City Council and Authorities Concurrent
June 9, 2026

Draft FINAL
Water and Sewer Rate Study
BLACK & VEATCH PROJECT NO. 410918

Prepared for
City of Santa Clara, CA
9 June 2026
Table of Contents
Legal Notice 1

1.0 Executive Summary 1-1

1.1 Water System 1-1

1.2 Recycled Water System 1-1

1.3 Sewer System 1-1

1.4 Financial Plan 1-2

1.4.1 Water Utility 1-2

1.4.2 Recycle Water Utility 1-3

1.4.3 Sewer Utility 1-4

1.5 Adequacy of Existing Rates to Meet Costs of Service 1-6

1.6 Cost of Service Analysis 1-6

1.7 Rate Design 1-7

1.7.1 Water and Recycled Water Utilities 1-7

1.7.2 Sewer Utility 1-9
Water and Recycled Water Utilities 1-1

2.0 Revenue and Revenue Requirements 2-1

2.1 Customer and Water Consumption 2-1

2.1.1 Customer Classes 2-1

2.1.2 Minimum Bills 2-1

2.1.3 Water Consumption 2-2

2.2 Revenue under Existing Rates 2-3

2.3 Other Revenue 2-5

2.4 Operating and Maintenance Expenses 2-5

2.5 Capital Improvement Program 2-6

2.5.1 Capital Improvement Financing Plan 2-7

2.6 Transfers 2-8

2.7 Reserves 2-8

2.8 Projected Operating Results 2-9

3.0 Cost of Service Analysis 3-1

3.1 Functional Cost Components 3-2

3.2 Allocation to Cost Components 3-3

3.2.1 System Base, Max Day, and Max Hour Allocations 3-3

3.2.2 Allocation of Operating and Maintenance Expenses 3-4

3.2.3 Allocation of Capital Investments 3-5

3.3 Units of Service 3-5

3.4 Cost of Service Allocations 3-6

3.4.1 Units Costs of Service 3-6

3.4.2 Distribution of Costs of Service to Customer Classes 3-6

4.0 Rate Design 4-1

4.1 Existing Rates 4-1

4.2 Proposed Rates 4-1

4.2.1 Monthly Service Charge 4-1

4.2.2 Fire Service 4-3

4.2.3 Cross Connection 4-3

4.2.4 Consumption Charge 4-4

4.3 Typical Monthly Costs under Proposed Charges 4-5

4.4 Neighboring Water Utilities 4-5
Sewer Utility 4-1

5.0 Revenue and Revenue Requirements 5-1

5.1 Customer and Water Consumption Projections 5-1

5.1.1 Customer Classes 5-1

5.1.2 Equivalent Dwelling Units 5-1

5.1.3 Minimum Bills 5-2

5.1.4 Contributed Sewage Flow 5-2

5.1.5 Major Users 5-3

5.2 Revenue under Existing Rates 5-3

5.3 Other Revenue 5-5

5.4 Operating and Maintenance Expenses 5-5

5.5 Debt Service Requirements 5-6

5.6 Capital Improvement Program 5-6

5.6.1 Capital Improvement Financing Plan 5-7

5.7 Transfers 5-8

5.8 Reserves 5-8

5.9 Projected Operating Results 5-8

6.0 Cost of Service Analysis 6-1

6.1 Functional Cost Components 6-1

6.2 Allocation to Cost Components 6-2

6.2.1 Volume and Strength Allocations 6-2

6.2.2 Allocation of Operating and Maintenance Expenses 6-2

6.2.3 Allocation of Capital Investments 6-4

6.3 Units of Service 6-4

6.4 Cost of Service Allocations 6-5

6.4.1 Units Costs of Service 6-5

6.4.2 Distribution of Costs of Service to Customer Classes 6-5

7.0 Rate Design 7-1

7.1 Existing Rates 7-1

7.2 Proposed Rates 7-1

7.2.1 Monthly Service Charge 7-1

7.2.2 Consumption Charge 7-2

7.2.3 Major Users 7-2

7.3 Typical Monthly Costs under Proposed Charges 7-4

7.4 Neighboring Sewer Utilities 7-4
Appendix A – Ten-Year Financial Plan 7-1
Water Utility 7-1
Recycled Water Utility 7-2
Sewer Utility 7-3
List of Tables
Table 11 Proposed Revenue Adjustments 1-6
Table 12 Proposed Three-Year Water Rate Schedule 1-8
Table 13 Proposed Three-Year Recycled Water Rate Schedule 1-9 Table 14 Proposed Three-Year Sewer Rate Schedules 1-10
Table 21 Minimum Bills 2-1
Table 22 Billed Water Consumption 2-3
Table 23 Existing Water and Recycled Water Rates 2-4
Table 24 Projected Revenue under Existing Rates 2-4
Table 25 O&M Expenses 2-6
Table 26 Capital Improvement Projects 2-7
Table 27 Construction Fund Financing Plan (Water) 2-7
Table 28 Construction Fund Financing Plan (Recycled Water) 2-8 Table 29 Operating Fund (Water) 2-12
Table 210 Operating Fund (Recycled Water) 2-13
Table 31 Cost of Service Revenue from Rates (Water) 3-1 Table 32 Cost of Service Revenue from Rates (Recycled Water) 3-2 Table 33 Allocation of O&M Expenditures (Water) 3-4
Table 34 Allocation of O&M Expenditures (Recycled Water) 3-4 Table 35 Allocation of Capital Costs (Water) 3-5
Table 36 Allocation of Capital Costs (Recycled Water) 3-5 Table 37 Units of Service (Water and Recycled Water) 3-1 Table 38 Units Cost of Service (Water) 3-1
Table 39 Distribution of Costs to Customer Classes (Water) 3-2 Table 310 Units Cost of Service (Recycled Water) 3-3
Table 311 Distribution of Costs to Customer Classes (Recycled Water) 3-3 Table 41 Costs within the Minimum Monthly Service Charge for FY 2026 (Water) 4-1 Table 42 Proposed Minimum Monthly Service Charge (Water) 4-2 Table 43 Costs within the Minimum Monthly Service Charge for FY 2025 (Recycled Water) 4-2 Table 44 Proposed Minimum Monthly Service Charge (Recycled Water) 4-2 Table 45 Costs within the Fire Service Charge for FY 2026 4-3 Table 46 Proposed Fire Service Charge 4-3
Table 47 Costs within the Cross-Connection Charge for FY 2026 4-4 Table 48 Proposed Cross Connection Charge 4-4
Table 49 Proposed Consumption Charges 4-4
Table 410 Typical Monthly Bill (Water) 4-5
Table 411 Typical Monthly Bill (Recycled Water) 4-5
Table 51 EDUs 5-2
Table 52 Minimum Monthly Service Bills 5-2
Table 53 Contributed Sewage Flow 5-3
Table 54 Existing Sewer Rates 5-4
Table 55 Projected Revenue under Existing Rates 5-5
Table 56 O&M Expenses 5-6
Table 57 Long-Term Debt Service 5-6
Table 58 Capital Improvement Projects 5-7
Table 59 Construction Fund Financing Plan 5-7
Table 510 Operating Fund (Sewer) 5-11
Table 61 Cost of Service Revenue from Rates 6-1
Table 62 Allocation of O&M Expenditures 6-4
Table 63 Allocation of Capital Costs 6-4
Table 64 Units of Service 6-1
Table 65 Units Cost of Service 6-1
Table 66 Distribution of Costs to Customer Classes 6-1
Table 71 Proposed Monthly Service Charge 7-1
Table 72 Proposed Consumption Charges 7-2
Table 73 Proposed Major User Charges 7-4
Table 74 Typical Monthly Bill 7-4
List of Figures
Figure 11 Water Operating Cashflow 1-3
Figure 12 Water Reserves 1-3
Figure 13 Recycled Water Operating Cash Flow 1-4
Figure 14 Recycled Water Reserves 1-4
Figure 15 Sewer Operating Cash Flow 1-5
Figure 16 Sewer Reserves 1-6
Figure 21 Water Sales 2-2
Figure 22 Status Quo Operating Cash Flow (Water) 2-9
Figure 23 Status Quo Operating Cash Flow (Recycled Water) 2-10 Figure 24 Water Operating Cash Flow 2-14
Figure 25 Recycled Water Operating Cash Flow 2-14
Figure 41 Comparison to Neighboring Water Utilities 4-6 Figure 51 Status Quo Operating Cash Flow 5-9
Figure 52 Sewer Operating Cash Flow 5-12
Figure 71 Comparison to Neighboring Sewer Utilities 7-6 Legal Notice
Black & Veatch Corporation (Black & Veatch) has prepared this report for the City of Santa Clara (City), and it is based on information not within the control of Black & Veatch. The City has not requested Black & Veatch to make an independent analysis, verify the information provided to us, or render an independent judgment of the validity of the information provided by others. Because of this, Black & Veatch cannot, and does not, guarantee the accuracy thereof to the extent that such information, data, or opinions were based on information provided by others.

