75A - PH - WATER AND SEWER RATES

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PUBLIC HEARING –Resolution Adjusting City Water and Sewer Rates November 19, 2019 Page 2 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 WorksAgency 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 atarate 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 burdenon 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 as the AMI Project) that are anomalies compared to normal capital spending levels. Debt financing in those cases allows the utility to avoid unnecessary “rate shock” and helps spread the cost of large projects over a longer period. It also ensures that future ratepayers who benefit from the project will also pay for the project. As part of the analysis, existing reserve levels were examined. Recommended reserves include an Operating & Maintenance Reserve target equal to 90days (3 months) of annual operating expenses;an Emergency Reserve set at$4 million (for both the Water and Sewer Enterprises); and a Repair, Renewal, and Replacement Capital Reserve equal to 50% of average annual projected capital spending. Rate Design Over the past decade the legal requirements surrounding utility rate setting in California have evolved. Namely the courts have made rulings with respect to California Constitution Article XIII C and D (commonly known as Proposition 218) that have created a higher “cost of service” standard for rate setting than has historically been practiced by public utilities. Simply put, the burden of proof is on utilities to demonstrate that all aspects of water and sewer rates are directly proportionate to the cost of providing service. This means aligning fixed revenue (fixed charges) with fixed costs, and variable revenue (usage rates) with variable costs. In addition, Stantec looked at opportunities to strengthen revenue stability for both utilities, which were found to rely too heavily on usage rates, making the utilities susceptible to revenue volatility. Currently, the City’s water