recent legal challenges in the State of California on utility rates. Given this, the development of the City’s proposed wastewater rates have been developed  to  meet  the  legal  requirements  of  California  Constitution  Article  XIII  D,  Section  6 (Article XIII D). A key component of Article XIII D is the development of rates which reflect the

Wastewater Rate Design 30
City of San Luis Obispo – Wastewater Rate Study
cost of providing service and are proportionally distributed among the various customer classes of  service  and  the  customers  within  each  class.  HDR  would  point  out  that  there  is  no  single methodology  for  proportionally  distributing  costs  to  the  various  customer groups. The Water Environment Federation Manual of Practice #27 (WEF MOP #27) provides various methodologies which may be used to establish cost‐based wastewater rates. Article XIII D is not prescriptive and does not provide a specific methodology for establishing rates. Given that, HDR developed the City’s  proposed  wastewater  rates  based  on  generally accepted  rate  setting methodologies  to meet the requirements of Article XIII D.

HDR is of the opinion that the proposed wastewater rates meet the legal requirements of Article XIII D. HDR reaches this conclusion based upon the following:
 The revenue derived from wastewater rates does not exceed the funds required to provide the property‐related service (i.e., wastewater service). The proposed rates are designed to collect the overall revenue requirement of the City’s wastewater system.  The revenues derived from wastewater rates shall not be used for any purpose other than that for which the fee or charge is imposed. The revenues derived from the City’s wastewater rates are used exclusively to operate and maintain the City’s wastewater system.  The amount of a fee or charge imposed upon a parcel or person as an incident of property ownership shall not exceed the proportional costs of the service attributable to the parcel.

The  cost  of  service  section  of  this  report  focused exclusively on  the  issue  of  proportional assignment of costs to customer classes of service. The proposed rates have appropriately grouped  customers  into  customer  classes  of  service  (residential,  multi‐family,  non‐ residential) that reflect the varying consumption patterns and system requirements (i.e., the benefits they receive from and burdens they place on the system) of each customer class of service.  The  grouping  of  customers  and  rates  into  these  classes  of  service  creates  the proportionality expected under Article XIII D by having differing rates by customer classes of service which reflect both the level of revenue to be collected by the utility, and the manner in which these costs are incurred and proportionally assigned to customer classes of service and customers within each class of service based upon their proportional impacts.

5.4 Overview of the Current Wastewater Rate Structure
It is important to understand that each customer class has a separate rate given the different characteristics as outlined in the cost of service analysis. All the City’s customers have the same base  fixed  charge  which  is  ¾”  and  less  for  residential  customers  then  multi‐family  and  non‐ residential  customers  are  charged  based  on  their  water  meter  size  to  reflect  the  potential volumetric flows on the wastewater system. The larger meters are ratioed based on the AWWA meter weightings on a ¾” meter basis.

Wastewater Rate Design 31
City of San Luis Obispo – Wastewater Rate Study

5.5 Development of the Proposed Wastewater Rates
After  discussion with  City  staff, and  reviewing  the  customer  characteristics,  no  rate  structure changes are  recommended at  this  time. However, it is important to note  that  the volumetric charges are  based  on  revised  strength assumptions which  distribute  costs  based  on assumed wastewater strength which is higher for non‐residential customers and results in an increased proportional  distribution.  The  proposed  wastewater  rates  are  based  on  the  unit  costs  as developed in the cost of service analysis and shown in Table 4 ‐ 5 and Table 4 ‐ 6. As noted, the proposed  wastewater  rates  are  based  on  the  results  of  the  overall  revenue  needs  (revenue requirement) and the proportional distribution of costs (cost of service results). Provided below in Table 5 – 1 is a summary of the current and proposed wastewater rates. As a note, the rates are implemented at the start of the fiscal year, or July 1 of each year.

