1. Accept staff report on the updated study of cost of service to provide potable water to San Jose Municipal Water System (SJMWS) customers; and

Size: px

Start display at page:

Download "1. Accept staff report on the updated study of cost of service to provide potable water to San Jose Municipal Water System (SJMWS) customers; and"

Avice Dawson
5 years ago
Views:

1 CITY OF Cr SAN IPSE CAPITAL OF SILICON VALLEY TO: HONORABLE MAYOR AND CITY COUNCIL SUBJECT: MUNICIPAL WATER SYSTEM COST OF SERVICE STUDY COUNCIL AGENDA: 05/09/17 ITEM: 7.2 Memorandum FROM: Kerrie Romanow DATE: April 17, 2017 Approved Date 7/2 a/i* COUNCIL DISTRICTS: 2, 4, 7, 8 RECOMMENDATION 1. Accept staff report on the updated study of cost of service to provide potable water to San Jose Municipal Water System (SJMWS) customers; and 2. Approve an Ordinance amending Part 12 of Chapter 4.80 of Title 4 of the San Jose Municipal Code to (1) replace all references to the Consolidated Potable Water Utility Operating Fund in Part 12, including the title, with "Municipal Water System Operating Fund"; and (2) revise Section to align provisions related to expenditure of funds in the Municipal Water System Operating Fund with the updated cost of service study, including the provisions regarding the establishment and funding of reserves, and to delete outdated provisions and unnecessary requirements related to general fund transfers, historic staffing ratios, and periodic audits. OUTCOME This report will provide a status report on an updated cost of service study for the San Jose Municipal Water System (SJMWS) in advance of upcoming Council consideration of the SJMWS budget and updated potable water rates for the SJMWS. BACKGROUND SJMWS is a rate -funded utility operating at full cost recovery to provide potable water to approximately 26,000 customer accounts, serving a population of about 116,000 people in the North San Jose, Alviso, Evergreen/ Edenvale, and Coyote Valley areas. SJMWS purchases potable water for the North San Jose and Alviso areas from the San Francisco Public Utilities

2 HONORABLE MAYOR AND CITY COUNCIL April 17,2017 Subject: Municipal Water System Cost of Service Study Page 2 Commission (SFPUC), which delivers treated water through its Hetch Hetchy Aqueduct from the Sierra Nevada mountain range. Potable water for the Evergreen and Edenvale areas is purchased from the Santa Clara Valley Water District (SCVWD) and comes from the Sacramento-San Joaquin River Delta, delivered through the State Water Project and Federal San Felipe Project, and local groundwater sources. SJMWS supplies all potable water for the Coyote area from local groundwater sources. Groundwater is currently used only as a backup supply in North San Jose/Alviso. Recycled water is purchased from South Bay Water Recycling (SBWR) and is retailed to customers in all service areas. SCVWD is the groundwater management agency in Santa Clara County responsible for the management, quality, and supply of the groundwater basin. Historically, SJMWS' potable water supplies have consisted of approximately 5% groundwater, 65% SCVWD treated water, and 30% SFPUC treated water. ANALYSIS. COST OF SERVICE STUDY Study Methodology In 2016, the City contracted with Raftelis Financial Consultants (RFC) to conduct a Cost of Service Study (Study) for the potable water enterprise of SJMWS. The purpose of the Study was to analyze the utility's potable system revenue requirements through the development of a Financial Plan and an up-to-date Cost of Service evaluation. RFC worked under the direction of the City Attorney's Office, in consultation with the City Manager's Budget Office and Environmental Services Department staff. The first step in a cost of service analysis is to determine the adequate and appropriate level of funding for a given utility. This is referred to as determining the "revenue requirement." This revenue requirement analysis considers the short-term and long-term service objectives of the utility over a given planning horizon, including capital facilities, system operations and maintenance, and financial reserve policies, to determine the adequacy of a utility's existing revenue sources to recover its costs. A number of factors may affect these projections, including the number of customers served, water-use trends, extraordinary gains or expenses, weather, conservation, use restrictions, inflation, interest rates, capital finance needs, and other changes in operating and economic conditions: After determining a utility's revenue requirements, the next step is analyzing the elements of the cost of providing service. Utilizing a public agency's approved budget, financial reports, operating data, system assets, and capital improvement plans, a cost of service study categorizes the operating system costs by function (e.g., treatment, storage, pumping, distribution/collection, etc.). Capital costs are similarly functionalized to determine the cost of service. Both capital and operating assets are properly categorized by function. These "functionalized costs" are allocated first to cost causation components, and then to the various customer classes

