SR-07-08-2008-9A - 505-001-01City of City'Council Report
Santa Monica,
City Council Meeting: July 8,,2008
Agenda Item: `=t
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, a five -year schedule of revenue increases for water and
wastewater was approved by Council in May 2008, as follows:
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
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FY 08109
FY 09/10
FY 10/11
FY 11/12
FY 12113
WATER
11.0%
10.5%
10.5%
WASTEWATER
1 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
`a
factor of 89 %. Commodity charges for non - residential customers vary depending on
type of business.
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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.
41
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 a commodity -only rate structure and the enhanced reserve levels.
On May 13, 2008 Council took the following actions:
1. approved a five -year plan to increase water rates:
WATER
FY 08/09
1 FY 09/10
1 FY 10/11
FY 11112
FY 12113
Maximum Projected
11.0%
10.5%
10.5%
10.0%
10.0%
Increase
2. approved a five -year plan to increase wastewater rates:
WASTEWATER
FY 08/09
FY 09110
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;
0
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 Range of Use /HCF
1 $1.65 0 -14
2 $2.47 15 -40
3 $3.70 41 -148
4 $5.78 149+
Multi - Family Residential Customers:
Multi Family Range of Use
Tier
Rate
Per Dwelling Unit /HCF
1
$1.65
.0 -4
2
$2.47
5 -9
3
$3.70
10 -20
4
$5.78
21+
Non - Residential Customers:
Meter Size
Tier Rate
Range of Use /HCF
%11 & T'
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 $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
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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* Range 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
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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. A commodity -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 August 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
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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 discount 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
Proposition 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
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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
Approved: Forwarded to Council:
Lee E. Swain
Director of Public Works
mt Ewell
nager
Attachment: A — Water Rates Resolution
B — Wastewater Rates Resolution
C — Protest Letters
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Reference:
Resolution No. 10321 (CCS) &
Resolution No. 10322 (CCS)
Attachments Filed with Original
Staff Report 9A in
Legislative File 502 - 001 -01