Table 5 – 1
Summary of the Present and Proposed Wastewater Rates
Present
Rates  FY 2023‐24  FY 2024‐25
Fixed Charge
3/4" or Less (Residential)  $21.89   $23.58   $24.52
1"  36.55   39.37   40.95

1.5"  72.86   78.51   81.65
2"  116.63   125.67   130.70
3"  218.83   235.78   245.21
4"  364.78   393.04   408.76
6"  729.34   785.85   817.28
8"  1,166.99   1,257.40   1,307.70
10"  1,677.72   1,807.71   1,880.02
Variable Charge
Residential  $9.19   $9.44   $9.82
Multi‐Family  9.19   9.44   9.82
Non‐Residential  9.19   9.88   10.27

5.6 Summary
The City’s proposed wastewater rates are contemporary in design and reflect the rate structures used  by  other  similar  utilities  in  California,  both  locally  and  statewide.  Based  on  the  City’s constraints  and  characteristics,  the  proposed  sewer  rates  appropriately  reflect  the  cost  to provide service and are cost‐based and proportional to the City’s customers. Full and complete technical appendices of the development of the City’s comprehensive wastewater rate study and the proposed rate adjustments can be found in appendices of this report.

Technical Appendix
City of San Luis Obispo – Wastewater Rate Study
Technical Appendix

R ______
RESOLUTION NO. _____ (2023 SERIES)

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN LUIS

OBISPO, CALIFORNIA, ESTABLISHING THE SEWER SERVICE RATES FOR FINANCIAL PLAN 2023-25
WHEREAS, it is the policy of the City of San Luis Obispo to review enterprise fund rates on an ongoing basis and to adjust them as required to ensure that they remain equitable and adequate to fully cover the cost of providing services; and WHEREAS, a comprehensive sewer rate study was completed in April 2023 by HDR Engineering, Inc. including analysis of Sewer Fund operating, capital, and debt service needs for fiscal years 2023-24 and 2024-25; and WHEREAS, on May 16, 2023, the City Council reviewed preliminary sewer rates based on updated revenue and expenditure information necessary to meet system operating, capital, and debt service requirements; and
WHEREAS, 27,175 notices regarding the proposed rates were sent out in April 2023 in compliance with Proposition 218 requirements; and WHEREAS, a public hearing was properly noticed and held on June 6, 2023; and WHEREAS, a majority protest, as contemplated by Article XIII D of the California Constitution, was not received by the conclusion of the public hearing.

NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo as follows:

SECTION 1. Sewer Rates. The sewer rates as set forth in Exhibit A are hereby adopted, establishing sewer rates effective July 1, 2023 and July 1, 2024. The cost of service does not exceed the proportional cost of services provided to the correspondence customer parcel and the revenues derived from the fees will be used for the provision of sewer services.

SECTION 2. California Environmental Quality Act. Modification of rates and charges by public agencies is statutorily exempt from the California Environmental Quality Act (CEQA) under Public Resources Code 21083 and 21080(b)(8) and State CEQA Guidelines Section 15273 (Rates, Tolls, Fares, and Charges) because the change in rates and charges is for the purpose of:
a) Meeting operating expenses;
b) Purchasing or leasing supplies, equipment, or materials; c) Meeting financial reserve needs and requirements;
d) Obtaining funds for capital projects necessary to maintain service within existing service areas; and

Resolution No. _____ (2023 Series) Page 2
R ______
e) Obtaining funds necessary to maintain such intra-city transfers as authorized by City Charter.

The change in fees is not intended to fund expansion of capital projects not otherwise evaluated under CEQA. Therefore, no environmental review is required for this item.

SECTION 3. Resolution No. 11257 (2021 Series) is hereby rescinded effective 11:59 p.m. June 30, 2023.

Upon motion of Council Member ___________, seconded by Council Member ___________, and on the following roll call vote:

AYES:

NOES:

ABSENT:

The foregoing resolution was adopted this _____ day of _______________ 2023. ___________________________
Mayor Erica A. Stewart
ATTEST:
______________________
Teresa Purrington
City Clerk
APPROVED AS TO FORM:
______________________
J. Christine Dietrick
City Attorney
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of the City of San Luis Obispo, California, on ______________________. ___________________________
Teresa Purrington
City Clerk

Resolution No. _____ (2023 Series) Page 3
R ______
EXHIBIT A: 2023-25 SEWER RATES
Usage (per unit cost) Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family and MultiFamily Residential Per Unit
Cost
(Up to Sewer Cap)
$9.44 $9.82
Non-Residential Per Unit
Cost
(For all Water Consumption)
$9.88 $10.27
Base Fees Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family Residential
Monthly Base Fee
$23.58 $24.52
Multi-Family and Non-Residential by Water Meter Size

0.75-inch or less meter $23.58 $24.52
1-inch meter $39.37 $40.95

1.5-inch meter $78.51 $81.65
2-inch meter $125.67 $130.70
3-inch meter $235.78 $245.21
4-inch meter $393.04 $408.76
6-inch meter $785.85 $817.28
8-inch meter $1,257.40 $1,307.70
10-inch meter $1,807.71 $1,880.02

879 Morro Street, San Luis Obispo, CA 93401
The protest form provided below is your official protest form. This form can be mailed or personally delivered to the City of San Luis Obispo, City Clerk Office, 990 Palm Street, San Luis Obispo, CA 93401, or personally delivered to the City Clerk at the noticed hearing prior to close of the hearing. For owners of multiple properties, additional protest forms are available at the City Clerk Office.