3 HONORABLE MAYOR AND CITY COUNCIL April 17,2017 Subject: Municipal Water System Cost of Serv ice Study Page 3 (e.g., single-family residential, multi-family residential, and commercial) within each service area by determining the characteristics of those classes and the contribution of each to incurred costs such as water supply, delivery, max-day demand 1, as well as service characteristics and demand patterns for water. Rate design is the final step of the procedure and uses the revenue requirements and cost of service analysis to determine appropriate rates. Rates utilize "rate components" that build-up to rates for variable charges ("quantity charges") and fixed charges ("meter charges") for any customer classes and meter sizes servicing customers. SJMWS Revenue Requirement Approximately 66% of total SJMWS revenue is used to purchase water from wholesalers and pay the SCVWD groundwater augmentation fee for groundwater pumped by SJMWS. The next largest SJMWS operating cost categories are personal services (staffing) and capital costs. RFC's analysis of SJMWS revenue requirement included a review of staffs projected 2 operating and capital expenditures for and projection of cost increases in future years. Based on input from staff, RFC determined that operating costs are projected to increase by almost 7% from to , primarily due to increases in water supply costs. A key part of the revenue requirement analysis also included RFC's independent review of the adequacy of SJMWS reserves. RFC concluded that while the City current reserve guidelines and practices were in-line with industry minimum standards, several options of increasing the reserves should be considered to ensure fiscal sustainability of the utility. SJMWS current reserve guidelines, practices, and target amounts 3 are as follows: Reserve Targets per Adopted Reserve Type Guidelines Budget Amounts Operating Reserve 60 Days of Operating Budget $5.9M Rate Stabilization Reserve 5% of Rate Revenue $1.85M Capital Rehabilitation Reserve 7% of Rate Revenue $2.59M Emergency Reserve $1,000,000 $1M Total Reserves - Funds 500 and 515 $11.34M 1 Max-day demand is the estimate of the maximum demand placed on the system on a single day in a single year. 2 Staff cost projections were provided to RFC early this calendar year. Costs for next fiscal year are still being finalized, and the final determination for FY 18 revenue requirement and rates will be made as part of the upcoming budget process. 3 Currently, only the Rate Stabilization Reserve and the Capital Rehabilitation Reserve are established in the Municipal Code. The Operating Reserve is established pursuant to administrative policy. Budgeted unrestricted fund balance for both the operating and capital funds is targeted at approximately $700,000 to $1,000,000 for unplanned, including emergency, activities that come up during any given budget year.

