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SR-07-08-2008-9A - 502-001-01~J ~;tY°, City Council Report Santa Monica City Council Meeting: July 8, 2008 Agenda Item: ~ To: Mayor and City Council From: Lee E. Swain, Director of Public Works Subject: Water and Wastewater Rates Recommended Action Staff recommends that the City Council adopt resolutions establishing revised water and wastewater rates, approve low-income provisions for water and wastewater rates, and hear public comment pursuant to Proposition 218 requirements. Executive Summary Following the last significant rate study and rate modification in 1996, annual inflationary increases in the water and wastewater rates have been outpaced by the rate of change in costs for labor, equipment, power, materials, purchased water and sewage disposal. Through a series of study sessions with City Council beginning in 2005, and new rate studies initiated in 2007, afive-year schedule of revenue increases for water and wastewater was approved by Council in May 2008, as follows: FY 08/09 FY 09/10 FY 10/11 FY 11112 FY 12/13 WATER 11:0% 10.5% 10.5% 10.0% 10.0% WASTEWATER 18.0% 18.0% 15.0% 9.0% 4.0% In accordance with Proposition 218 requirements, notices of the proposed rate increases. were mailed out to all property owners in the city. All water customers, independent of property owners, were also mailed the notices. A .commodity-only rate structure is proposed; which eliminates the fixed service charge component of the previous rate structure. As such, a strong conservation incentive will be created. Low- income provisions for water and wastewater rates have been incorporated in the proposed structure, and enhanced reserve .fund levels for operating and capital reserve funds will provide greater flexibility to meet future unforeseen challenges. Background Existing Rates The City provides water service to three customer types: single-family, multi-family and non-residential. The current water rate structure was adopted in 1996 to provide equity 1 between customer types and among customers within a class. There were no rate changes in 1997 or 1998. In 1999, a resolution to annually increase rates by the actual Consumer Price Index (CPI) increase was adopted and has been implemented with each annual budget. A 6% increase was approved by Council for FY 05/06. The existing water rate is structured so that every single family, multi-family and non- residential customer pays a fixed bi-monthly service charge based on size of the water meter. The service charge rates do not differ by customer class. Customers are also charged a commodity; or usage rate based on the quantity of water used in each .two- month billing period. There are three levels, or tiers, of the commodity rate, the purpose of which is to provide financial incentives for water conservation. As an example, for single family customers, Tier 1 rates are charged on the first 13 hundred cubic feet (HCF: each HCF represents 748 gallons of usage). Tier 2 rates are charged for usage from 14 to 126 HCF, and Tier 3 rates are charged on any usage above 127 HCF, which very few customers reach. Established. pursuant to a 1996 rate study, the existing .wastewater rate structure similarly comprises a fixed service charge plus a commodity charge. The rate structure has remained unchanged since 1996; however, an annual CPI-based rate increase has been in effect since 2001: The fixed service charge component is assessed to each customer account based on water meter size, and the commodity charges are based on estimated wastewater flows during the bi-monthly billing period. A discharge factor is applied to the metered water consumption to represent the portion of water usage returned to the wastewater system. The discharge factors range from 51 % for single family residential accounts, to 95% for multi-family residential accounts with more than 4 units. Typically, single family residential users exhibit the greatest level of outdoor water usage which is not returned to the wastewater system. All non-residential customers are assigned a discharge 2 factor of 89°/0. Commodity charges for non-residential customers vary depending on type of business. Previous Council Actions In a City Council study session on May 17, 2005, staff presented information addressing. the status of the fund balances for the Water -and Wastewater funds. Specifically, expenditures in both of these funds were outpacing revenues. Options were provided in the study session to balance expenditures and revenues. A subsequent report to Council on June 21, 2005, provided additional information regarding expenditures and revenues for the Water fund and presented additional options for bringing expenditures and revenues into balance. Staff indicated in the June 21, 2005 report that consideration of wastewater rate adjustments could be deferred until FY 06/07 or FY 07/08 depending on actual costs and revenues during the ensuing period. Council direction to staff received on June 21, 2005 included.: • Implement a 6% increase to water rates for FY 05/06 that would balance revenues and expenditures for one year. only; • Conduct a water rate study to finalize the additional rate increase amounts required to balance the fund, including examining a restructuring of the tiered system to provide a conservation incentive to reward customers who voluntarily conserve water, • Utilize a cost of service approach in any new rate design; and • Review practices and procedures to assess efficiencies throughout the operational functions of the Division. Concurrent with the commissioning of a water rate study in 2007, staff also. commissioned a wastewater rate study to review the revenue requirements necessary to meet required wastewater operating and capital expenditures as well as existing debt service obligations. 