If the City timely receives (prior to close of the noticed public hearing) written protests to the proposed rates or rate in excess of 50 percent of the parcels receiving water and/or sewer services from the City, City Council will not adopt the proposed rates or rate. Only one protest per parcel will be counted. Mailed or delivered protests received after the close of the noticed public hearing are not valid and won’t be counted, even if postmarked prior to the date of the noticed hearing.

1. Only the property owner on record of a parcel subject to the proposed rate increase or any tenant directly liable for payment of water and sewer service fees (i.e. customer of record) may protest the proposed rate increases.

2. The protest must be in writing.3. The protest must be submitted to and received by the City Clerk prior to the close of the public hearing that is the subject of this Notice that will begin at 5:30 p.m. on Tuesday, June 6, 2023. Written protests must be mailed or personally delivered to the City of San Luis Obispo, City Clerk Office, 990 Palm Street, San Luis Obispo, CA 93401, or personally delivered to the City Clerk at the noticed hearing prior to close of the hearing. Protests submitted orally or by email, fax, or text will not be valid and will not be counted.

4. The written protest must state that the signer opposes the proposed increase in water rates, sewer rates, or both. If a written protest form is used, the box(es) identifying that you are protesting the water and/or sewer rates must be checked.

5. The written protest must contain the service address. 6. The protest must be signed by either the account holder or the property owner of the service address.

Para acceder este aviso en español, por favor visite www.slocity.org/waterandsewerrates.

FOR PROPOSED RATE INCREASESFOR WATER AND SEWER SERVICES This notice is provided to all property owners and customers who currently receive water and sewer services from the City of San Luis Obispo. The San Luis Obispo City Council will be holding public hearings to consider proposed increases to water and sewer rates as further described in this notice. The hearings will be held on:

DATE: June 6, 2023TIME: 5:30 PMPLACE: City of San Luis Obispo, Council Chambers 990 Palm Street, San Luis Obispo, CA 93401
The public hearings will cover proposed rate increases over two years (one increase to take effect from July 1, 2023 to June 30, 2024, and one increase to take effect from July 1, 2024 to June 30, 2025) for water and sewer services provided to users by the City of San Luis Obispo. If adopted, the proposed rate increases will become effective on July 1, 2023 and on July 1, 2024, respectively.

In November 1996, California voters approved Proposition 218, which added Article XIII D to the California Constitution to regulate the imposition of assessments, fees, and charges imposed by local governments. As a result, California agencies must comply with the requirements of California Constitution Article XIII D when setting utility rates. One provision requires an agency to hold a noticed public hearing on proposed utility rate increases, to be held not less than 45 days after notice of the hearing is mailed to each recorded owner of each identified parcel upon which the proposed rates will be imposed, and that rates not be increased if a majority of affected parcels protest the proposed increased rates in writing. Please see the last page of this notice regarding the protest process.

The City’s records indicate that you are an account holder and/or owner of a parcel receiving water and sewer services from the City of San Luis Obispo. As an account holder and/or owner of an identified parcel, you have the right to participate in the City’s rate setting process and, if you choose, to submit a written protest to the proposed increase(s) in rates.

The City’s water and sewer operations rely on rate revenue to pay for operation, maintenance, and replacement of public water and sewer infrastructure, and debt service. General funds (such as property tax or sales tax) do not support these essential services.

Rates for both water and sewer service support maintaining and replacing critical infrastructure, meeting public health regulations, and purchasing and maintaining necessary equipment. Water rates pay for all costs associated with bringing water from surface water reservoirs to the City’s water treatment plant and distributing drinking water to approximately 16,400 service connections. Sewer rates pay for all costs associated with the conveyance of wastewater from each connection to the Water Resource Recovery Facility where the wastewater is treated and valuable resources, such as energy, recycled water, and compost are recovered.Pursuant to California Constitution Article XIII D, the City may not collect more revenue from water and sewer charges than is necessary to recover the costs of providing water and sewer services, and may not use collected revenues for any purpose other than that for which the fee or charge was imposed.