4 HONORABLE MAYOR AND CITY COUNCIL April 17,2017 Subject: Municipal Water System Cost of Service Study Page 4 RFC recommended that the City consider increasing the operating reserve to an ideal goal of 90 days of annual operating expenses; and increase the rate stabilization reserve to 10% of commodity rate revenue to more closely reflect the standards for this type of reserve utilized by other water utilities. RFC also recommended changing the manner in which the capital rehabilitation reserve is calculated, to be either the average annual reinvestment of planned capital projects or a percentage of system depreciation, both of which capture an estimate of reinvestment into the system and are based on industry standards. Finally, RFC recommended the City consider establishing the emergency reserve goal based on either risk of catastrophic system failure (6 months purchased water costs) or the typical industry standard of 2% of system asset value. The following summarizes RFC's recommendations related to SJMWS reserves compared to the current reserves: Recommended Goal Reserve Type Minimum Reserve Goal Level ($) Operating Reserve $5.9M 90 Days of Operating Budget S8.70M Rate Stabilization Reserve $1.85M 10% of Commodity Revenue $3.04M Capital Rehabilitation Reserve $2.59M 1 Year Replacement Cost Depreciation $5.32M Emergency Reserve $1M 2% of assets or 6 Months of Purchased Water S2.23M/ 11.10M The result of the consultant's analysis was that SJMWS would need an overall increase in revenue of 9% a year over the next five years ( through ) to cover the full cost of operating and maintaining the distribution system, plus funding for capital costs and to begin increasing the funding of financial reserves. Attachments A and B display pro formas for SJMWS showing no revenue adjustment and RFC's recommended 9% per year rate adjustment. As Attachment A demonstrates, with no future rate adjustment, SJMWS will be unable to sustain cost recovery over the next five years. Attachment B demonstrates that with RFC's recommended 9% revenue adjustment, SJMWS will be able to cover all operating and capital costs, while making significant progress toward achieving reserve goals, and ensuring fiscal sustainability of SJMWS. Sources of SJMWS Revenue The City sets potable water rates and charges in two categories, to recover fixed costs (meter charges) and variable costs (quantity charges). All customers have historically been and will continue to be billed a flat service charge based on the size of the water meter, as well as a quantity rate per unit of water used. The proposed quantity rates reflect the cost to supply water to customers within each service area and within elevation zones in the Evergreen/Edenvale service area. Customers with a private fireline service will continue to pay flat bi-monthly charges. Currently, variable charges (variable charges and elevation surcharges) make up approximately 78% of SJMWS revenue and fixed charges (meter charges, including private

5 HONORABLE MAYOR AND CITY COUNCIL April 17,2017 Subject: Municipal Water System Cost of Service Study Page 5 fireline charges) make up approximately 22% of revenue. RFC's cost of service analysis updated SJMWS's categorization of costs as fixed versus variable, finding that a higher percentage of the costs may be allocated as fixed because they will be incurred regardless of the amount of water sold. The result of RFC's analysis was that for , variable charges should make up approximately 68% of the SJMWS revenue requirement, while fixed charges should total approximately 32% of the revenue requirement. Increasing the allocation of costs to the fixed charges will improve the City's ability to fully recover costs. Rate Design SJMWS' meter charges consist of one fixed component (bi-monthly service charge) and one volumetric charge component (based on meter size). RFC's rate design review recommended updating the volumetric component of the meter charge, based on industry standard hydraulic capacity ratios determined by the American Water Works Association. Larger meters are more expensive to replace and maintain and have the potential to demand more capacity than smaller meters. As a result of the meter capacity update, the percentage increase in projected meter charges is greater for meters 6-inches and above than for those 4-inches and below. RFC also recommended two changes to SJMWS' quantity rate structure: elimination of tiered water rates for residential customers, and establishment of quantity rates based on cost of supply for three distinct service areas. The result is quantity rates that are uniform among customer classes (residential and non-residential) but vary based on service area due to the different sources of water supply. Attachment C displays the maximum meter charges and water commodity rates that have been noticed for the City Council's consideration and approval if all of RFC's recommendations are fully adopted and the costs used to develop RFC's pro forma match the amount ultimately adopted in the SJMWS operating and capital budgets. Attachment C also compares a current average residential and non-residential bill based on current rates to average bills based on the maximum rates and charges set forth in the rate notice. ORDINANCE RELATED TO USE OF SJMWS REVENUE In order to implement the consultant's recommendations related to SJMWS reserves, Section of the San Jose Municipal Code must be amended. Specifically, Section of the Code requires that the SJMWS rate stabilization reserve be established and maintained in an amount equal to 5% of rate revenue, and that the capital rehabilitation reserve be established and maintained in an amount equal to 7% of rate revenue. In order to provide the City Council with maximum flexibility in determining appropriate reserve levels, it is recommended that the Code be amended to provide for establishment of all four reserves in an amount not to exceed RFC's recommended maximum, with the actual amount of each reserve to be as determined by Council during the annual budget process. Further, in order to update the Code to reflect the City's current practices and eliminate unnecessary requirements, it is recommended that provisions related to general fund transfers, historic staffing ratios, and periodic audits be deleted.