In conducting these analyses and in forming an opinion of the projection of future financial operations summarized in this report, Black & Veatch made certain assumptions on the conditions, events, and circumstances that may occur in the future. The methodology utilized in performing the analyses follows generally accepted practices for such projections. Such assumptions and methodologies are reasonable and appropriate for the purpose for which they are used. While we believe the assumptions are reasonable and the projection methodology valid, actual results may differ materially from those projected, as influenced by the conditions, events, and circumstances that occur. Such factors may include the utilities’ ability to execute the capital improvement program as scheduled and within budget, regional climate and weather conditions affecting the demand for water, discharge of sewage flow, and adverse legislative, regulatory, or legal decisions (including environmental laws and regulations) affecting the utilities’ ability to manage the system and meet water quality requirements.

Executive Summary
The City of Santa Clara commissioned Black & Veatch Corporation to perform an update of the Water and Sewer Rate Study (Study) for its Water, Recycled Water, and Sewer Utilities. The Study included the development of a three-year financial plan, a cost-of-service analysis, and the design of rates. In addition, a ten-year financial plan was developed to provide the City with a high-level view of each utility’s operations. The specific objectives of the Study were to:

Evaluate the adequacy of projected revenues under existing rates to meet projected revenue requirements.

Develop sound financial plans for the utilities covering a three and ten-year period for both ongoing operations and planned capital improvements.

Allocate the utilities’ projected revenue requirements to the various customer classes in accordance with their respective service requirements.

Develop a suitable rate schedule that produces revenues adequate to meet financial needs while recognizing customer costs of service and regulatory considerations such as Proposition 218 and applicable judicial decisions.

Water System
The Water Utility provides water services to over 26,952 residential, commercial, irrigation, schools, and agricultural customers. The City obtains potable water from three primary sources: local groundwater, surface water from the Santa Clara Valley Water District (Valley Water) and imported water from the Hetch Hetchy watershed through the San Francisco Public Utilities Commission (SFPUC). The water system infrastructure consists of 335 miles of transmission and distribution mains, 7 storage tanks totaling 28.8 million gallons of storage capacity, 26 wells, and 3 booster pump stations.

Recycled Water System
The Recycled Water Utility, operating since 1989, provides recycled water services to over 292 commercial, irrigation, and industrial customers. The City obtains recycled water from South Bay Water Recycling. The recycled water comes from the San Jose-Santa Clara Regional Wastewater Facility (RWF), an advanced tertiary treatment facility located in San Jose, of which the City is a co-owner. The recycled water infrastructure within the City limit boundary mainly consists of 34 miles of recycled water pipelines. A portion of the recycled water from the RWF supplies the Valley Water’s Silicon Valley Advanced Water Purification Center for advanced treatment (microfiltration, reverse osmosis, and advanced oxidation) to create a mix of high-quality recycled water that is blended back into the recycled water system.

Sewer System
The Sewer Utility provides sewer services to over 26,710 residential, commercial, industrial, and municipal customers. Services include the construction and maintenance of the sewer system and installing sewer lateral clean-outs at the property line. Sanitary sewer flows in the City are collected and transported through more than 288 miles of sewer main by way of six pumping stations to the San Jose-Santa Clara Regional Wastewater Facility. The RWF is a regional treatment facility that receives waste from seven agencies in Santa Clara County and can treat 167 million gallons a day (MGD) of liquid waste.

Financial Plan
The City operates the utilities as individual self-supporting enterprises. Therefore, the utilities must develop financial plans that provide sufficient revenues to meet all operation and maintenance expenses, water purchases, wastewater treatment, debt service requirements, capital improvements funded from current revenues, and other expenditures.

The Study develops financial plans that project operating revenue, expenses, and capital financing costs for the utilities over a ten-year planning period beginning July 1, 2026 and ending June 30, 2036. This report will focus on a three-year planning period for discussion, beginning July 1, 2026 and ending June 30, 2029. The full ten-year financial plans can be found in Appendix A.

The financial plans project future rate revenues under existing rates, operations, and maintenance (O&M) expenses, principal and interest expense on debt, transfers, and capital improvement program (CIP) requirements. In the projection of rate revenues, annual projections of customers and water consumption rely upon the City’s historical data and estimates of growth. In addition, the Water Utility’s forecast incorporates efforts to continue to encourage conservation measures of maintaining a 15% voluntary water use reduction and the City’s Water Shortage Contingency Plan.

Water Utility
The Water Utility’s revenue requirements are summarized below:

Operation and Maintenance Expenses: The Water Utility anticipates O&M expenses to increase from $75.2M in FY 2027 to $87.7M in FY 2029. Water production and water purchases account for most of this increase, representing an average of 66.8% of O&M expenses.

Debt Service: The Water Utility has no existing debt service, and no future debt is planned.

Capital Improvements: The Water Utility plans to execute an average of $5.3M annually in capital projects from FY 2027 to FY 2029.

Reserves: The Water Utility plans to continue funding the operating reserve, construction fund, and rate stabilization reserve.

The operating fund reserve is to help cover fluctuations in day-to-day expenses. The scheduled target is 90 days of O&M expenses.

The construction fund reserve is to help maintain enough funds on hand to help mitigate unexpected capital costs. The scheduled target is the average for the following two-year CIP.

The rate stabilization fund reserve is to help mitigate future increases in drought-stricken years. The scheduled target is 10% of the prior year’s rate revenues.

The Water Utility is proposing revenue adjustments to allow it to operate the enterprise on a revenue-neutral basis and meet reserve targets, as shown in Figure 11.

Figure 11 Water Operating Cashflow
Figure 12 Water Reserves
Recycled Water Utility
The Recycled Water Utility’s revenue requirements are summarized below:

Operation and Maintenance Expenses: The Recycled Water Utility anticipates O&M expenses to increase from $12.7M in FY 2027 to $15.3M in FY 2029. Recycled water purchase costs constitute most of the increase, averaging 83.1% of O&M expenses.

Debt Service: The Recycled Water Utility has no existing debt service, and no future debt is planned.

Capital Improvements: The Recycled Water Utility plans to execute an average of $53.6k annually in capital projects from FY 2027 to FY 2029.

Reserves: The City plans to continue funding the operating reserve, construction fund reserve, and rate stabilization reserve.

The operating reserve is to help cover fluctuations in day-to-day expenses. The scheduled target is 90 days of O&M expenses.

The construction fund is to help maintain enough funds on hand to help mitigate unexpected capital costs. The scheduled target is the average for the following two-year CIP.

The rate stabilization fund reserve is to help mitigate future increases in drought-stricken years. The scheduled target is 10% of the prior year’s rate revenues.

The Recycled Water Utility is proposing revenue adjustments and drawing down reserves to allow it to operate the enterprise on a revenue-neutral basis and meet reserve targets, as shown in Figure 13.

Figure 13 Recycled Water Operating Cash Flow
Figure 14 Recycled Water Reserves
Sewer Utility
The Sewer Utility’s revenue requirements are summarized below:

Operation and Maintenance Expenses: The Sewer Utility anticipates O&M expenses to increase from $44.2M in FY 2027 to $46.5M in FY 2028. RWF-related costs represent an average of 69.2% of O&M expenses.

Debt Service: The Sewer Utility anticipates an average debt service payment of $4.8M annually from FY 2027 to FY 2029 associated with existing and proposed debt issuances. The City anticipates a new revenue bond for $15.5M to be issued in 2027 and another for $12.5M in 2029.

Capital Improvements: The Sewer Utility plans to execute an average of $28.7M annually in capital projects from FY 2027 to FY 2029.

Reserves: The Sewer Utility plans to continue funding the operating reserve, construction fund, rate stabilization fund reserve, and pension stabilization reserve.

The operating reserve is to help cover fluctuations in day-to-day expenses. The scheduled target is 90 days of O&M expenses.

The construction fund is to help maintain enough funds on hand to help mitigate unexpected capital costs. The scheduled target is the average for the following two years City CIP.

The rate stabilization reserve is to help mitigate future increases in drought-stricken years. The scheduled target is 10% of the prior year’s rate revenues.

The pension reserve is to pay for the unfunded pension liabilities and the increase in the City’s share of pension costs due to factors such as higher CalPERS rates and negotiated pay increases.

The Sewer Utility is proposing revenue adjustments and drawing down on reserves to allow it to operate the enterprise on a revenue-neutral basis and meet reserve targets, as shown in Figure 15.

Figure 15 Sewer Operating Cash Flow
Figure 16 Sewer Reserves
Adequacy of Existing Rates to Meet Costs of Service
Based on the financial plans, Black & Veatch recommends the revenue adjustments shown in Table 11 to meet the projected revenue requirements for FY 2027 to FY 2029. These do not represent proposed rate increases for customers. Rather, these represent the overall revenue increases the utilities need to meet their overall obligations and maintain current service levels.

Table 11 Proposed Revenue Adjustments
Cost of Service Analysis
The cost-of-service analysis allocates the costs to the various customer classes of service in a fair and equitable manner. The methodologies used in the Study are specific to the respective utility operations. The following is a brief description of the methodologies.