3 In a study session with Council on May 8, 2007, staff presented various options for both water and wastewater rate and structure modifications. A five-year plan was presented for each, with water rate increase recommendations by staff comprising an 11% annual rate increase for water, and a wastewater rate increase plan of 30%, 25%, 20%, 10%, and 0%. Structural modifications for each were also suggested. Council was informed that alternative information was pending at the time and that staff would return with updated information, and very likely lower rate increase options at a later date.. At a follow-up study session with Council on April 22, 2008, staff presented updated financial projections and alternate scenarios for water and wastewater rates. Two updated options each were presented for water and wastewater rates (each presented with and without a one time cash infusion alternate). A change to a commodity-only rate structure was recommended, in addition to a recommendation for enhanced reserve levels in order to provide increased flexibility in the event of unforeseen financial challenges. Council directed staff to return with the preferred option, as described in detail .herein, with. the proposed change to acommodity-only rate structure and the enhanced reserve levels. On May 13, 2008 Council took the following actions: 1. approved afive-year plan to increase water rates: WATER FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13 Maximum Projected Increase 11.0% .10.5% 10.5% 10.0% 10.0% 2. approved afive-year plan to increase wastewater rates: WASTEWATER FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13 Maximum Projected 18.0% 18.0% 15.0% 9.0% 4.0% Increase 3. approved a revision of the rate structure for both water and wastewater to a commodity-only structure to promote water efficiency and conservation; 4. approved enhanced funding levels for capital, operating, and rate stabilization reserve funds for both water and wastewater; 4 5. adopted a resolution setting a public hearing on July 8, 2008; in accordance with Proposition 218, to consider water and wastewater rate increases; and 6. directed staff to present to Council a revised proposal for low income rates. Notices of proposed rate increases were mailed out to all property owners, and all water customers, on May 21, 2008, in compliance with Proposition 218 requirements. Details of the analyses, and the rate study reports, were included as attachments to the May 13, 2008 staff report to Council. Discussion Highlights of the proposed water. rate: 1. The five-year schedule of rate increases represents maximum projected rate increase percentages. Financial conditions will. be reviewed annually to determine the appropriate increase, up to the approved maximum. Follow-up rate analyses will be performed at five year intervals in order to monitor fund balance positions and ascertain the need for future rate revisions. 2. The fixed service charge has been eliminated in the new structure. In adopting a commodity-only rate structure, a stronger conservation incentive will apply, allowing customers to have a more direct impact on their water charges. 3. The existing three-tier structure, irrespective of meter size, is replaced with four tiers for residential customers. For non-residential customers, a uniform commodity rate is established applicable to nearly all water use; a second tier will apply to only the extreme high end of consumption. The tier breaks vary with meter size for non-residential customers. 4. Reserve fund levels will be increased for Operating Reserve and Capital Reserve, providing enhanced ability to meet unforeseen future challenges. 5 The recommended water rate structure in FY 08/09 (effective August 1, 2008) is as follows: Single-Family Residential Customers Tier Rate 1 $1.65 2 $2.47 3 $3.70 4 $5.78 Range of Use/HCF 0-14 15-40 41-148 149+ Multi-Family Residential Customers: Tier Rate 1 $1.65 2 $2.47 3 $3.70 4 $5.78 Multi Family Range of Use Per Dwelling Unit/HCF 0-4 5-9 10-20 21+ Non-Residential Customers: Meter Size Tier Rate Range of Use/HCF '/" & 1" Tier 1 $2.35 0-210 Tier 2 $5.78 211+ 1-1/2" Tier 1 $2.35 0-465 Tier 2 $5.78 466+ 2" Tier 1 $2.35 0-870 Tier 2 $5.78 871+ 3" Tier 1 $2.35 0-1,700 Tier 2 $5.78 1,701+ 4" Tier 1 $2.35 0-2,550 Tier 2 $5.78 2,551+ 6" and above Tier 1 $2.35 0-5,280 Tier 2 $5.78 5,281+ For fire-line meters, fixed bi-monthly service charge: Meter Size Service Charge 2" $62.67 3" $111.63 4° $181.60 6 6" $356.48 8" $566.37 10" $811.23 Unauthorized metered water usage for fire-line meters will result in doubling of the service charge. For recycled water, a uniform rate. of $2.22 per HCF will be charged Low-income provisions The City of Santa Monica currently offers