6 HONORABLE MAYOR AND CITY COUNCIL April 17,2017 Subject: Municipal Water System Cost of Service Study Page 6 EVALUATION AND FOLLOW-UP Staff will return to City Council on June 6 with recommendations relating to water rates. PUBLIC OUTREACH On April 17, 2017, SJMWS sent Public Notices directly to all its customers advising them of the proposed rate changes and that the public hearing on the proposed rate increases is scheduled for June 6, SJMWS will publish a notice in the San Jose Mercury News in advance of City Council consideration of the proposed rate updates. COORDINATION This memo was coordinated with the Environmental Services Department, City Attorney's Office, and City Manager's Budget Office. COMMISSION RECOMMENDATION/INPUT There is no commission recommendation or input associated with this action. CEOA Not a Project, File No. PP (a), City Organizational & Administrative Activities, Staff Reports that involve no approvals of any City actions. /s/ KERRIE ROMANOW Director, Environmental Services For questions, please contact Jeff Provenzano, Deputy Director, at (408) Attachment A - Potable water rate pro forma with no revenue adjustment Attachment B - Potable water rate pro forma with RFC recommended revenue adjustment Attachment C maximum rate increases and billing impacts

7 ATTACHMENT A POTABLE WATER RATE PRO FORMA WITH NO REVENUE ADJUSTMENT 1 Fund 515 Water Utility FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Operating Revenues Revenue from Existing Rates $39,295,876 $39,904,713 $40,836,233 $42,115,521 $43,778,595 $43,778,595 Total Revenue Adjustments $0 $0 $0 $0 $0 $0 Total Rate Revenue $39,295,876 $39,904,713 $40,836,233 $42,115,521 $43,778,595 $43,778,595 Non-Rate Revenue Uncollectible/Bad-Debt Factor ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) Utility Tax Clearing $0 $0 $0 $0 $0 $0 Miscellaneous $100,000 $60,000 $61,200 $62,424 $63,672 $64,946 Interest Income $100,000 $76,381 $76,381 ($8,585) ($131,992) ($301,104) Transferfrom Rate Stabilization $0 $0 $0 $0 $0 $0 TOTAL OPERATING REVENUE $39,395,876 $39,941,094 $40,873,814 $42,069,360 $43,610,276 $43,442,437 TOTAL O&M EXPENSES $34,794,919 $37,205,775 $42,785,264 $48,560,274 $53,121,307 $58,573,812 1 REVENUES LESS OPERATING EXPENSES $4,600,957 $2,735,319 ($1,911,450) ($6,490,914) ($9,511,031) ($15,131,375) REPLACEMENT CAPITAL PROJECTS $7,166,000 $4,207,000 $3,826,000 $4,697,000 $4,123,000 $5,490,167 PAYGO $5,966,000 $4,207,000 $3,826,000 $4,697,000 $4,123,000 $5,490,167 Commercial Paper $1,200,000 $0 $0 $0 $0 $0 Debt Funded $0 $0 $0 $0 $0 $0 DEBT ISSUES $0 $0 So $0 $0 $0 Issuance Costs $0 $0 $0 $0 $0 $0 Debt Proceeds $0 $0 $0 $0 $0 $0 DEBT SERVICE SO SO So So $0 $0 Current Debt Service $0 $0 $0 $0 $0 $0 Proposed Debt Service $0 $0 $0 $0 $0 $0 TRANSFERS TO OTHER FUNDS So SO So So $0 so General Fund $0 $0 $0 $0 $0 $0 NETCASH CHANGE ($1,465,043) ($1,548,062) ($5,813,831) ($11,179,329) ($13,502,040) ($20,320,438) Cash Reserve Balances Beginning Cash Reserve Balance $14,526,935 $13,061,892 $11,513,830 $5,699,999 ($5,479,330) ($18,981,370) Ending Cash Reserve Balance $13,061,892 $11,513,830 $5,699,999 ($5,479,330) ($18,981,370) ($39,301,807) Reserve Minimum $11,340,000 $11,989,528 $13,031,225 $14,147,241 $15,106,983 $16,015,734 Reserve Goal $28,163,928 $29,819,526 $33,878,254 $38,097,459 $41,425,935 $45,289,782