The water and recycled water cost-of-service allocation performed in this Study uses the Base-Extra Capacity Method endorsed by the American Water Works Association (AWWA) Principles of Water Rates, Fees, and Charges, M1 manual. Under cost-of-service principles, costs are allocated to the different customer classes in proportion to their water system use. As recommended by AWWA, Black & Veatch distributed functional costs to the base (average load conditions), extra capacity (peaking), and customer-related parameters. This allocation methodology produces unit costs for allocation to individual customer classes based on the projected customer service requirements.

The sewer cost-of-service allocation performed in this Study follows the Functional Cost Allocation Method endorsed by the Water Environment Federation (WEF) Financing and Charges for Wastewater Systems, Manual of Practice 27 manual. Like the methodology used for water systems, the sewer cost of service analysis allocates costs to the different customer classes in proportion to their use of the sewer system. As recommended by WEF, Black & Veatch distributed functional costs to volume, strength, and customer-related parameters. This allocation methodology produces unit costs for allocation to individual customer classes based on the projected customer service requirements.

Rate Design
The Right to Vote on Taxes Act, also known as Proposition 218, was passed by California voters in 1996 and added Article XIIIC and Article XIIID to the California Constitution. These articles provide the regulatory framework that guides and informs the rate-setting process. The cost-of-service analyses provide the cost nexus for the proposed rate structures. The regulatory framework helps ensure cost recovery is proportionate to the cost of providing the service.

Water and Recycled Water Utilities
To minimize impacts, retain simplicity, and ensure the reasonable stability of revenue, Black & Veatch recommends the following rate structure.

Monthly Service Charge: The Water and Recycled Water Utilities should retain the minimum monthly service charge based on meter sizes for all customer classes. The minimum monthly service charge includes a minimum consumption allowance and recovers portions of fixed cost elements such as operating and capital components, meter maintenance and services, meter reading, issuing bills, and maintenance and capacity costs associated with public fire protection. The minimum consumption allowance accommodates water considered essential for health and safety.

Consumption Charge: The Water and Recycled Water Utilities should maintain the uniform consumption charge for all customer classes. The consumption charge recovers costs associated with the base and extra capacity demands.

Fire Service Charge: The Water Utility should continue to utilize the fire service charge based on meter size for private fire service connections. The fire service charge will recover maintenance and capacity costs associated with private fire protection costs.

Cross Connection Charge: The Water Utility should continue to utilize the cross-connection charge based on meter size for backflow connections. The cross-connection charge will recover the costs of maintenance associated with backflow devices.

Table 12 summarizes the recommended three-year rate schedules for all Water Utility components.

Table 12 Proposed Three-Year Water Rate Schedule
Table 13 summarizes the recommended three-year rate schedules for all Recycled Water Utility components.

Table 13 Proposed Three-Year Recycled Water Rate Schedule Sewer Utility
To minimize impacts, retain simplicity, and ensure the reasonable stability of revenue, Black & Veatch recommends the following rate structure.

Monthly Service Charge: The Sewer Utility should retain the monthly service charge based on equivalent dwelling units (EDUs) for all residential customer classes. In addition, the monthly service charge serves as the base amount, or minimum, for all non-residential customer classes.

Consumption Charge: The Sewer Utility should retain its uniform consumption charges for each non-residential customer class. The recommended rate structure should be based on customer class.

Major Commercial and Industrial Users: The Sewer Utility should retain the major commercial and industrial user charge for customers with high discharge quantities and/or high strength loadings.

Table 14 summarizes the recommended three-year rate schedules for all Sewer Utility components.

Table 14 Proposed Three-Year Sewer Rate Schedules
Water and Recycled Water Utilities
Revenue and Revenue Requirements
To meet the costs associated with providing water services to its customers, the Water and Recycled Water Utilities derive revenue from a variety of sources, including water user charges (rates), developer contributions, solar water heating, interest earned from the investment of available funds, engineering fees, and other miscellaneous revenues. Both utilities are constantly looking for other sources of revenue, such as grants, to fund infrastructure investments. Black & Veatch has projected the level of future revenue generated in the Study through an analysis of historical and future system growth in terms of the number of bills and water consumption. This section also projects the expenses, or revenue requirements, necessary to operate and maintain the system, invest in capital improvements, make debt service payments, and cover other water and recycled water systems expenses.

Customer and Water Consumption
Customer Classes
The Water Utility’s customer base includes both residential and non-residential accounts. The City has three distinct customer classes: General Customer, Fire Service, and Cross Connection.

The Recycled Water Utility’s customers are mainly non-residential. The City has two distinct customer classes: General Customer and Industrial Process. The City is working on transitioning Industrial Process to General Customer.

Minimum Bills
The City provides potable water services to 26,952 customers and recycled water services to 292 customers. All customers connected to the water and recycled water systems do so through metered connections. The City bills customers based on water consumption, but several bills do not meet the consumption allowance identified by meter size. Therefore, the City refers to these bills as minimum monthly service bills. Since the City bills customers based on minimum bills generated, the analysis included a review of historical bill patterns for customers and anticipated growth within the City. The projected total number of bills is expected to increase by average of 0.2% for the Water Utility and increase by an average of 1.0% for the Recycled Water Utility.

Table 21 summarizes the projected number of minimum bills for the Water and Recycled Water Utilities.

Table 21 Minimum Bills
Water Consumption
Table 22 shows the projected water and recycled water consumption for the Study period. In determining the projected water and recycled water consumption, Black & Veatch analyzed historical water consumption patterns in conjunction with future water conservation requirements set by the City’s Water Shortage Contingency Plan. In 2017, the State of California formally lifted the water restrictions as it declared the drought over. Unfortunately, in 2022 after another three years of dry weather, Governor Newsom called for local water suppliers to move to Level 2 of their Water Shortage Contingency Plans to drive water conservation. The City then moved to Level 2 in conjunction with Valley Water. In July 2023, after increased rainfall, the City rescinded Level 2 and have returned to normal. Despite operating under normal conditions, the City and Valley Water work together to maintain a 15% voluntary water use reduction as water conditions change.

Figure 21 below represents the population growth and a decline in water consumption. Many factors have contributed to the City’s steady decline in consumption despite the increase in population. The City’s primary conservation goals can be found in the Water Shortage Contingency Plan, and Santa Clara’s Council codified the continuing goal to conserve in July of 2017. The City offers incentives to customers and works with Valley Water on other outreach and rebate programs for water conservation. Expanding the use of recycled water to existing and new customers has also been important for the City in supplementing the use of potable water. Overall, customers have done well to increase efficiency in the use of water resources.

Figure 21 Water Sales
While recognizing the City’s water conservation goals, the City still anticipates consumption to increase by 2.5% annually for the Water Utility and 1.0% annually for the Recycled Water Utility over the Study period. The City is experiencing new development which contribute to the increase in water consumption. The City currently bills water consumption in hundred cubic feet (HCF) and only charges for consumption more than the allowance.

Table 22 Billed Water Consumption
Revenue under Existing Rates
Water and recycled water user rates serve as the primary source of revenue for the Water and Recycled Water Utilities. Therefore, the level of future rate revenue is important in developing a long-range financial plan. To determine rate revenue, the projected system growth in terms of the number of minimum bills and billed water consumption is multiplied by the applicable rates to determine water and recycled water rate revenue.

Table 23 shows the current Water and Recycled Water Utilities rate schedules. It is important to note that the minimum monthly service charge applies to customers that do not exceed the consumption allowance within the meter sizes. Therefore, the minimum monthly service charge serves as a baseline cost that the City needs to recover. (Section left intentionally blank)
Table 23 Existing Water and Recycled Water Rates
Table 24 summarizes projected water and recycled water rate revenue under existing rates. As shown, the revenue generated is projected to increase recycled water over the Study period in conjunction with the increase in the number of minimum bills and water consumption. The projected Water Utility revenues will increase from $75.5M from FY 2027 to $79.1M in FY 2029, while the projected Recycled Water Utility revenue increases from $9.5M in FY 2027 to $9.7M in FY 2029, reflecting an overall increase of 4.7% and 2.0%, respectively over the three-year Study period.

Table 24 Projected Revenue under Existing Rates
Other Revenue
Other sources of operating revenue include charges for hydrant flow tests, meter tests, engineering plan review, water installation and relocation, interest on investments, and other miscellaneous revenues. In total, other operating revenues represent an average of 3.6% of the Water Utility’s total revenue and an average of 9.5% of the Recycled Water Utility’s total revenue. The City anticipates that these revenues will remain relatively constant for the duration of the Study period.

Operating and Maintenance Expenses
Table 25 summarizes the Water and Recycled Water Utilities’ projected O&M expense for the Study period. These expenses include costs related to salaries and benefits, materials and supplies, contract and professional services, water supply costs, indirect and direct costs, and routine capital outlay. The City anticipates that all O&M expenditures, excluding water supply costs, will increase on average by 3.7% annually for the Water Utility and an average of 5.8% annually for the Recycled Water Utility from FY 2027.

Water supply costs include water produced and water purchased costs. In the case of the Water Utility, the City has three main sources of water: 1) groundwater pumped from City-owned wells; 2) surface water from the Valley Water and 3) imported water from the Hetch Hetchy watershed from SFPUC. The City operates 26 groundwater wells that tap the underground aquifers, which make up approximately 53% of the City's water supply. The City imports the remainder of its water supplies from the two wholesale water agencies. Based on estimates of groundwater and wholesale rates provided by Valley Water and SFPUC, the City expects water production and purchased water costs to increase by at least 21.3% over the Study period.

