HomeMy WebLinkAboutResolutions 2011-165 N.C.S. 12/05/2011 Resolution No. 2011-165 N.C.S.
of the City of Petaluma, California
ADOPTING A NEW RATE SCHEDULE FOR WATER SERVICE
AND SUPERSEDING RESOLUTION NO. 2007-022 N.C.S.
WHEREAS, Petaluma Municipal Code Title 15 provides for the establishment and
operation of a water system and the charging of certain fees and charges; and,
WHEREAS, Chapter 15.16 of Title 15 provides for the setting of certain fees and
charges by resolution; and,
WHEREAS, water services provided by the City include, but are not limited to,
pumping, storage, and distribution of water purchased from the Sonoma County Water Agency
("SCWA") and pumping, storage and distribution of groundwater; and,
WHEREAS, the City retained The Reed Group, Inc. to develop a Water and Wastewater
Rate Study and Financial Plan ("Study"); and,
WHEREAS, the Petaluma City Council conducted a public meeting on the proposed
rates pursuant to the Study on October 24, 2011; and,
WHEREAS, notice of the proposed water rate increases ("Rates") and a public hearing
on possible adoption of the Rates on December 5, 2011 was mailed to water utility customers
and record owners of properties that would be impacted by the proposed increases on October
18, 2011; and,
WHEREAS, a notice of the proposed Rates and the December 5 public hearing was
published in the Petaluma Argus Courier on October 20, 2011; and,
WHEREAS, the Petaluma City Council conducted a public hearing on the proposed
Rates on December 5, 2011, and received testimony and considered all evidence ("the Record")
presented regarding the proposed Rates; and,
Resolution No. 2011-165 N.C.S. Page I
WHEREAS, a majority of the record owners of properties that would be impacted by the
rate increases did not protest the increases; and,
WHEREAS, after due consideration, the Petaluma City Council finds based on the Study
and the Record that:
(1) The proposed Rates as presented herein are necessary to achieve full recovery of the
costs of providing water services to residents and businesses in Petaluma;
(2) The proposed Rates as presented herein will not generate revenue in excess of the
cost of providing water services;
(3) The proposed Rates as presented herein will not be used for purposes other than
providing water services;
(4) The Rates or charges imposed on any parcel or person as an incident of property
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ownership shall not exceed the proportional cost of the service attributable to the
parcel;
(5) Proper notice of the proposed Rates were given to record owners of properties that
would be impacted by the proposed increases, as prescribed by law; and •
(6) A majority of record owners of properties that would be impacted by the proposed
Rates did not protest the proposed Rates; and
WHEREAS, the proposed Rates are not a "tax" as defined in Section I, paragraph (e) of
Article XIIIC of the California Constitution ("Proposition 26") because such rates are imposed
for a specific benefit conferred or privilege granted directly to the payor that is not provided to
those not charged, and which does not exceed the reasonable cost to the local government of
providing the service or product; and/or such fees and charges are imposed for a specific
government service or product provided directly to the payor that is not provided to those not
charged, and which does not exceed the reasonable cost to the local government of providing the
service or product; and/or such fees and charges are imposed for the reasonable regulatory costs
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to a local government for issuing licenses and permits, performing investigations, inspections
and audits, enforcing agricultural marketing orders and the administrative enforcement and
adjudication thereof; and/or such fees and charges are imposed as a condition of property
development; and
Resolution No. 2011-165 N.C.S. Page 2
WHEREAS, adoption of revised rates and charges pursuant to this resolution involves the
establishment, modification, restructuring or approval of rates and charges, as identified and
analyzed in the Study, including rates and charges to obtain funds for meeting operating
expenses, purchasing or leasing supplies, equipment or materials, meeting financial reserve
needs and requirements and/or obtaining funds for capital projects necessary to maintain service
within existing service areas. Therefore, adoption of this resolution setting rates and charges is
not a project under the California Environmental Quality Act pursuant to California Public
Resources Code Section 21080(b)(8)(D) and 14 Cal. Code Regs. Section 15273.
NOW, THEREFORE, BE IT RESOLVED, that the Petaluma City Council hereby adopts
this resolution superseding Resolution 2007-022 N.C.S. effective January 1, 2012.
ARTICLE I
GENERAL
SECTION 1.1: PURPOSE.
(A) Findings. The above recitals are hereby declared to be true and correct and to be
findings of the City Council of the City of Petaluma and are made a part of this resolution.
