HomeMy WebLinkAboutItem a - Study Session Updated Water Sewer Rate StudyStudy Session Water and Sewer Cost of Service Study Update
March 17, 2020
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DATE: March 17, 2020
TO: Honorable Mayor and City Council
FROM: Tom Tait, Public Works Services Director
By: Jacquelyn Mercado, Senior Management Analyst
SUBJECT: REPORT AND DISCUSSION REGARDING THE WATER AND SEWER
COST OF SERVICE STUDY UPDATE
Recommendation: Provide direction on moving forward with water
and sewer rate adjustments
SUMMARY
In October 2015, the City Council adopted a tiered water rate structure and approved a
five-year water and sewer rate adjustment through the end of calendar year 2020,
based on the completed Water and Sewer Cost of Service Study (“Cost Study”). In
December 2019, the City Council adopted resolutions for the fifth and final year of the
previously approved water and sewer rate adjustment. In an effort to continue to fund
the City’s water and sewer systems ongoing operation and maintenance costs, an
update to the Cost Study was completed to recommend a new five-year water and
sewer rate adjustment.
The Cost Study Update recommends that the City increase water rates by 3% for Fiscal
Year 2020-21, and 6% for the following four fiscal years through 2024-25, in order to
fund expected operations, maintenance, water supply costs, capital expenditures, and
maintain a sufficient Reserve Fund balance. The Cost Study Update also proposes that
the City increase sewer revenues by 1.5% for Fiscal Year 2020-21, and 3% for the
following four fiscal years through 2024-25, in order to fund ongoing sewer operations
and achieve a 75-year replacement cycle for the City’s sewer system.
It is recommended that the City Council provide direction to the Public Works Services
Department (“PWSD”) to move forward with the adoption of the Cost Study Update and
water and sewer rate adjustment process by following Proposition 218 (“Prop 218”)
balloting procedures to establish a five-year water and sewer rates structure for Fiscal
Years 2020-21 through 2024-25.
Study Session Water and Sewer Cost of Service Study Update
March 17, 2020
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BACKGROUND
The City provides and maintains water and sewer services to more than 56,000
residents. Utility rate increases are necessary to fund ongoing operations, maintenance,
and capital improvements, and to maintain adequate Reserve Fund balances for the
water and sanitary sewer systems, in order to provide quality services to Arcadia
residents and businesses. In February 2014, the City Council awarded a Professional
Services Agreement to Carollo for the preparation of the Water and Sewer Cost of
Service Study and the development of a financial model that would determine how best
to recover projected ongoing operational costs, capital improvements to water and
sewer infrastructure, and water supply costs, over a five-year period. The PWSD and
Carollo gathered and analyzed data on the City’s water and sanitary sewer operations,
and established a seasonal tiered water rate structure that would meet the City’s
primary objectives of providing revenue stability, while encouraging water use efficiency.
On January 19, 2016, the City Council adopted a seasonal tiered water rate structure
and approved a five-year water and sewer rate adjustment schedule for calendar years
2016 through 2020. The PWSD annually reviews water and sewer operating budgets,
revenues, expenditures, and Reserve Fund balances to determine whether the
approved maximum rate adjustment is necessary. The City of Arcadia’s water and
sewer rates are among the lowest in the area, and have remained so even with annual
rate adjustments over the past five years.
Although the Governor declared the drought emergency to be over, local regions
continue to suffer from long-term drought impacts. In the Main Basin, where the City
draws most of its water, basin levels have not recovered to minimum operating levels. In
response, the Main Basin Watermaster adopted a Drought Management Plan that
includes a Resource Development Assessment (“RDA”), which is a pass-through fee
based on each individual producer’s annual amount of water pumped from the Main
Basin. The purpose of the RDA is to restore ground water levels by purchasing
imported water from the State Water Project, separate from the purchase of
Replacement Water. The RDA has continued to increase annually and is anticipated to
cost the City over $2 million dollars in Fiscal Year 2021-22. The RDA was implemented
by the Main Basin in Fiscal Year 2017-2018; therefore, this cost was not accounted for
in the 2015 Cost Study and the City has not been able to recover the costs of this
charge from ratepayers.
In December 2019, the City Council adopted resolutions for the fifth and final year of the
approved water and sewer rate adjustment. Water and Sewer rate adjustments have
typically been on a fiscal year cycle. However, in the spring of 2015 the City Council
chose to delay the public hearing for new water and sewer rates, pending a decision
from the California Fourth District Court of Appeals in the Capistrano Taxpayers
Association, Inc. v. City of San Juan Capistrano case. This case involved the use of a
budget-based water rate structure. Following the Capistrano ruling, the City Council
Study Session Water and Sewer Cost of Service Study Update
March 17, 2020
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approved moving forward with a tiered water rate structure, and set the public hearing
for water and sewer rate adjustments on a calendar year cycle. The PWSD is
recommending that these adjustments be returned to a fiscal year calendar to align with
the City’s budgeting practices and financial models.