Recycled water is a reliable drought-proof source of water that helps offset the use of potable sources, especially in drought-prone years in California. In the case of the Recycled Water Utility, the City has one main source of recycled water: The San Jose-Santa Clara Regional Wastewater Facility. This facility produces highly treated water delivered through separate pipelines. Based on estimates from the facility, the City expects purchased recycled water costs to increase by at least 22.2% over the Study period.

Table 25 O&M Expenses
As shown in Table 25, the Water Utility’s O&M expenses increase from $75.2M in FY 2027 to $87.7M in FY 2029, while the Recycled Water Utility’s O&M expenses increase from $12.7 in FY 2027 to $15.3M in FY 2029.

Capital Improvement Program
The Water and Recycled Water Utilities develop five-year Capital Improvement Plans annually to identify water and recycled water system needs, including assessments, inspections, maintenance, and rehabilitation and replacement requirements.

Table 26 summarizes the Water and Recycled Water Utilities CIP for FY 2027 through FY 2029. The Water Utility is projecting $15.8M in CIP, and the Recycled Water Utility is projecting $160.9k in CIP over the Study period, which includes both capital and replacement projects. The City has posted the CIP Budget on its website for complete details associated with each CIP project.

Table 26 Capital Improvement Projects
Capital Improvement Financing Plan
The City funds annual expenditure for the CIP from a combination of available funds on hand, connection charges, developer contributions, and revenues derived from user rates. As shown in Table 27 and Table 28, the average annual CIP expenditure is $5.3M for the Water Utility and $53.6k for the Recycled Water Utility. There is no planned annual CIP contribution from the Water Utility Operating Fund and Recycled Water Utility over the Study period. The CIP will be funded through funds on hand.

Table 27 Construction Fund Financing Plan (Water)
Table 28 Construction Fund Financing Plan (Recycled Water) Transfers
The Water and Recycled Water Utilities will each conduct transfers from their respective Operating Funds and other funds and reserves over the Study period. Table 29, Lines 18 to 21 for the Water Utility and Table 210, Lines 13 to 15 for Recycled Water Utility summarize these associated amounts, respectively. The other funds consist of the Operating Reserve, Rate Stabilization Reserve, and Construction Fund. See Section 2.7 for further explanation on Rate Stabilization Reserve. The Construction Fund transfers represent money to cover planned CIP project expenditures. These transfers do not represent direct operating expenses for either enterprise; therefore, Black & Veatch includes these costs as “below-the-line” cash flow items and does not include them as O&M expenses.

Reserves
A utility typically establishes reserves for several reasons, such as covering shortfalls in operating revenues, maintaining strong bond ratings, covering day-to-day operating costs, and easing the burden on ratepayers associated with large rate increases. Per the reserve level recommendations, the Water and Recycled Water Utilities will maintain the following three reserves:

Operating Reserve represents working capital maintained by the Operating Fund to cover day-to-day expenses and maintain enough funds to cover accounts receivable if there are supplier issues, periods of lower-than-expected water sales, or unforeseen cost increases. The reserve will maintain a minimum balance of 90 days of operating expenses once fully funded.

Construction Reserve represents funds used for unforeseen and unbudgeted capital costs. Once fully funded, this reserve will maintain a minimum balance of the average of the following two-years planned CIP.

Rate Stabilization Reserve represents funds used to absorb revenue shortfall due to short-term decreases in water sales. This reserve stabilizes water and recycled water rate revenue and is an effort to avoid wide swings in rates charged to customers over time. The reserve will maintain a minimum balance of 10% of water and recycled water sales revenue when fully funded.

Appropriate reserve levels help the Water and Recycled Water Utilities with liquidity, provide operational flexibility, and demonstrate fiscal responsibility to the rating agencies, which allows the City to access lower-cost funds.

Projected Operating Results
The revenue requirements of the Water and Recycled Water Utilities consist of O&M expenses, debt service, capital expenditures, and reserve requirements.

To fully understand the current condition of the Water and Recycled Water Utilities, it is important to examine the cash flow projections under the status quo scenario. As shown in Figure 22 and Figure 23, the status quo conditions would project that both utilities would operate from an annual deficit position, thus requiring the use of reserves to keep operating. In this scenario, the Water and Recycled Water Utilities would not impose any revenue increases over the Study Period and continue to incur O&M expenses, pay for the execution of the planned CIP, and transfer to reserves.

Figure 22 Status Quo Operating Cash Flow (Water)
Figure 23 Status Quo Operating Cash Flow (Recycled Water) The analyses performed for the Study indicate that the City should implement the proposed revenue increases shown in Table 29 and Table 210 if it wishes to keep the Water and Recycled Water Utilities in a balance financial condition. The revenue increases represent the overall total revenue adjustment needed to meet revenue requirements. The revenue adjustment does not represent adjustments to the individual rates but reflects the overall level of revenue needed to meet the Water and Recycled Water Utilities’ obligations.

The suggested revenue increases help the Water and Recycled Water Utilities meet the following goals:

Meet budgeted operating obligations in the three FYs.

Meet planned capital investments in the three FYs.

Maintain an operating reserve of 90 days of operating expenses.

Increase combined construction and infrastructure reserve to the average of the next two years CIP.

Continue transfers for the rate stabilization reserve to meet the goal of 10% of rate revenues.

Table 29 and Table 210 summarize proposed Operating Funds for the Study Period. The Operating Funds consist of 1) Revenue and 2) Revenue Requirements.

Revenue
Line 1 is the revenue under existing rates.

Lines 2 through 4 are the additional revenues generated from the required annual revenue increases. The additional revenue generated is a direct reflection of the number of months the increase is effective for, and therefore amount might be calculated at less than that stated amount.

Line 6 is the total revenue generated from user charges.

Line 14 for the Water Utility and Line 9 for the Recycled Water Utility represent other operating revenues.

Line 15 for the Water Utility and Line 10 for the Recycled Water Utility represent total revenues for the enterprises.

Revenue Requirements
Line 17 for the Water Utility and Line 12 for the Recycled Water Utility represent O&M expenses. The O&M expenses include water production and water purchase.

Line 22 for the Water Utility and Line 16 for the Recycled Water Utility represent transfers. The transfers include money to the Rate Stabilization Fund, Operating Reserve, and Construction Fund.

Line 23 for the Water Utility and Line 17 for the Recycled Water Utility represent total revenue requirements for the enterprises.

Line 27 for the Water Utility and Line 21 for the Recycled Water Utility represent the net cumulative cash balance (unrestricted) within the Operating Funds. The net unrestricted plus operating reserve intends to match, to the extent possible, Line 28 for the Water Utility and Line 29 for the Recycled Water Utility. The cash balance reserve is required to ensure the Operation Fund can continue in the event of a supplier interruption, market price fluctuations in critical equipment or supplies, or an abrupt drop in accounts receivable. The reserve target minimum is 90 days of O&M expenses. (Section left intentionally blank)
Table 29 Operating Fund (Water)
Table 210 Operating Fund (Recycled Water)
Table 29 presents the proposed Water Utility Operating Fund, and Table 210 presents the Recycled Water Utility Operating Fund.

Figure 24 Water Operating Cash Flow
Figure 25 Recycled Water Operating Cash Flow
Cost of Service Analysis
The cost-of-service analysis requires recovery of the City’s needed revenues from water and recycled water service rates, allocated to customer classes according to the service rendered. An equitable rate structure allocates the capture of revenue requirements to customer classes based on the quantity of water consumed, peak flows, the number of customer connections, and other relevant factors.

In analyzing the Water and Recycled Water Utilities’ cost of service for allocation to its customer classes, Black & Veatch selected the annual revenue requirements for FY 2027 as the Test Year (TY) requirements to demonstrate the development of cost-of-service water and recycled water rates.

Table 31 summarizes the total costs of service that need to be recovered from water user rates. Table 32 summarizes the total costs of service that need to be recovered from recycled water user rates. Both tables represent TY 2027.

Table 31 Cost of Service Revenue from Rates (Water)
Table 32 Cost of Service Revenue from Rates (Recycled Water) The total revenue requirement is shown in Line 4, which corresponds with Table 29, Line 23, and Table 210, Line 17. As shown in Line 12 for the Water Utility and Line 7 for the Recycled Water Utility, we deduct revenues from other sources to derive the net revenue requirement recovered through rates, which correspond with Table 29, Line 14 and Table 210, Line 9, respectively.

Line 13 for the Water Utility and Line 8 for the Recycled Water Utility represent the net annual cash balance during the TY. If the enterprise is drawing down funds already in the Operating Fund, this number is positive. The number will be negative if the enterprise is replacing funds. In the case of the Water Utility, the $3.2M figure indicates that the forecast projects a negative cash balance for the year. In the case of the Recycled Water Utility, the $1.1M figure indicates that the forecast projects a negative cash balance for the year.