8 ATTACHMENT B POTABLE WATER PRO FORMA WITH RFC RECOMMENDED REVENUE ADJUSTMENT Fund 515 Water Utility FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Operating Revenues Revenue from Existing Rates $39,295,876 $39,904,713 $40,836,233 $42,115,521 $43,778,595 $43,778,595 Total Revenue Adjustments $0 $3,591,424 $7,681,295 $12,425,300 $18,018,465 $23,580,200 Total Rate Revenue $39,295,876 $43,496,137 $48,517,528 $54,540,821 $61,797,060 $67,358,795 Non-Rate Revenue Uncollectible/Bad-Debt Factor ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) ($100,000) Utility Tax Clearing $0 $0 $0 $0 $0 $0 Miscellaneous $100,000 $60,000 $61,200 $62,424 $63,672 $64,946 Interest Income $100,000 $139,398 $139,398 $153,291 $169,872 $188,104 Transfer from Rate Stabilization $0 $0 So $0 $0 $0 TOTAL OPERATING REVENUE $39,395,876 $43,595,535 $48,618,127 $54,656,536 $61,930,604 $67,511,845 TOTAL O&M EXPENSES $34,794,919 $37,205,775 $42,785,264 $48,560,274 $53,121,307 $58,573,812 REVENUES LESS OPERATING EXPENSES $4,600,957 $6,389,760 $5,832,863 $6,096,262 $8,809,297 $8,938,033 REPLACEMENT CAPITAL PROJECTS $7,166,000 $4,207,000 $3,826,000 $4,697,000 $4,123,000 $5,490,167 PAYGO $5,966,000 $4,207,000 $3,826,000 $4,697,000 $4,123,000 $5,490,167 Commercial Paper $1,200,000 $0 $0 $0 $0 $0 Debt Funded $0 $0 $0 $0 $0 $0 DEBT ISSUES So $0 $0 $0 $0 $0 Issuance Costs $0 $0 $0 $0 $0 $0 Debt Proceeds $0 $0 $0 $0 $0 $0 DEBT SERVICE $0 SO $0 $0 $0 $0 Current Debt Service $0 $0 $0 $0 $0 $0 Proposed Debt Service $0 $0 $0 $0 $0 $0 TRANSFERS TO OTHER FUNDS SO $0 $0 $0 $0 $0 General Fund $0 $0 $0 $0 $0 $0 NETCASH CHANGE ($1,465,043) 1 $2,043,362 $1,867,465 $1,245,971 $4,516,425 $3,259,762 Cash Reserve Balances Beginning Cash Reserve Balance $14,526,935 $13,061,892 $15,105,254 $16,972,719 $18,218,690 $22,735,115 Ending Cash Reserve Balance $13,061,892 $15,105,254 $16,972,719 $18,218,690 $22,735,115 $25,994,877 Reserve Minimum $11,340,000 $12,420,499 $13,952,981 $15,638,277 $17,269,198 $18,845,358 Reserve Goal $28,163,928 $30,098,982 $34,479,840 $39,078,769 $42,863,366 $47,170,902