The goal of the 2015 Cost Study was to utilize Reserve Funds to minimize larger rate
adjustments. Due to changes in water use trends resulting from the last drought
emergency, increases to operations and maintenance budgets, mainly due to the cost
of the RDA and Replacement Water, and funding capital improvements, an update to
the 2015 Cost Study is necessary. In July 2019, the City Council approved a
Professional Services Agreement with Carollo to complete an update to the 2015 Cost
Study and to recommend a new five-year water and sewer rate adjustment for Fiscal
Years 2020-21 through 2024-25.
DISCUSSION
The Cost Study Update comprehensively relies on the City’s financial and rate models,
which were exclusively developed by Carollo during the 2015 Cost Study and
subsequently updated and refined in 2017. These models have again been updated to
include actual revenues and operational expenditures, capital improvement costs, and
customer usage data, along with additional items that were necessary to develop
financial projections for Fiscal Years 2020-21 through 2024-25. The current sewer and
tiered water rate structures remain the same, but minor modifications have been
recommended to the seasonal tier allotments. Some meter sizes received an increase
or minor decrease in allotments, while other allocations remained the same. This was
done based on an historical analysis of actual tiered customer usage data and is
necessary in order to realign tier usage with each meter size to current customer
demand patterns. The tier allotments are now more proportional across all tiers and
meter sizes, which makes the proposed rate structure more fair and legally defensible.
The following goals were identified in the 2015 Cost Study and carried forward through
the Cost Study Update:
• Generate sufficient revenue to fund continued operations and maintenance of the
City’s sewer and water supply and distribution system, including increases in
water supply costs driven by the Main Basin’s Drought Management Plan to
restore the health the basin.
• Provide for equipment replacement and improvements to the water and sewer
systems infrastructure through capital improvements.
• Review reserve policies and set rates to adequately maintain a reserve fund to
make necessary repairs in the event of an emergency.
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March 17, 2020
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Based on discussions and previous direction from the City Council, rate adjustments
have been designed to eliminate the ongoing use of Reserve Funds to fund operations
and capital improvement expenditures.
Water Rates
Operations and maintenance expenditures comprise the majority of the expenses within
the Water budget, with the single largest line item being water supply costs. The
updated Cost Study financial model was used to forecast water sales and expenditures
that include looking at the cost of current and future water supplies, including the rising
cost of replacement water, system operation costs, and Watermaster’s imposed RDA
fee.
In addition to regular replacement water costs, the RDA fee has increased annually
since 2016 from $40 per acre-foot to $140 per acre-foot for Fiscal Year 2019-20. The
RDA fee is set to increase to $175 per acre-foot. By the end of Fiscal Year 2020-21, the
City will have paid over $6 million dollars in total RDA fees without passing any of those
charges onto customers. The RDA fee will continue for the foreseeable future and is
estimated to cost the City approximately $2.1 million annually. The RDA fee has been
included in the Cost Study Update and the proposed five-year water rate adjustments
has accounted for this cost.
The previous annual rate adjustments were designed to use Reserve Funds to lessen
the amount of annual water rate adjustments. Accordingly, the City Council agreed to
lower the water Reserve Fund balance from $20 million to $12 million over the five-year
period. The updated Cost Study has estimated the value of the City’s water system
replacement at $236 million. Based on industry standards for such a valuation, the Cost
Study determined that $7.1 million in capital reserve (or 3% of $236M) is required,
combined with about $3.8 million required to fund operation and maintenance costs for
at least 90 days. As such, a total reserve minimum required is $11 million.
Based on those factors, the Cost Study Update proposes that the City increase water
revenues by 3% for Fiscal Year 2020-21, and 6% for the following four fiscal years
through 2024-25, in order to fund expected operations, maintenance, and CIP
expenditures, and maintain a sufficient Reserve Fund balance. The Cost Study Update
took into account that water customers already received a 7% Water rate adjustment in
January 2020. In order to align water rates to a fiscal year timeline, a smaller rate
adjustment is proposed for the first year of the proposed 5-year rate adjustment
schedule.
The Cost Study Update has proposed the following water rates for Fiscal Years 2020-21
through 2024-25, which will not exceed the estimated amount necessary to fund the
operation of the City Water System:
Study Session Water and Sewer Cost of Service Study Update
March 17, 2020
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(a) An increase to the current fixed bimonthly meter charge for all customer classes to
adequately reflect the actual cost of service incurred.