Functional Cost Components
The first step in conducting a cost-of-service analysis involves analyzing the cost of providing water and recycled water service by system function to properly allocate the costs to the various customer classes and, subsequently, design rates. As a basis for allocating costs of service among customer classes, the study separates costs into the following four basic functional cost components: (1) Base; (2) Extra Capacity; (3) Customer; and (4) Direct Assignment, described as follows:

Base costs represent operating and capital costs of the system associated with service to customers to the extent required under constant or average annual load conditions without the elements necessary to meet water consumption variations or peak demands.

Extra Capacity costs represent those operating and capital costs incurred in meeting peaking demands. Peaking demands represent water consumption more than the average rate of use.

Customer costs are those expenditures that tend to vary in proportion to the number of customers connected to the system. These include meter reading, billing, collecting, accounting, maintenance, and capital costs associated with meters and services.

Directly assigned costs are specifically identified as those incurred to serve specific customers. These costs include fire protection and cross-connections for the Water Utility. The Recycled Water Utility has no direct assigned categories.

Allocation to Cost Components
The next step of the cost-of-service process involves allocating each cost element to functional cost components based on the parameter or parameters having the most significant influence on the magnitude of that cost element. O&M expenses are allocated directly to appropriate cost components. A detailed allocation of related capital investment is used as a proxy for allocating capital and replacement costs. The separation of costs into functional components provides a means for distributing such costs to the various classes of customers based on their respective responsibilities for each type of service.

System Base, Max Day, and Max Hour Allocations
The water and recycled water systems consist of various facilities designed and operated to fulfill a given function. For the systems to provide adequate service for its customers, it must be capable of meeting the annual volume requirements and the maximum demand rates placed on the system. Because not all customers and types of customers exert maximum demand at the same time, the capacities of the various facilities must meet the maximum coincidental demand of all classes of customers. Each water and recycled water service facility within the system has an underlying average demand exerted by the customers for whom the base cost component applies. For those facilities designed solely to meet average day demand, 100% of the costs go to the base cost component. Extra capacity requirements associated with coincidental demands more than average use consist of maximum daily and maximum hourly demand subcomponents.

The first step in determining the allocation percentages for volume-related cost allocations is to assign system peaking factors. The base element is equal to the average daily demand (ADD) and is assigned to a value of 1.0. Based on the City’s 2002 Water Master Plan, the Water Utility’s maximum day (max day) demand is 1.5 times the ADD. The maximum hourly (max hour) demand is 1.8 times the ADD. Based on the City’s 2014 Strategic and Master Planning Report, 2002 Water Master Plan, the Recycled Water Utility’s max day demand is 1.7 times the ADD. The max hour demand is 2.38 times the ADD.

The costs associated with facilities required to meet maximum day demand are allocable to base and maximum day extra capacity as shown below for the Water Utility. Recycled Water Utility would use a similar allocation based on its respective max day and max hour ratios.

Base = (1.0/1.5) x 100 = 66.7%
Max Day = (1.5 – 1.0)/1.5 x 100 = 33.3%
These calculations indicate that the average or base use requires 66.7% of the capacity of facilities designed and generated to meet maximum day demand, and the remaining 33.3% meets maximum day extra capacity requirements.

The costs associated with facilities required to meet maximum hour demand are allocable to base, maximum day extra capacity and maximum hour extra capacity as follows:

Base = (1.0/1.8) x 100 = 55.6%
Max Day = (1.5 – 1.0)/1.8 x 100 = 27.7%
Max Hour = (1.8 – 1.5)/1.8 x 100 = 16.7%
Allocation of Operating and Maintenance Expenses
In allocating O&M expenses for TY 2027, costs are directly allocated to the cost components to the extent possible. The Water and Recycled Water Utilities book operating costs by functional categories. Therefore, Black & Veatch used the factors noted in Section 3.1 to allocate the operating expenses to the cost components. The study based the allocation of Administration and Transfer cost elements on the average of all other costs. The direct assignment represents fire protection and cross-connections for the Water Utility.

Table 33 and Table 34 represent the allocation of O&M to the cost components. Next, revenues are subtracted from other sources as shown in Table 31, Lines 12 and 14 and Table 32, Lines 7 and 9. The analysis deducts any drawdown of available cash balances and normalizes the rate adjustments for a full year to determine the net O&M costs for each utility.

Table 33 Allocation of O&M Expenditures (Water)
Table 34 Allocation of O&M Expenditures (Recycled Water) Allocation of Capital Investments
In allocating capital investment for TY 2027, the existing fixed assets (which serve as a proxy for the current capital investments) are allocated directly to cost components to the extent possible. The allocation of costs in this manner provides a basis for annual investment in water and recycled water system facilities. Plan capital costs can be allocated using the distribution of total net system investment across the functional cost components.

Table 35 and Table 36 show the total allocation of existing system investment serving water and recycled water customers. The total net system investment of $64.5M shown on Line 11 for the Water Utility and $1.0M on Line 9 for the Recycled Water Utility represents the Test Year original cost less accumulated depreciation of the system in service. The total net system investment reflects the Water and Recycled Water Utilities fixed asset listing ending June 30, 2025. This value represents the original cost (book value) of the assets.

Table 35 Allocation of Capital Costs (Water)
Table 36 Allocation of Capital Costs (Recycled Water)
Units of Service
To properly recognize the cost of service, each customer class receives its share of base, maximum day, peak hour, and customer costs. Following the allocation of costs, the total cost responsibility for each customer class is developed using unit costs of service for each cost function and subsequently assigning those costs to the customer classes based on the respective service requirements of each. The number of units of service required by each customer class provides a means for the proportionate distribution of costs previously allocated to respective cost categories.

Table 37 summarizes the estimated TY 2027 units of service for various customers. Base costs vary with the volume of water consumed and distributed to the customers on that basis. Extra Capacity costs are those associated with meeting peak demand rates of water use and distributed to the customers based on the respective class capacity requirements more than average rates of use. Black & Veatch followed the capacity factor methodology outlined in Appendix A of the AWWA M1 Manual to derive peak consumption information from the monthly consumption records in the City’s Customer Information System which helps provide the basis for estimating maximum day and peak hour ratios. The number of bills for each customer serves as the basis for distributing customer billing requirements. Customer meter requirements are allocated on an equivalent meter basis for each customer. The estimated number of equivalent meters for each customer relies on the total number of meters serving respective classes and the hydraulic capacity ratio of the meters to the 5/8 x 3/4-inch meter. The equivalent meter ratios adopted in this analysis are consistent with the AWWA M1 Manual. Private fire-protection costs allocations use equivalent fire hydrants.

Cost of Service Allocations
The Study applies the unit costs of service to each customer class’s respective service requirements to determine the cost of service for each customer class. The total unit costs of service applied to the respective requirements for each customer class results in the total cost of service for each customer class.

Units Costs of Service
The TY 2027 unit cost of service for each functional cost component is simply the total cost divided by the applicable units of service, as shown in Table 38 and Table 310. On Line 4, the total costs represent the cost that rates need to recover, as demonstrated in Table 31, Line 16 for the Water Utility, and Table 32, Line 11 for the Recycled Water Utility. The net O&M cost includes O&M (including water purchase), less revenue from other sources and adjustments. The total capital cost includes debt service payments and transfers to the Construction Fund. Line 6 represents the unit costs for the entire water and recycled water systems regardless of customer classes. After that, the unit costs are used to allocate the costs to the specific customer classes.

Distribution of Costs of Service to Customer Classes
Applying the unit costs to the units for each customer class produces the customer class costs. This process is illustrated in Table 39 and Table 311, in which unit costs are applied to the customer class units of service for TY 2027. The costs attributable to each customer class reflect the functional cost components described in Section 3.1. Each customer class places a burden on the system in different ways, and thus the allocation of the units is representative of this burden.

An example of the application of unit costs is shown below for illustrative purposes.

Table 37 Units of Service (Water and Recycled Water)
Table 38 Units Cost of Service (Water)
Table 39 Distribution of Costs to Customer Classes (Water) Table 310 Units Cost of Service (Recycled Water)
Table 311 Distribution of Costs to Customer Classes (Recycled Water) Rate Design
The initial consideration in the derivation of rate schedules for water and recycled water service is establishing equitable charges to the customers commensurate with the cost of providing that service. While the cost-of-service allocations to customer classes should not be construed as literal or exact determinations, they offer a guide to the necessity for, and the extent of, rate adjustments. Practical considerations sometimes modify rate adjustments by considering additional factors such as the extent of bill impacts, existing contracts, and historical local policies and practices.

Existing Rates
The existing rates of the Water and Recycled Water Utilities consist of a fixed component in the form of a minimum monthly service charge and a variable component in the form of a consumption charge. The minimum monthly service charge is based on meter size and applied when consumption does not exceed the consumption allowance. The consumption charge is based on units of consumption (1 unit = 1 HCF = 748 gallons). The City has separate fixed charges for fire services and cross-connections. Table 23, presented earlier in this report, summarizes the existing water and recycled water rates.

Proposed Rates
The cost-of-service analysis described in the preceding sections of this report provides a basis for the design of water and recycled water rates.