Proposed Water and/or Sewer Rate Protest Form
Name (please print): _______________________ Date: ____________ Service Address (please print):
______________________________________________
□ I am protesting the proposed Sewer Rate (check the box) □ I am protesting the proposed Water Rate (check the box)______________________________ □ Property Owner □ Account Holder
Signature
This Notice of Public Hearing provides information about proposed increases to the City’s water and sewer rates pursuant to the requirements of California Constitution Article XIII (commonly referred to as Proposition 218). This Notice provides information on (1) the amount of the proposed rates to be imposed, (2) the reasons for the rate adjustments, (3) how water and sewer rates are calculated, (4) how customers can receive more information on the effect of the proposed changes to their water and sewer bills, and (5) how to file a protest against the proposed rate increases.

Para acceder este aviso en español, por favor visite www.slocity.org/waterandsewerrates.

1. One Unit = 748 gallons

2. Current rates effective July 1, 2022

1. One Unit = 748 gallons2. Current rates effective July 1, 20223. Water System Access Charge applies where the city provides fire protection only to businesses that utilize a private well for domestic purposesThe proposed water and sewer rate structures recognize different customer classes and their proportionate costs associated with the system. To derive the proportionality, the City completed a comprehensive Cost of Services Study in 2023. Based on the analysis, the water rates are proposed to increase revenues by 8.5 percent in 2023-24 and 7.5 percent in 2024-25. The sewer rates are proposed to increase revenues by 4 percent in both 2023-24 and 2024-25. If approved, the proposed water and sewer rates would become effective on July 1 of each fiscal year. Proposed increases for specific customer classes are shown in the tables below.

While most operations have not changed substantially, cost of commodities and support services related to water and sewer services have increased significantly over the past two years. Some of the primary drivers of increased costs of operations are:x Increase in construction costs for replacement of utility assets like aging water and wastewater pipelines and treatment plantsx Increase in electricity costs related to the treatment and conveyance of water and wastewaterx Cost of salaries and benefits to remain competitive in the recruitment and retention of qualified and licensed personnelx Increase in chemical costs for the treatment of water and wastewater These costs are essential for high quality water and wastewater services that are compliant with State and Federal regulations.

Usage (per unit cost) Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single Family Residential
Tier 1: 0 to 5 units $6.90 $7.94 $8.54Tier 2: 6 to 12 units $8.04 $9.16 $9.84Tier 3: 13+ units $14.74 $15.79 $16.97 Multi-Family, Non-Residential, and Landscape Irrigation Multi-Family $7.88 $8.91 $9.58Non-Residential $9.57 $9.43 $10.14Landscape Irrigation $11.73 $9.63 $10.35 Base Fees Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single-Family Residential Monthly Base Fee $24.12 $28.15 $30.25 Multi-Family, Non-Residential, and Landscape Irrigation by Water Meter Size

0.75-inch or less meter $24.12 $28.15 $30.251-inch meter $40.28 $47.00 $50.501.5-inch meter $80.38 $93.75 $100.802-inch meter $128.61 $150.05 $161.303-inch meter $241.31 $281.50 $302.604-inch meter $402.24 $469.25 $504.456-inch meter $804.30 $938.25 $1,008.608-inch meter $1,286.92 $1,501.25 $1,613.85Water System Access Charge $93.02 $100.93 $108.50 For single-family and multi-family residential customers, a winter water use average is the three-month average of water used during the December, January, and February billing periods. This is also referred to as a “sewer cap” and is the basis of the usage portion of the customer’s monthly sewer charges. For non-residential customers, all “usage” is based on monthly water consumption. For more on how sewer cap is calculated, visit www.slocity.org/ub and click on “Sewer Cap Info”.