9 ATTACHMENT C MAXIMUM RATE INCREASES AND BILLING IMPACTS Table 1: Monthly Meter Charge MONTHLY METER CHARGE (based on meter size) Meter Size Current Charges Proposed Charges 5/8-inch $16.49 $ /4-inch $16.84 $ inch $29.30 $ inch $58.60 $ inch $90.33 $ inch $ $ inch $ $ inch $ $ inch $ $1, inch $ $2, Table 2: Monthly Quantity Charge MONTHLY QUANTITY CHARGE (PER HCF*) Current Charges Proposed Charges EVERGREEN/EDENVALE Zone 1 (E levation 0 to 275 feet) Residential Tier 1: 0 to 7 HCF $3,740 Residential Tier 2: > 7 HCF $4,310 $3,580 Non-Residential $4,310 Zone 2 (Elevation 275 to 375 feet) Residential Tier 1: 0 to 7 HCF $3,950 Residential Tier 2: > 7 HCF $4,470 $3,640 Non-Residential $4,470. Zone 3/4 (Elevation 375 to 630 feet) Residential Tier 1: 0 to 7 HCF $4,120 Residential Tier 2: > 7 HCF $4,640 $3,960 Non-Residential $4,640 Zone 5/6 (Elevation 630 to 880 feet) Residential Tier 1: 0 to 7 HCF $4,330 Residential Tier 2: > 7 HCF $4,870 $4,350 Non-Residential $4,870 NORTH SAN JOSE/ALVISO Residential Tier 1: 0 to 7 HCF $3,740 Residential Tier 2: > 7 HCF $4,310 $4,790 Non-Residential $4,310 COYOTE VALLEY Non-Residential $4,310 $1,880 *HCF = hundred cubic feet; 1 HCF = 748 gallons

10 Table 3: Monthly Private Fireline Charge MONTHLY PRIVATE Fl RELINE CHARGE (based on service size) Service Size Current Charges Proposed Charges 2-inch $18.00 $ inch $36.00 $ inch $54.00 $ inch $72.00 $ inch $90.00 $ inch $ $90.89 Billing Impacts Sample Water Bill Calculations Comparing Current and Proposed Rates Water Bill Amount (without utility tax) = Meter Charge + (Quantity x Rate per HCF) Residential Example in Evergreen Zone 5/6: Monthly Usage: 15 HCF Meter Size: 3/4-inch Current Rate: $ (7 HCF x $4.33) + (8 HCF x $4.87) = $86.11 Proposed Rate: $ (15 HCF x $4.35) = $91.97 Non-Residential Example in North San Jose: Monthly Usage: 100 HCF Meter Size: 2-inch Current Rate: $ (100 HCF x $4.31) = $ Proposed Rate: $ (100 HCF x $4.79) = $ Actual impacts to customers' bills will depend on their service area, meter size, and the amount of water used. Calculations of average bill impacts are shown in Tables 4 and 5 for residential and industrial customers, respectively. Meter Charge and Quantity Charge are included in all example bill amounts. Average monthly residential bill is based on a 3/4-inch meter and usage of 15 HCF. Average monthly industrial bill is based on a 6-inch meter and usage of 600 HCF. Table 4: Residential Average Monthly Bill RESIDENTIAL AVERAGE MONTHLY BILL Charges Charges Evergreen - Zone 1 $77.50 $80.42 Evergreen - Zone 2 $80.25 $81.32 Evergreen - Zone 3/4 $82.80 $86.12 Evergreen - Zone 5/6 $86.11 $91.97 North San Jose/Alviso $77.50 $98.57 Table 5: Industrial Average Monthly Bill INDUSTRIAL AVERAGE MONTH LY BILL Charges Charges Evergreen - Zone 1 $2, $3, Evergreen - Zone 2 $3, $3, Evergreen - Zone 3/4 $3, $3, Evergreen - Zone 5/6 $3, $3, North San Jose/Alviso $2, $3,847.31

The City of Sierra Madre

The City of Sierra Madre Comprehensive Water and Wastewater Cost of Service Study Report / December 24, 2018 24640 Jefferson Avenue Suite 207 Murrieta, CA 92562 Phone 951.698.0145 www.raftelis.com December