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Authorize Staff to Prepare Documents for Proposed Water and Sewer Rate Adjustments September 17, 2019 Page 2 experienced in recent years, the rate revenue collected for both the water and sewer enterprises has been far below that which is necessary keep up with needed capital improvement projects. Currently 20% of the water distribution infrastructure is past its useful life and an estimated 70% will reach its useful life by 2040. Similarly, the sewer system requires an average of 4 miles of pipe replacement a year for the next 100 years but currently only about 1 mile of replacement a year can be afforded. On February 5, 2018, the City Council directed staff to perform a comprehensive rate study for both the water and sanitary sewer enterprises. A prior such study had been performed in 2014. On July 3, 2018, upon completion of a competitive bid process, the City awarded a contract to Stantec to develop a financial plan, cost of service, and rate structure analyses for water, recycled water, and sewer rates. The objectives of the study is to ensure the financial stability of both water and sewer enterprises while ensuring that the rates are in compliance with applicable law (namely California's Proposition 218 requirements). Capital Improvement Program The City's Water Resources Division has determined that both the water and sewer utilities need significant investment in the repair and rehabilitation of its aging infrastructure. The Water Enterprise has completed a Water Master Plan which identifies critical projects that will average nearly $15 million in annual capital spending for the next 20 years. Over the past 4 years the City has spent an average of less than $4 million annually. The water and sewer systems are already showing signs of distress. In past year alone the systems experienced 21 water main breaks, 173 water service leaks, 132 sewer laterals repaired, and 2 pump stations and 6 groundwater wells downed due to mechanical and/or electrical failures. While the Public Works Agency has excelled in making cost-effective repairs and rehabilitations, continued deferral of capital project investment will eventually result in the complete failure and loss of critical assets. The proposed projects predominately focus on groundwater well improvements, pipe replacement, and a major Advanced Metering Infrastructure (AMI) Project. With this increase in capital spending, the Water Enterprise will require a higher level of staffing to manage the projects (as many as an additional 8 full-time positions). Planned capital spending for the Sewer Enterprise includes pipe replacement at rate of 4 miles of aging pipe per year and the construction of a new $7 million pump station (which will be paid for with developer fees). This signifies an increase in average annual capital spending from under $1 million to over $6 million for the next 20 years. With this increase in capital spending, the Sewer Enterprise will require a higher level of staffing to manage the projects (as many as an additional 3 full-time positions). Financial Plan The rate study proposes to primarily cash finance the above re -investments in critical water and sewer infrastructure, with the exception of the AMI project. Cash financing is more appropriate to pay for average/typical capital spending levels. Cash financing avoids the cost of interest and ensures that a utility is not creating undue burden on future ratepayers through the accumulation of debt. For the AMI Project, some grant funding has already been secured and additional debt financing is being sought. Debt financing is appropriate for one-time, large capital projects (such 65B-2