Usage (per unit cost) Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single-Family and Multi-Family Residential Per Unit Cost (Up to Sewer Cap) $9.19 $9.44 $9.82Non-Residential Per Unit Costs (for All Water Consumption) $9.19 $9.88 $10.27 Base Fees Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single-Family Residential Monthly Base Fee $21.89 $23.58 $24.52 Multi-Family and Non-Residential by Water Meter Size

0.75-inch or less meter $21.89 $23.58 $24.521-inch meter $36.55 $39.37 $40.951.5-inch meter $72.86 $78.51 $81.652-inch meter $116.63 $125.67 $130.703-inch meter $218.83 $235.78 $245.214-inch meter $364.78 $393.04 $408.766-inch meter $729.34 $785.85 $817.288-inch meter $1,166.99 $1,257.40 $1,307.7010-inch meter $1,677.72 $1,807.71 $1,880.02 Under the proposed rate changes, a typical single-family home using six units of water per month can expect the water portion of their monthly bill to increase from $66.66 to $77.01 in July 2023, and to $82.79 in July 2024. A typical single family home with a sewer cap of five units can expect the sewer portion of their monthly bill to increase from $67.84 to $70.78 in July 2023, and to $73.62 in July 2024. For information on financial assistance programs, please visit https://www.slocity.org/cap.

To calculate how the proposed water and sewer rates affect your bill, visit www.slocity.org/waterservice and click on “Calculate My Bill”. If you keep your monthly water and sewer bill, you can look back at the units of water used and your residential sewer cap to determine how the proposed rate will impact your bill. Look up your bill online by logging into your online payment portal at www.slocity.org/paywaterbill. Please call the City of San Luis Obispo Utilities Department at 805-781-7133 for assistance.

Average Monthly Residential Bill Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Water (base fee + six units) $66.66 $77.01 $82.79Sewer (base fee + five units) $67.84 $70.78 $73.62Total Monthly Bill $134.50 $147.79 $156.41 2 1
1 2
3

City of San Luis Obispo, Council Memorandum
City of San Luis Obispo
Council Agenda Correspondence
DATE: June 6, 2023
TO: Mayor and Council
FROM: Emily Jackson, Finance Director
VIA: Derek Johnson, City Manager
SUBJECT: ITEM 7C – ADOPTION OF THE 2023-25 FINANCIAL PLAN AND FISCAL YEAR 2023-24 BUDGET
Staff received the following questions, regarding the 2023-15 Financial Plan and Fiscal Year 2023-24 Budget. The questions are below with staff’s response shown in italics:

1. What are the total proposed new FTE’s and in which Department? Is the Operating employee’s list on pages 113-115 the actual total (10)? Or are there also more FTE’s in Capital (p 211 engineering)?
There are 10 (see table 1 below). Pg. 211 is referring to previously approved positions to help support CIP. Some positions are currently under recruitment.

2. What are the contract positions converted to FTE’s and in which departments? See table 1 below. The City’s employee summary is included on Financial Plan Pg. 115. In total there are 10 FTE positions being added from FY 2022-23 to FY 2023-24; however, eight of these were already approved during FY 2022-23 and the ongoing budget allocation is included in the new financial plan. Per Resolution 11399, Section 1: “The budget allocations listed in Exhibit A will be included in the 2023-25 Financial Plan as ongoing budget items.”
Table 1:

Position Dept Type FTE
Previously
Approved
Sustainability & Natural Resources Analyst Admin Contract to Regular Ongoing 1 Housing Specialist Position CDD Contract to Regular Ongoing 1 Volunteer Coordinator P&R Contract to Regular Ongoing 1 Contract Coordinator PW Contract to Regular Ongoing 1
Community Services Officers PD Contract to Regular Ongoing 4 Admin Assistant (Admin/IT)* Admin Contract to Regular Ongoing 1 Urban Forester PW New Position 1
Total 10
*This is a reclassification of the “Management Fellow” position approved by the City Council in the 2019-21 Financial Plan as an ongoing, contract position to a regular position. As a result, there is no fiscal impact associated with this change.

Item 7c – Adoption of the 2023-25 Financial Plan and Fiscal year 2023-24 Budget Page 2

3. What are the job openings resulting from current staff promotions and in which departments?
During the 2021-2023 financial plan, job openings were generally distributed evenly across three categories: one-third resulting from the addition of new positions to support the services provided to the community, another third was due to internal promotions, and the remaining third arose from general turnover. Specifically, in 2022- 23, internal promotions accounted for 35% of the job openings.

4. What positions are proposed to be eliminated or reduced? There are no regular FTEs proposed to be eliminated or reduced. The supplemental employee count decreased in some cases due to one-time budget being removed.