Monthly Service Charge
Black & Veatch used meter ratios based on maximum operating capacities by meter size as shown in AWWA M1, Table B-1, which recognizes that as meter size increases, so does the capacity. For example, customers with a 4” meter expects to be able to use more water (at a higher flow capacity) than customers with a ¾” meter. Consequently, the City’s water system must maintain assets sized accordingly and capable of providing customers with the level of service expected from their meter connection when the tap turns on. The minimum monthly service charge recovers a portion of the costs associated with wholesale water purchase, meter maintenance and services, meter reading, bill issuance, and maintenance and capacity costs associated with public fire protection regardless of the level of water consumed.

Table 41 demonstrates the water cost elements incorporated into the minimum monthly service charge for FY 2026. Table 42 shows the Water Utility three-year fixed service charge rate schedule.

Table 41 Costs within the Minimum Monthly Service Charge for FY 2027 (Water) Table 42 Proposed Minimum Monthly Service Charge (Water) Table 43 demonstrates the recycled water cost elements incorporated into the minimum monthly service charge for FY 2026. Table 45 shows the Recycled Water Utility three-year fixed service charge rate schedule.

Table 43 Costs within the Minimum Monthly Service Charge for FY 2027 (Recycled Water) Table 44 Proposed Minimum Monthly Service Charge (Recycled Water) Fire Service
The fire service charge includes costs of issuing bills and maintenance and capacity costs associated with private fire protection. The fire service charge increases as pipeline diameter size increases. The Water Utility provides fire service to approximately 1,287 private fire service accounts. These customers have a water line connection to the water system specifically for fire protection. The Water Utility must design, operate, and maintain a water system that can meet peak fire demand requirements to meet fire protection demands. The Water Utility charges these accounts a fire service charge based on the diameter of the line that connects their fire protection system to the water system.

Table 45 demonstrates the costs incorporated into the fire service charge, and Table 46 shows the three-year rate schedule based on unit costs in future years.

Table 45 Costs within the Fire Service Charge for FY 2027 Table 46 Proposed Fire Service Charge
Cross Connection
The cross-connection charge includes costs of issuing bills and maintenance and replacement costs associated with backflow devices. The cross-connection charge increases as pipeline diameter size increases. The Water Utility provides backflow services to approximately 3,037 accounts. These customers have a backflow device that prevents possible contaminated water from entering the water system. The Water Utility maintains and replaces the devices accordingly to ensure that the devices are working properly. The Water Utility charges the accounts a cross-connection charge based on the diameter of the line that connects their service to the water system.

Table 47 demonstrates the costs incorporated into the cross-connection charge, and Table 48 shows the three-year rate schedule.

Table 47 Costs within the Cross-Connection Charge for FY 2027 Table 48 Proposed Cross Connection Charge
Consumption Charge
This consumption charge is designed to recover costs associated with the base and extra capacity demands. These costs include fixed and variable costs incurred by the water and recycled water system while providing the average annual usage and peaking demands. While most of the costs are fixed, such as personnel and direct and indirect charges, variable costs represent most of the costs through water production and water purchase.

Table 49 shows the three-year rate schedule for both the Water and Recycled Water Utilities. For the Recycled Water Utility, the industrial process is part of general customers.

Table 49 Proposed Consumption Charges
Typical Monthly Costs under Proposed Charges
Table 410 and Table 411 compare typical monthly costs under existing rates and the proposed schedule of water and recycled water user rates derived in this study.

Table 410 Typical Monthly Bill (Water)
Table 411 Typical Monthly Bill (Recycled Water)
Neighboring Water Utilities
Presented in Figure 41 are the proposed rates compared to rates of neighboring cities for a single-family residential customer with a 5/8” x ¾” meter consuming 12 units of water. Based on the comparison, the City is currently one of the lowest water providers in the area. With the proposed rate increases, the City remains the lowest water provider of the surveyed communities. All surveyed community rates are current as of May 2026.

Figure 41 Comparison to Neighboring Water Utilities
Sewer Utility
Revenue and Revenue Requirements
To meet the costs associated with providing sewer services to its customers, the Sewer Utility derives revenue from a variety of sources, including sewer user charges (rates), outlet charges, conveyance fees, connection charges, interest earned from the investment of available funds, engineering fees, and other miscellaneous revenues. The Sewer Utility is constantly looking for other sources of revenue, such as loans, bonds, and grants. Black & Veatch has projected the level of future revenue generated in the Study through an analysis of historical and future system growth in terms of the number of EDUs, bills, and contributed sewage flow. This section also projects the expenses, or revenue requirements, necessary to operate and maintain the system, invest in capital improvements, make debt service payments, and cover other sewer system expenses.

Customer and Water Consumption Projections
Customer Classes
The Sewer Utility’s customers include both residential and non-residential customers. The City has the following customer classes:

Residential: Single-family residential and multi-family residential.

Non-Residential: Amusement Parks; Auto Dealers & Service Stations; Churches; Electric & Electronic Equipment; Food & Kindred Products; Hospitals & Convalescent Homes; Industrial Chemical; Industrial Water Treatment; Laundries; Machinery Manufacturers; Metal Plating; Motels & Hotels; Paper; Repair Shops & Car Washes; Restaurants; Schools & Colleges; and Commercial/Industrial/Miscellaneous (catch-all for remainder of non-residential customers).

Major Users: Major Users customer class is composed of major commercial and industrial users who are identified based on the following:

Have a sewage discharge of at least 25,000 gallons per day; or Have a daily discharge that is intermittent or irregular in strength, amount, or nature.

Equivalent Dwelling Units
The City provides sewer services to over 26,710 customers. All customers generating sewage flow connect to the sewer system. Since the City bills residential customers based on EDUs, a review of historical EDUs patterns for customers, and anticipated growth within the City, the projected total number of EDUs is expected to grow at 0.3% annually over the Study period. An EDU represents a single-family residential customer equivalent with a flow of 245 gallons per day and strengths of 250 mg/L of Biological Oxygen Demand (BOD), 250 mg/L of Total Suspended Solids (TSS), and 35 mg/L of Ammonia (NH3).

Table 51 summarizes the projected number of EDUs for the Sewer Utility.

Table 51 EDUs
Minimum Bills
The City bills non-residential customers primarily on contributed sewage flow and imposes a minimum bill on those whose flow charges do not exceed the included volume allowance within the monthly service charge. The City refers to these bills as minimum monthly service bills. Therefore, a review of historical minimum bills patterns for non-residential customers and anticipated growth within the City, the projected total number of minimum bills is expected to increase 2.5% annually over the Study period.

Table 52 summarizes the projected number of minimum monthly service bills for the Sewer Utility.

Table 52 Minimum Monthly Service Bills
Contributed Sewage Flow
The City charges all its non-residential customers based on contributed sewage flow, which is determined by multiplying water consumption by a return factor. In determining the projected sewage flow, Black & Veatch analyzed historical sewage flow patterns in conjunction with a projected estimate of future water consumption. In conjunction with water consumption, contributed sewage flow has fluctuated based on drought conditions in the state. In addition, the City’s Water Shortage Contingency Plan remains in effect, and customers have made conservation a way of life. Therefore, the City projects that sewage flow will increase 2.5% annually over the Study period.

Table 53 shows the projected sewage flow generated for the Study period. The City contributed sewage flow in units of HCF for non-residential customers.

Table 53 Contributed Sewage Flow
Major Users
The City charges major commercial and industrial sewer customers based on contributed sewage flow and strength loadings. Major users are identified individually, as each customer places different burdens on the sewer system. In 2023, the City’s last major user customer left the City, therefore there are no major users for the duration of the Study period.

Revenue under Existing Rates
Sewer user rates serve as the primary source of revenue for the Sewer Utility. Therefore, the level of future rate revenue is important in developing a long-range financial plan. Rate revenue is determined by multiplying the projected system growth in terms of the number of EDUs, minimum monthly service bills, contributed sewage flow, and major user flow and loadings by the applicable rates to determine sewer rate revenue.

Table 54 shows the Sewer Utility’s current schedule of charges. It is important to note that the minimum monthly service charge applies to non-residential customers that do not exceed the base amount. Therefore, the minimum monthly service charge serves as a baseline cost that the City needs to recover. The City maintains a separate schedule of rates based on the customer classes identified in Section 5.1.

Table 54 Existing Sewer Rates
Table 55 summarizes projected sewer rate revenue under existing rates. As shown, the revenue generated stays relatively flat over the Study period in conjunction with the number of EDUs, minimum bills, billed sewage flow, and major user volume and loadings. The projected Sewer Utility revenues increase from $54.5M in FY 2027 to $55.7M in FY 2029. (Section left intentionally blank)
Table 55 Projected Revenue under Existing Rates
Other Revenue
Other operating sources include charges for revenue from other agencies served by Santa Clara, sewer lateral video inspections, sewer clean-out installations, interest on investments, and other miscellaneous revenues. In total, other operating revenues represent an average of 1.9% of the Sewer Utility’s total revenue. The City anticipates that these revenues will remain relatively constant for the duration of the Study period.