Proposed Meter Charge ($/Meter Size)
Meter Size
(in inches)
Current
Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25
5/8” $30.33 $31.80 $33.71 $35.73 $37.87 $40.14
3/4” $32.40 $33.85 $35.88 $38.03 $40.32 $42.73
1” $36.55 $37.95 $40.23 $42.64 $45.20 $47.91
1 1/2” $46.93 $48.21 $51.10 $54.17 $57.42 $60.86
2” $59.39 $60.52 $64.15 $68.00 $72.08 $76.40
3” $88.45 $89.24 $94.59 $100.27 $106.28 $112.66
4” $ 129.97 $130.27 $138.08 $146.37 $155.15 $164.46
6” $ 254.53 $253.35 $268.55 $284.66 $301.74 $319.85
8” $ 399.85 $396.95 $420.76 $446.01 $472.77 $501.13
10” $ 607.45 $602.09 $638.21 $676.50 $717.09 $760.12
(b) Commodity charges ($/HCF) for single-family residential customers based on the
approved four-tier inclining block rate structure, and recommended seasonal
variable consumption allotments based on the customers’ water meter size. This
helps to account for the natural usage requirements of a large property versus a
smaller one. The tier allotments were determined by analyzing the relationship
between meter size and consumption patterns for all single-family accounts over
the past five years. The updated Cost Study has proposed a few minor adjustments
to some of the tier break points, which are necessary to realign tier usage with each
meter size to current water demand patterns.
Bimonthly Tier Break Points (in HCF) for Winter Water Usage
(November through April)
Meter Size
Tier 5/8” 3/4” 1” 1 1/2” 2”
Tier 1 0 - 22 0 - 22 0 - 22 0 - 22 0 - 22
Tier 2 23 - 32 23 - 34 23 - 42 23 - 48 23 - 60
Tier 3 33 - 42 35 - 44 43 - 58 49 - 70 61 - 90
Tier 4 43+ 45+ 59+ 71+ 91+
Study Session Water and Sewer Cost of Service Study Update
March 17, 2020
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Bimonthly Tier Break Points (in HCF) for Summer Water Usage
(May through October)
Meter Size
Tier 5/8” 3/4” 1” 1 1/2” 2”
Tier 1 0 - 22 0 - 22 0 - 22 0 - 22 0 - 22
Tier 2 23 - 34 23 - 42 23 - 60 23 - 70 23 - 94
Tier 3 35 - 44 43 - 58 61 - 92 71 - 112 95 - 148
Tier 4 45+ 59+ 93+ 113+ 149+
Additionally, a seasonal single-family tiered water rate structure assists in managing
customer demand for water by pricing discretionary water uses, such as landscape
irrigation, at a higher rate than water used for drinking and sanitation purposes. This
is to provide a price signal to customers, to use water efficiently and offer an
incentive to reduce excess water use. As water usage increases, so does the cost
per unit of additional water; this methodology has proven effective in curtailing
wasteful water practices.
Proposed Single-Family Rates for Commodity Charges ($/HCF)
Tier
Current
Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25
Tier 1 $1.82 $1.86 $1.97 $2.09 $2.22 $2.35
Tier 2 $2.23 $2.27 $2.41 $2.55 $2.71 $2.87
Tier 3 $2.53 $2.34 $2.48 $2.63 $2.79 $2.95
Tier 4 $2.72 $2.96 $3.13 $3.32 $3.52 $3.73
(c) Commodity charges ($/HCF) for multi-family residential customers based on the
approved two-tier rate structure with water allocations based on the number of
dwelling units in each multi-family complex.
Bimonthly Tier Allotments (Per Dwelling Unit)
Tier Tier (HCF) x Per Dwelling Unit
Tier 1 12
Tier 2 13 +
Proposed Multi-Family Rates for Commodity Charges ($/HCF)
Tier Current
Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25
Tier 1 $1.69 $1.79 $1.89 $2.01 $2.13 $2.25
Tier 2 $1.97 $1.98 $2.10 $2.22 $2.35 $2.49
Study Session Water and Sewer Cost of Service Study Update
March 17, 2020
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(d) Specific uniform rates for Commercial, Government, and Institutional classes.
Proposed Rates for Commodity Charges ($/HCF)
Current
Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25
Commercial $1.81 $1.89 $2.01 $2.13 $2.25 $2.39
Government &
Institutional $2.13 $2.23 $2.36 $2.50 $2.65 $2.81
The net change to a customer’s water bill will be affected by the customer’s ability to
use water efficiently. A typical single-family customer with a 1” water meter and 55
Hundred Cubic Feet (“HCF”) usage in the summer will see a $3.60 or 2.4% bimonthly
increase in their water bill. The percent increase will vary among customers based on
usage.