Contract Stormwater Inspector Position (CDD)
Contract Heavy Equipment Mechanic (PW)
Reductions in Supplemental/Intern budget: Fleet, CIP, Engineering, Transportation, WRRF

5. What, if any, is the effect of the hiring chill on this proposed budget? The hiring chill does not have a direct impact on the recommendations included in the 2023-25 Financial Plan. The hiring chill is intended to prompt a critical review of all vacancies in order to determine if there is a need to fill positions immediately. Under the Hiring Chill, Department Heads must demonstrate that positions are necessary to meet health, safety or other high-priority needs. The expectation is that only certain positions will be filled and the savings from positions that aren’t filled will contribute to FY 2022-23 year-end fund balance which will enable repayment of the Operating Reserve (used to cover storm recovery costs), Infrastructure Investment Fund (used to purchase the building at 1106 Walnut) or make an additional discretionary payment to CalPERs.

The description of a Hiring Chill included in the Fiscal Health Contingency Plan is as follows:

Hiring Chill. City Manager approval will be required to fill vacant regular positions. To fill a vacant position, department heads must demonstrate that it is necessary in meeting public health, safety or other high-priority service needs that cannot be met on an interim basis through contract, overtime or temporary staffing. In implementing the “chill,” the goal is not just short-term savings, but preserving future options if the problem turns-out to be ongoing.

Item 7c – Adoption of the 2023-25 Financial Plan and Fiscal year 2023-24 Budget Page 3

6. By what amount would our PERS debt increase if all proposed FTE’s are approved?
The CalPERS unfunded liability is influenced by various factors that are not solely determined by the number of FTE’s at the City. The unfunded liability amount is based upon an actuarial analysis which factors in a number of variables including but not limited to: CalPERS investment gains/losses, the number of active and retired members in the City’s pension plans, and the various benefits provided based on enrollment in the various pension tiers.

Out of the ten FTE’s proposed, nine are existing contract employees who receive CalPERS retirement benefits. Unless there is different direction to eliminate these positions, the nine positions are not adding to the unfunded liability as they are already eligible for CalPERS retirement and are paying the member contribution.

7. Has the recent FEMA reimbursement decision changed the cost impacts of storm recovery (p8,27,73)
The recent announcement that the Federal Disaster Declaration for the February and March storms was extended to include San Luis Obispo County for Public Assistance means that the City will be eligible for FEMA reimbursement of certain costs related to the March storms up to a maximum of 75%. The FEMA coverage is not expected to change overall estimated costs, but will reduce the City’s share of eligible expenses in response to the March storms from 100% to 6.25% due to Cal OES covering 75% of the remaining 25% of eligible costs through the California Disaster Assistance Act (CDAA). The percentage of these incurred costs and estimated future expenses that are deemed eligible through FEMA Public Assistance or CDAA are yet to be determined.

8. What is the criteria for listing some FTE’s listed as “operating” and other FTE’s as “capital” expenses?
All positions are listed in the FTE count on page 112 and are included in the operating budget. In an attempt to reflect the projected cost of staff time within the Public Works Department spent on management of the CIP and delivery of projects, some positions are categorized as “Capital” in the Local Revenue Measure and Capital sections of the budget. (Fiscal Policy Section 9J, pg. 521)

9. Why is the target for affordable housing production down significantly to 50 per year (p173)?
50 units has been the target used as a Performance Measure for several years running. The last time the market did not produce 50 affordable housing units was in 2020-21, when 40 units were produced. Currently, there are 214 affordable units under construction, and 257 affordable units that are fully entitled and ready to go through the building permit process for permits.

Item 7c – Adoption of the 2023-25 Financial Plan and Fiscal year 2023-24 Budget Page 4 These projects include:
 Under Construction
o Tiburon Place (Orcutt Area) - 68 units
o Broad Street Place – 40 units
o Toscano – 38 units
o Anderson Hotel – 68 units
 Entitlements Approved
o Monterey Mixed-Use – 106 units
o 736 Orcutt (Maxine Lewis) - 40 units
o Bridge Street Family Apartments – 94 units
o Jones Mixed-Use (Orcutt Area) - 9 units
o THMA Palm Street Studios – 8 units