Operating and Maintenance Expenses
Table 56 summarizes the Sewer Utility’s projected O&M expenses for the Study Period. These expenses include costs related to salaries and benefits, materials and supplies, contract and professional services, RWF costs, indirect and direct costs, and routine capital outlay. The City anticipates that all O&M expenditures, excluding Water Pollution Control Plant costs, will increase on average by 4.2% annually from FY 2027.

The Sewer Utility receives treatment services from the RWF operated and maintained by the City of San Jose. While the City has an ownership stake in the RWF, the City must still pay for O&M associated with operating the facility. Based on the City of San Jose estimates, the City expects RWF O&M costs to increase by approximately 2.0% annually over the Study period.

Table 56 O&M Expenses
As shown in Table 56, the Sewer Utility’s O&M expenses increase from $44.2M in FY 2027 to $46.5M in FY 2029.

Debt Service Requirements
Table 57 represents the Sewer Utility’s existing and proposed debt service obligations. This table shows the combined principal and interest requirements on the existing debt over the Study period. It is common practice for utilities to debt finance large capital improvement projects, such as in the case of Trimble Road sewer trunk line replacement in Santa Clara. By financing the cost of the projects, the City can fund large projects immediately and spread the payment over a specified time frame, thereby helping to offset the impact on ratepayers.

Table 57 Long-Term Debt Service
Capital Improvement Program
The Sewer Utility annually develops a five-year Capital Improvement Plan to identify sewer system needs, including ongoing assessments, maintenance, and renewal and replacement requirements.

Table 59Table 58 summarizes the Sewer Utility’s CIP for FY 2027 through FY 2029. The Sewer Utility is projecting $86.0M in CIP over the Study period, including capital and replacement projects. The City has posted the CIP Budget on its website for complete details associated with each CIP project.

Table 58 Capital Improvement Projects
Capital Improvement Financing Plan
The City funds annual expenditure for the CIP from a combination of available funds on hand, outlet charges, conveyance fees, debt financing, connection charges, developer contributions, and revenues derived from user rates. As shown in Table 59, the average annual CIP expenditure is $28.7M for the Sewer Utility. The planned average annual CIP contribution from the Sewer Utility Operating Fund is $15.5M annually over the Study period.

Table 59 Construction Fund Financing Plan
Transfers
The Sewer Utility will perform transfers over the Study period from the Operating Fund and other funds and reserves. The other funds consist of the Operating Reserve, Rate Stabilization Reserve, Pension Stabilization Reserve and Construction Fund. See Section 5.8 for further explanation on Rate Stabilization Reserve. The Construction Fund transfers represent money to cover planned CIP project expenditures. All these transfers do not represent direct operating expenses for the enterprise. Therefore Black & Veatch includes these costs as “below-the-line” cash flow items and not included as O&M expenses. Table 510, Lines 19 to 23 for the Sewer Utility reflect these associated amounts.

Reserves
A utility typically establishes reserves for several reasons, such as covering shortfalls in operating revenues, maintaining strong bond ratings, covering day-to-day operating costs, and easing the burden on ratepayers associated with large rate increases. Per the reserve policy, the Sewer Utility will maintain the following four reserves:

Operating Reserve represents working capital maintained by the Operating Fund to cover day-to-day expenses and maintain enough funds to cover accounts receivable if there are supplier issues, periods of lower-than-expected sewer revenues, or unforeseen cost increases. The reserve will maintain a minimum balance of 90 days of operating expenses once fully funded.

Construction Reserve represents funds used for unforeseen and unbudgeted capital costs. Once fully funded, this reserve will maintain a minimum balance of 12-months of the following year’s planned City CIP and 6-months of the following year’s planned RWF CIP.

Rate Stabilization Reserve represents funds used to absorb revenue shortfalls due to short-term decreases in sewer sales. This reserve is designed to stabilize sewer rate revenue and avoid wide swings in rates charged to customers over time. The reserve will maintain a minimum balance of 10% of sewer rate revenue when fully funded.

Pension Stabilization Reserve represents funds used to pay for the unfunded pension liabilities and the increase in the City’s share of pension costs due to factors such as higher CalPERS rates and negotiated pay increases. The reserve target is $1.2M for the Sewer Utility.

Appropriate reserve levels help the Sewer Utility maintain liquidity and demonstrate to the rating agencies that the City’s financial policies and practices are focused on maintaining a balanced financial position.

Projected Operating Results
The revenue requirements of the Sewer Utility consist of O&M expenses, debt service, capital expenditure, and reserve requirements.

It is important to examine the cash flow projections under the status quo scenario to fully understand the current condition of the Sewer Utility and the need for revenue adjustments. As shown in Figure 51, the status quo conditions would project that the Sewer Utility would operate from an annual deficit position, thus tapping into its reserves. In this scenario, the Sewer Utility would not impose any revenue increases over the Study Period and continue to incur O&M expenses, pay for the execution of the planned CIP, and transfer to reserves.

Figure 51 Status Quo Operating Cash Flow
The Sewer Utility will fall into a deficit position if the City does not implement the revenue increases, as shown in Figure 51. The revenue increases represent the overall total revenue adjustment needed to meet revenue requirements. The revenue adjustment does not represent adjustments to the individual rates but reflects the overall level of revenue needed to meet the Sewer Utility’s obligations.

The suggested revenue increases help the Sewer Utility meet the following goals:

Meet budgeted operating obligations in the three FYs.

Meet planned capital investments in the three FYs.

Maintain an operating reserve of 90 days of operating expenses.

Maintain construction and infrastructure reserve to the average of the next two years CIP for City and RWF projects.

Continue to fund the rate stabilization reserve to reach its goal of 10% of rate revenues.

Continue to transfer into the pension stabilization reserve to meet the target goal.

Shown in Table 510 is a summary of the proposed Operating Fund for the Study Period. The Operating Fund consists of 1) Revenue and 2) Revenue Requirements.

Revenue
Line 1 is the revenue under existing rates.

Lines 2 through 4 are the additional revenue generated from the required annual revenue increases. The additional revenue generated is a direct reflection of the number of months the increase is effective for, and therefore amount might be calculated at less than that stated amount.

Line 6 is the total revenue generated from user charges.

Line 12 represents other operating revenues.

Line 13 represents total revenues for the enterprise.

Revenue Requirements
Line 15 represents O&M expenses. The O&M expenses include RWF costs.

Line 18 represents debt service payments.

Line 24 represents transfers. The transfers include money to the reserves and other funds.

Line 25 represents total revenue requirements.

Line 28 represents the net cumulative cash balance (unrestricted) within the Operating Fund. The net unrestricted cash balance plus the operating reserve intends to match, to the extent possible, Line 30. The cash balance reserve is required to ensure the Operation Fund can continue in the event of supplier interruption, market price fluctuations of critical equipment or supplies or an abrupt drop in account receivables. The reserve target minimum is 90 days of O&M expenses. Line 31 represents debt service coverage. The operating cash flow is set up to achieve a debt service coverage of 1.25x requirement in all years. The lending financial institution sets the debt service coverage ratio via a rate covenant that will also obligate the City to increase revenues as needed to meet the minimum debt service coverage requirement. (Section left intentionally blank)
Table 510 Operating Fund (Sewer)
Figure 52 presents the proposed Operating Fund.

Figure 52 Sewer Operating Cash Flow
Cost of Service Analysis
The cost-of-service analysis requires that the utility recovers needed revenues from rates for sewer service, which are allocated to customer classes according to the service rendered. An equitable rate structure allocates the capture of revenue requirements to customer classes based on contributed sewage volume, strengths, number of customer connections, and other relevant factors.

In analyzing the Sewer Utility’s cost of service for allocation to its customer classes, Black & Veatch selected the annual revenue requirements for FY 2027 as the Test Year requirements to demonstrate the development of cost-of-service sewer rates. Table 61 summarizes the total costs of service that need to be recovered from sewer user rates. The table represents TY 2027.

Table 61 Cost of Service Revenue from Rates
To derive the net revenue requirement recovered through rates, it is necessary to deduct revenues from other sources as shown in Line 10 which corresponds with Table 510, Line 12. Shown in Line 4 is the total revenue requirement that corresponds with Table 510, Line 25. Line 11 represents the net annual cash balance during TY. If the enterprise is drawing down funds already in the Operating Fund, this number is positive. The number will be negative if the enterprise is replacing funds. In the case of the Sewer Utility, the $1.2M figure indicates that the forecast projects a positive cash balance for the year.

Functional Cost Components
The first step in conducting a cost-of-service analysis involves analyzing the cost of providing sewer service by system function to properly allocate the costs to the various customer classes and, subsequently, design rates. As a basis for allocating costs of service among customer classes, costs are separated into the following four basic functional cost components: (1) Base; (2) Strength; (3) Customer; and (4) Direct Assignment, described as follows:

Base costs represent operating and capital costs of the system associated with collection. The collection costs vary directly with the quantity of sewage flow.

Strength costs represent those operating and capital costs associated with treatment. The treatment costs are specifically related to strength parameters such as Biological Oxygen Demand, Total Suspended Solids, and Ammonia.

Customer costs are those expenditures that tend to vary in proportion to the number of customers connected to the system. These include meter reading, billing, collecting, accounting, maintenance, and capital costs associated with meters and services.