Sewer Rates
The City’s sewer system includes 138 miles of pipe and is, on average, 75 years old.
The Sewer Master Plan is a comprehensive report outlining a long-range program of
capital improvements and preventative maintenance measures to upgrade and maintain
the City’s sewer system. Annual sewer rate adjustments are necessary to fund the
operations and maintenance activities of the sewer system to ensure that the City’s
sewer system is in compliance with state regulations that mandate the elimination of
sewer overflows.
The Cost Study Update determined that the current sewer rate structure equitably
recovers costs from each customer class but that the City must increase sewer
revenues annually in order to fund ongoing capital improvement projects and meet
projected operating expenditures while maintaining a Reserve Fund balance of $1.3
million, or 1.5% of the valuation of the City’s sanitary sewer system, which is currently
estimated at $90 million.
Therefore, the updated Cost Study is recommending that the City increase sewer
revenues by 1.5% for Fiscal Year 2020-21, and 3% for the following four fiscal years
through 2024-25, in order to fund City to fund ongoing operations and achieve a 75-year
replacement cycle for the City’s sewer system.
The proposed sewer rates for Fiscal Years 2020-21 through 2024-25 are shown in the
tables below, and will not exceed the estimated amount necessary to fund the operation
of the City Sewer System:
Study Session Water and Sewer Cost of Service Study Update
March 17, 2020
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(a) Single-Family Residential and Multi-Family Residential Dwellings Bimonthly Rates
Current
Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25
$16.97 $17.27 $17.79 $18.32 $18.87 $19.44
(b) Commercial Dwellings Bimonthly Rates (Fixed Rate + Variable Per HCF Billed
Water Usage)
Current
Rate FY 20-21 FY 21-22 FY 22-23 FY 23-24 FY 24-25
$50.69 +
$0.28
Variable
Per HCF
$51.80 +
$0.28
Variable
Per HCF
$53.36 +
$0.30
Variable
Per HCF
$54.96 +
$0.30
Variable
Per HCF
$56.61 +
$0.31
Variable
Per HCF
$58.30 +
$0.32
Variable
Per HCF
The proposed sewer rates are increased proportionally in each year to generate the
necessary projected level of revenues provided in the Cost Study Update. Should the
City find that revenue requirements are less than those projected in the study, the City
could opt to forgo rate increases in any given year or implement rates lower than the
proposed increase for that year.
Implementation of New Rates
At the April 21, 2020, City Council Meeting, the PWSD will request that the City Council
approve the Water and Sewer Rate Cost of Service Study update and set a Public
Hearing date for June 16, 2020, to consider any protests to the proposed rates. The
PWSD will, at least forty-five (45) days before the date of the Public Hearing, mail a
notice to all water customers detailing the proposed rate increase in accordance with
Proposition 218 requirements. All public outreach efforts and informational pieces
developed will be approved through the City Attorney’s office to ensure that the City is in
compliance with Prop 218 regulations. If there is no majority opposition, the newly-
established rates will become effective July 1, 2020.
ENVIRONMENTAL ANALYSIS
The proposed action does not constitute a project under the California Environmental
Quality Act (“CEQA”), and it can be seen with certainty that it will have no impact on the
environment. Thus, this matter is exempt under CEQA.
Study Session Water and Sewer Cost of Service Study Update
March 17, 2020
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FISCAL IMPACT
Water and sewer rate increases are necessary to fund ongoing operations and
maintenance budgets and the Capital Improvement Program while maintaining an
adequate Reserve Fund balance in case of an emergency. The lack of a rate
adjustment would not allow the City to recover increasing water supply costs, and
operations and maintenance costs for the City’s water and sewer system. The Water
and Sewer Costs of Service Study Update has determined that the City will need to
increase water revenues by 3% for Fiscal Year 2020-21, and 6% for the following four
years through Fiscal Year 2024-25, in order to fund expected operations, maintenance,
and Capital Improvement Program expenditures.
Additionally, the Cost Study Update determined that a 1.5% sewer rate adjustment for
Fiscal Year 2020-21, and 3% for the following four years through Fiscal Year 2024-25 is
necessary to fund expected operations and maintenance costs for the City’s sewer
system.
RECOMMENDATION
It is recommended the City Council provide direction to the Public Works Services
Department to move forward with the adoption of the Cost Study Update and water and
sewer rate adjustment process by following Proposition 218 balloting procedures to
establish a five-year water and sewer rates structure for Fiscal Years 2020-21 through
2024-25.