10.CC just approved the Community Forest Plan, but tree maintenance as proposed seems to be dispersed through departments, not coordinated centrally. Why is the City arborist transferring from Public Works to Community Development? (p179) Why is Public Works proposing a new Urban Forester position? (208) Trees have been removed from the Urban Forest Services metrics since they are maintained by Parks and Recreation Rangers (210) Planting 10,000 more trees is listed (p 216) as an Urban Forest Services function, but a large number of those trees will likely be in City Open Space and maintained by the Parks & Rec Rangers. Is there a central tree coordinator position proposed?
On January 12, 2023, Council completed an Urban Forest Study Session which included an overview of Urban Forest Services Program’s Organizational Structure, an updated tree inventory, an overview of the Community Forest Plan, and a Maintenance Work Plan. At that study session Council was briefed on the breadth of services the Urban Forest Services Program provides to the City including Proactive & Responsive Maintenance, Community Education & Outreach, Staff of the Tree Committee, Community Partner Liaison, Tree Removal Applications, Municipal Code Enforcement, Heritage Tree Program, Development Review, and Pest Management.

Due to the program’s diversity of services provided to the Community by a small maintenance program, Council was presented with a staffing plan that bifurcated services offered moving administrative, liaison, development review and code enforcement work over to the Community Development Department in order to align work efforts with expertise as the Community Development Department largely completes this type of work for other City operations. Public Works would keep the maintenance responsibility for trees in streets, parks and City facilities and Parks and Recreation would keep the maintenance responsibility for trees in open spaces and public creek areas.

With the Urban Forest Study Session, Council was presented with an updated tree inventory that was specific to the areas maintained by the Urban Forest Services Program including public rights of way, parks and City facilities. Trees were not

Item 7c – Adoption of the 2023-25 Financial Plan and Fiscal year 2023-24 Budget Page 5 removed from the inventory, we have a more accurate inventory of the trees within the public rights of way, parks and City facilities now and that asset inventory will be closely managed.

There is not a central tree coordinator position that is proposed with the 2023-25 Financial Plan nor was it proposed in the study session presented to Council. Metrics for trees within the public rights of way, parks and City facilities will continue to be presented as a performance measure for the Public Works Department. Trees planted as part of the 10 Tall initiative (10,000 more trees planted) within the areas maintained by the Urban Forest Services Program will be tracked and reported out as a Public Works performance measures. Trees planted as part of the 10 Tall Initiative will also be formally reported out to Council via future Climate Action Plan updates every four years and will include new trees planted on private property, in open spaces, in public rights of way, parks, and City facilities. The next formal Climate Action Plan update is scheduled for the fall of 2027 precedent to preparation of the 2027-29 Financial Plan (see Figure 4.1 on page 74). Informal updates to tree planting activity will be provided on a regular basis, however, through the 10 Tall website that was demonstrated at the January 12, 2023, Study Session.

As presented in the study session, the plan to bifurcate maintenance of the trees planted in public rights of way, parks and City facilities was reviewed and that implementation is included in this 2023-25 Financial Plan. This includes outsourcing the maintenance pruning of City trees to a maintenance contractor and keeping a small crew of maintenance staff in the Public Works Department to address small tree care (newly planted trees) as well as responding to immediate needs such as falling limbs blocking the public right of way. Young tree care is critical especially in the built environment to ensure that trees are growing correctly and have the proper watering.

Even though a majority of the trees planted to address the 10 Tall Initiative are planned for open spaces, this will remain a large work effort for the Urban Forest Program in the coming years.

In summary, the proposals outlined in the 2023-25 Financial Plan align with Council direction received at the January 12, 2023 study session.

11.Stormwater Utility should be included in Utilities, not Public Works. Utilities has expertise with enterprise fund management.

The City’s Stormwater program is managed through Utilities; however, it is combined with Flood Control and is primarily funded through the General Fund and therefore included in the Public Works budget. If Stormwater became its own enterprise fund, it would be included in Utilities.

Item 7c – Adoption of the 2023-25 Financial Plan and Fiscal year 2023-24 Budget Page 6

12.Could the Police motto be changed from “Service, Pride, Integrity” to “Service, Respect, Integrity”?
The Police Department is currently undergoing a 5-year strategic planning process.

Consideration of an update to the Department’s Mission, Vision, and Motto are included in that process, but it is too early to know what potential changes to the motto might be made, as engagement with the community and staff is ongoing.