Directly assigned costs are specifically identified as those incurred to serve specific customers. The Sewer Utility has no directly assigned categories.

Allocation to Cost Components
The next step of the cost-of-service process involves allocating each cost element to functional cost components based on the parameter or parameters having the most significant influence on the magnitude of that element of cost. O&M expense items are allocated directly to appropriate cost components. A detailed allocation of related capital investment is used as a proxy for allocating capital and replacement costs. The separation of costs into functional components provides a means for distributing such costs to the various classes of customers based on their respective responsibilities for each type of service.

Volume and Strength Allocations
The sewer system consists of various facilities designed and operated to fulfill a given function. For the system to provide adequate service to its customers, it must be capable of meeting not only the annual volume requirements but also the strength loading demands placed on the system. Because not all customers and types of customers exert volume and strength loading demands similarly, the capacities of the various facilities must be designed to accommodate the demands of all classes of customers. Each sewer service facility within the system has an underlying volume demand exerted by all customers for whom the base cost component applies. For those facilities designed solely to meet volume demand, 100% of the costs go to the base cost component. For facilities designed to meet strength loading demands, the percentage of the costs is allocated to the different strength cost components based on their specific function.

Allocation of Operating and Maintenance Expenses
The Sewer Utility books operating costs by functional categories. Therefore, Black & Veatch used the factors noted in Section 5.1 to allocate the operating expenses to the cost components. In allocating O&M expenses for TY 2027, the costs are directly allocated to the cost components to the extent possible. The allocation of Administration and Transfer cost elements is based on the average of all other costs.

Table 62 represents the allocation of O&M to the cost components. Revenues are subtracted from other sources as shown in Table 61, Lines 10, and any drawdown of the cash balance is deducted and normalized for partial rate adjustments as shown in Line 13 to determine the net O&M costs.

Table 62 Allocation of O&M Expenditures
Allocation of Capital Investments
In allocating capital investment for TY 2027, the existing fixed assets (which serve as a proxy for the current capital investments) are allocated directly to cost components to the extent possible. Plan capital costs can be allocated using the distribution of total net system investment across the functional cost components. The allocation of costs in this manner provides a basis for annual investment in sewer system facilities. Table 63 shows the total allocation of existing system investment serving sewer customers for the TY 2027. The total net system investment of $42.8M shown on Line 7 represents the Test Year original cost less accumulated depreciation of the system in service. The total net system investment reflects the Sewer Utility’s fixed asset listing ending June 30, 2025. This value represents the original cost (book value) of the assets.

Table 63 Allocation of Capital Costs
Units of Service
To properly recognize the cost of service, each customer class receives its share of base, strength, and customer costs. Following the allocation of costs, the total cost responsibility for each customer class is developed using unit costs of service for each cost function and subsequently assigning those costs to the customer classes based on the respective service requirements of each. The number of units of service required by each customer class provides a means for the proportionate distribution of costs previously allocated to respective cost categories.

Table 64 summarizes the estimated Test Year units of service for the various customer classes. Base costs vary with the volume of sewage flow produced and distributed to customer classes on that basis. Black & Veatch derived sewage flow information from the monthly water consumption records in the City’s CIS multiplied by a return factor. Strength costs are those associated with pollutant characteristics, and the Study allocated these costs to customer classes based on loadings. The pollutant loadings for each customer class come from recommendations of the State Water Resources Control Board, Revenue Program Guidelines, Appendix G, and the City of San Jose. The City’s commercial and industrial class consists of 17 distinct types of businesses such as retail, offices, restaurants, and hospitals. Since sampling is not an immediate possibility, the City has relied on industry standards used by the State of California. The number of bills for each customer class serves as the basis for distributing customer billing requirements.

Cost of Service Allocations
Unit costs of service are applied to each customer class’s respective service requirements to determine the cost of service for each customer class. The total unit costs of service applied to the respective requirements for each customer class results in the total cost of service for each customer class.

Units Costs of Service
The TY 2027 unit cost of service for each functional cost component is simply the total cost divided by the applicable units of service, as shown in Table 65. The capital costs on Line 3 and 4 are associated with City projects and RWF projects. These costs have been separated to determine the collection and treatment costs independently. On Line 5, the total costs represent the cost that rates need to recover, as demonstrated in Table 61, Line 14. The net O&M cost includes O&M (including the RWF) less revenue from other sources and adjustments. The total capital cost includes debt service payments and transfers to the Construction Fund. Line 6 represents the unit costs for the entire sewer system regardless of customer classes. After that, these unit costs are applied in allocating the costs to the specific customer classes.

Distribution of Costs of Service to Customer Classes
Applying the unit costs to the units for each customer class produces the customer class costs. This process is illustrated in Table 66, in which the study applies the unit costs to the customer class units of service. The costs attributable to each customer class are based on the functional cost components described in Section 6.1. Each customer class places a burden on the system in different ways, and thus the allocation of the units is representative of this burden.

An example of the application of unit costs is shown below for illustrative purposes.

Table 64 Units of Service
Table 65 Units Cost of Service
Table 66 Distribution of Costs to Customer Classes

Table 6-6 Distribution of Costs to Customer Classes (Con’t) Rate Design
The initial consideration in the derivation of rate schedules for sewer service is establishing equitable charges to the customers commensurate with the cost of providing that service. While the cost-of-service allocations to customer classes should not be construed as literal or exact determinations, they offer a guide to the necessity for, and the extent of, rate adjustments. Practical considerations sometimes modify rate adjustments by considering additional factors such as the extent of bill impacts, existing contracts, and historical local policies and practices.

Existing Rates
The Sewer Utility’s existing rates consist of a fixed component in the form of a monthly service charge and a variable component in the form of a consumption charge. The monthly service charge is a flat fee based on EDUs and is applied to residential customers. The monthly service charge also is a minimum for non-residential customers and applies when the consumption charge is less than the monthly service charge. Non-residential customers also have a consumption charge based on units of water consumption (1 unit = 1 HCF = 748 gallons) multiplied by a return factor. The City has separate charges for major users consisting of O&M and capital components. Table 55, presented earlier in this report, summarizes the current sewer rates.

Proposed Rates
The costs of service analysis described in the preceding sections of this report provide a basis for designing sewer rates.

Monthly Service Charge
The monthly service charge is designed to recover residential costs associated with contributed sewage flow, strength loadings, billing, collecting, accounting, and maintenance and capital costs. The charge is a flat monthly fee based on EDUs. An EDU is defined in Section 5.1.

The monthly service charge also serves as the minimum monthly service charge for non-residential customers. The minimum service charge will recover non-residential costs associated with volume, strength, meter reading, billing, collecting, accounting, and maintenance and capital costs. The minimum monthly service charge incorporates an allowance for sewage flow. Once a customer exceeds the allowance, the minimum monthly service charge goes away.

Table 71 shows the forecasted proposed three-year monthly service charge schedule.

Table 71 Proposed Monthly Service Charge
Consumption Charge
The consumption charges are designed to recover the remainder of the cost component costs not recovered through the monthly service charge for non-residential customers. Table 72 shows the forecasted proposed three-year rate schedule for the Sewer Utility. All customers that were classified as Paper are now under Commercial/Industrial/Misc.

Table 72 Proposed Consumption Charges
Major Users
The major commercial and industrial user charge is designed to recover the costs associated with O&M and capital for major users. Major users are classified based on requirements in Section 5.1. These customers are monitored monthly for volume and strength loadings. Major users are charged the unit charges identified in Table 65, Line 7. Note that the major user charges are specifically identified O&M and capital components. Charges for all other customers incorporate these charges, but the City has combined them into a single rate for simplicity. The City does not have any major users left within the City; therefore, these rates will be for any future customer.

Table 73 shows the three-year rate schedule based on unit costs in future years. The City does not have any major users left within the City; therefore, these rates will be for any future customer.

Table 73 Proposed Major User Charges
Typical Monthly Costs under Proposed Charges
Table 74 compares typical monthly costs under existing rates and the proposed schedule of sewer user rates derived in this study for residential and non-residential customers.

Table 74 Typical Monthly Bill
Neighboring Sewer Utilities
Presented in

Figure 71 is the proposed rates compared to rates of neighboring jurisdictions, for a single-family residential customer. Based on the comparison, the City is currently a medium cost sewer provider in the area. With the proposed rate increases, the City remains one of the medium sewer providers of the surveyed communities. All surveyed community rates are best estimates as of May 2026.

Figure 71 Comparison to Neighboring Sewer Utilities
Appendix A – Ten-Year Financial Plan
Water Utility
Recycled Water Utility
Sewer Utility
ii
June 2026

BLACK & VEATCH
BLACK & VEATCH | Table of Contents
i
BLACK & VEATCH | Legal Notice
LN-1
BLACK & VEATCH | Revenue and Revenue Requirements
2-2
City Website, Schedule S-16 Monthly Sewer Service Charges, <http://www.santaclaraca.gov/government/departments/water-sewer-utilities/water-sewer-and-recycled-water-rates/sewer-rates> Enter Report Name That Goes In The Header | Client Name: Style Links to the Header City of Santa Clara, CA | Water and Sewer Rate Study