qualified low-income customers a discount on water bills by waiving the fixed service charge. With elimination of the service charge proposed as part of rate restructuring, a new approach to the low-income discount is warranted. It is recommended that qualified low income customers receive a discount of $0.69 per HCF in all tiers of the commodity-only rate structure. For the average low income single family customer with an average consumption of 14 units of water bi- monthly, this proposed discount yields a bi-monthly charge for water of $13.44. This is equal to the charge under the present rates and structure (adjusted for inflation). The recommended water rate structure for qualified low-income customers in FY 08/09 (effective August 1, 2008) is as follows: Residential Low-Income Customers Tier Rate* Ranpe of Use/HCF 1 $0.96 0-14 2 $1.78 15-40 3 $3.01 41-148 4 $5.09 149+ Tier rates represent $0.69 discount from regular residential rates Highlights of the proposed wastewater rate: 1. The five-year schedule of rate. increases represents maximum projected rate increase percentages. Financial conditions will be reviewed annually to determine the appropriate increase, up to the approved maximum. Follow-up 7 rate analyses will be performed at five year intervals in order to monitor fund balance positions and ascertain the need for future rate revisions. 2. The fixed service charge has been eliminated in the new structure for all user classes. Acommodity-only structure is proposed. This is consistent with the water rate structure and the city's sustainability objectives, and is also consistent with the regulatory requirement of the California State Water Quality Control Board to base rates on quantity and strength of wastewater discharges. 3. Discharge factors (percentage of water used returned to the wastewater system) will continue to apply as in the previous structure. 4. Reserve fund levels will be increased for Operating Reserve and Capital Reserve, providing enhanced ability to meet unforeseen future challenges. The recommended wastewater rate structure for in FY 08/09 (effective Augusf 1, 2008) is as follows: Wastewater discharge factors, applied to metered water usage, are unchanged from the existing rate structure. For information purposes, the discharge factors are presented below: Single Famlily 51% Duplex 80% Triplex 85% Fourplex 90% Over Four Units 95% Individually metered 95% Non-Residential 89% Landscape Meter 0% Wastewater commodity charges: Sewage Strength Category Rate per HCF Residential: $2.94 Non-Residential General Commercial $2.68 Medium Low $2.79 Medium $3.22 Medium High $3.51 8 High $4:11 Churches $2.64 School, Institutional $2.64 Misc. Industrial $3.26 Low-income provisions The City currently offers qualified low income customers a discourt on wastewater bills by waiving the fixed service charge. With elimination of the service charge proposed as part of rate restructuring, a new approach to the low income discount is warranted. It is recommended that qualified low-income customers receive a discount of the commodity-only rate of $1.52 per HCF. -For the average low-income single family customer with an average consumption of 14 units of water bi-monthly, this proposed discount yields a bi-monthly charge for wastewater of $10.14. .This is equal to the charge under the present rates and structure (adjusted for inflation). The recommended wastewater rate structure for qualified low-income customers in FY 08/09 (effective August 1, 2008) is as follows: Wastewater discharge factors, applied to metered water usage: Single Family 51% Duplex 80% Triplex 85% Fourplex 90% Over Four Units 95% Individually metered 95% Non-Residential 89% Landscape Meter 0% * no change in discharge factors for low income customers Wastewater commodity charges: Residential low-income $1.42 per HCF*" "" rate represents $1.52 discount from regular residential rates Public Notice Requirements Propositiori 218 requirements call for a public notice of proposed changes to rates be made to all property owners in the affected area. Notices of the. proposed increase were mailed to all property owners, as well as to all water/wastewater customers, on 9 May 20, 2008. -The protest period will close at the public hearing on July 8, 2008. Absent a majority protest from property owners, City Council may approve the final adoption of the rates at the July 8 Council meeting. Rates will become effective August 1, 2008. Copies of protests submitted to date are included in Attachment A. A summary of all protests received to the closing date will be presented at the July 8 Council meeting. Financial Impacts & Budget Actions As a result of the water and wastewater rate increases, the FY2008-09 Adopted Budget should be revised as follows: 1) .Increase water commercial sales revenue account number 25671.402310 by $910,897; and 2) Increase sewer service. charges revenue account number 31661.401650 by $1, 554,450. Prepared by: Gil Borboa, P.E., Water Resources Manager gee t. Swam Director of Public Works Attachment: A -Water Rates Resolution B -Wastewater Rates Resolution C -Protest Letters ager 10 Approved: Forwarded to Council: Reference Resolution Nos. 10321 (CCS) and 10322 (CCS). Additional attachments available for review in the City Clerk's Office.