13.Could the term “base fee” be changed to “service fee” or “hook up fee”? (p 269) Across the water and wastewater industry, the terms “base fee”, “service fee”, etc. are used to represent that portion of the bill that is uniformly and equally applied to all customers in the same customer class. On Agenda Packet Page 348, they are referred to as a “Fixed Charge” by the City’s rate consultant. Staff would be hesitant to change the term at this point due to the inclusion of the term “base fee” in the Proposition 218 Public Hearing Notification. Staff believe that, if desired, a change in terms would be best made with an upcoming rate structure study, currently planned for with the next 2025-27 Financial Plan.

14.Could water rates be lowered during this budget cycle due to reduced chemicals usage and efficiencies? (p 276) If yes, by how much?
Any increases in efficiencies that could lead to reduced costs were completely offset due to increases in commodity costs in the current budget cycle. Future areas for exploring opportunities for efficiencies include the utilization of groundwater, potential revenue from short-term outside City non-potable water sales, and with the Water Treatment Plant Infrastructure Renewal Strategy which will look at changing the time of plant operations to take advantage of more favorable time of use electrical rates.

15.Why groundwater recharge with wastewater (injection well field) not being included in this budget cycle? Why delay replenishing groundwater with excess wastewater? (281)
The current Financial Plan contain funding to study these next steps towards potable reuse in the form of a Source Water Strategic Plan (CIP #117). The first step towards indirect potable reuse will be the completion of the WRRF, with significant treatment processes being scheduled for completion at the end of 2023. The next step will involve the utilization of existing groundwater supplies to free capacity in the groundwater basin. As the City has stored groundwater for several years, in conjunction with the large winter storms, the groundwater basin currently has no room for additional water to be injected. The City recently received a grant for approximately $6 million that will enable the utilization of local groundwater. This groundwater project will be designed to be adaptable to future indirect potable reuse projects. It is wise to clean up the existing groundwater before adding new water to the basin.

Item 7c – Adoption of the 2023-25 Financial Plan and Fiscal year 2023-24 Budget Page 7

16.At the April 18th Council meeting, a question was asked about the lack of new funding allocated to childcare other than the additional funds allocated in Major City Goal task 2.8d for financial aid to low-income families, concerned that after making childcare a central part of our original goal and budget discussions, we’re left with very little to show for it in this budget? There were active talks between SLCUSD, Cal Poly and the City around a partnership and we clarified that we could revisit the allocation of funds when/if those opportunities manifested. What is the status of this partnership and timing? A. The City met with SLCUSD and Cal Poly representatives on April 25 to discuss and explore the opportunity for a partnership pilot program to support the three agencies for ‘on-site’ childcare for employees. All three agencies agree on the benefits this collaboration would bring to support the variety of employees. The current Teach Elementary campus (across from Cal Poly on Grand and Slack St) was highlighted as primary focus for this potential and SLCUSD is currently researching with the SLO County Office of Education on one of the facilities on that property, as well as some adjacent facilities managed by Cal Poly (along Grand). There is exiting potential at this location to support all three agencies and there are more conversations to be had, however all three are optimistic with this potential collaboration. A similar effective model was identified with City of Davis and UC Davis and staff from each agency are in research stages for a future meeting. As the City Manager mentioned at the previous Council meeting, the intent of the partners is to use the remaining funds contributed from the initial Child Care Study to advance a feasibility study for employee specific childcare. The feasibility study will include identifying any potential facility options for expanding after school care, not limited to just the current school district facilities.

B. The SLCUSD is utilizing Measure C-22 funds to upgrade and expand facilities and shared that the initial priority is at the elementary campuses. The City is in communication with District Administrators regarding providing appropriate space to support programs for before and after-school childcare at each of the elementary campuses. Discussions continue regarding the potential for additional portable classrooms to supplement the impacts to construction during projects.

C. Operational Budget Clarification: The SLCUSD will continue to provide and fund the TK and Kinder programs for families at each campus this upcoming year. The District has an MOU with the City to pay for the staffing and oversight of these programs. Previous to 2022-2023, the City coordinated and operated the registrations for TK & Kinder programs and included that in the revenue forecasting.

D. The City’s Parks & Recreation Department is continuing to provide Before and After-School care at the five other elementary campuses, including supporting the District’s TK programs with City Parks & Rec staff. Additionally, the Department will strategically continue to offer the afternoon/early evening programs such as sport clinics, fitness camps, contract class offerings in order to provide alternatives for children during after-school hours.