(B) Revenue. The purpose of the water service charge is to raise revenue for the cost
of operation and maintenance of the City of Petaluma's water utility used for the distribution,
pumping and storage of water and for payment of principal and interest on bonds and capital
recovery costs.
(C) Resolution. The purpose of this resolution is to establish a method of sharing the
cost of the operation and maintenance of the City's water utility among the users of water
service.
(D) Study. This resolution and the water charges established in this resolution are
based on the Wastewater and Water Rate Study and Financial Plan prepared by The Reed Group,
Inc. The Study is attached to and made a part of this resolution as Exhibit A.
Resolution No. 2011-165 N.C.S. Page 3
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ARTICLE II
RATES
SECTION 2.1: WATER SERVICE CHARGE.
(A) Potable Water. The monthly service charge for potable water shall be as set forth
in Table 1.
Table 1. Monthly Water Service and Commodity (Usage) Charges
Water Rates
(Jan. 2012)
Monthly Service Charges
Up to 3/4" meter $ 6.66
1" meter (residential) $ 9.70
1" meter $ 9.70
1 1/2" meter $ 17.25
2" meter $ 26.35
3" meter $ 47.59
4" meter $ 77.92
6" meter $ 153.70
Water Usage Charge ($9acl
Single Family (1)
Tier 1 $ 2.91
Tier 2 $ 3.49
Tier 3 $ 4.36
Tier 4 $ 5.66
Other Customers
All water usage $ 3.24
Notes:
(1) Monthly tier allocations:
Tier 1 0-8 hcf/mo.
Tier 2 9-16 hcf/mo.
Tier 3 17-24 hcf/mo.
Tier 4 >24 hcf/mo.
(B) Monthly Service and Commodity (Usage) Charge Annual Increases. Beginning
January 1, 2013 and each January 1 thereafter,all fixed monthly service charges and water usage
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charges shall be adjusted upward based on changes to the San Francisco-Oakland-San Jose
consumer price index (San.Francisco CPI) for all items and all urban consumers from August to
August in the preceding year. A negative CPI shall result in no change in the rate structure.
Resolution No.2011-165 N.C.S. Page 4
(C) Monthly Usage Charge Annual Pass Through Increase. Beginning July 1, 2013
and each July 1 thereafter, or whenever the SCWA implements new water rates applicable to the
City, water usage charges shall be adjusted based on the changes to wholesale water purchase
costs from SCWA. Following the formal adoption of new water rates by the SCWA, the City
will use the calculation methodology shown in Table 2 to calculate adjustments to the City's
water usage rates. The actual rate adjustments will depend on the specific action taken by
SCWA each year, as well as the City's need for purchasing water supplies.
Table 2. Sample Calculation of Automatic Rate Adjustment
for Changes in SCWA Water Charges (U
SCWA Water Charges
Petaluma Aqueduct
Current Rate (FY 11-12) $ 634.11 /AF
Estimated Future Rate (FY 12-13) $ 672.15 /AF
Change $ 38.04 /AF
6.0%
Estimated SCWA Water Purchases (annual)
SCWA Water Purchase Volume 7,532 AF
Impact of SCWA Cost Change $ 286,506
Petaluma Water Usage Rate Impact
Est. Annual Water Usage Revenue (2) $ 10,661,000
Impact of SCWA Cost Change 2.7%
City's Proposed
2012 Water Pass-Through
Petaluma Water Usage Rates Usage Rates Adjustment (3)
Single Family Residential
Tier 1 $ 2.91 /hcf $ 0.08 /hcf
Tier 2 $ 3.49 /hcf $ 0.09 /hcf
Tier 3 $ 4.36 /hcf $ 0.12 /hcf
Tier 4 $ 5.66 /hcf $ 0.15 /hcf
MF, Comm., Inst., Indus, & Irrig. $ 3.24 /hcf $ 0.09 /hcf
Notes:
(1) Assumes the City adopts the proposed 2012 water rates, which is then followed by a SCWA FY
12-13 rate increase of 6 percent.
(2) Based on current usage rates and estimated annual water sales.
(3) Pass through adjustments would be added to the then current water usage rates.
Legend:
Data input fields -->
Resulting rate adjustments -->
Resolution No. 2011-165 N.C.S. Page 5
SECTION 2.2: RECYCLED WATER COMMODITY CHARGES. The commodity
charge for recycled water use shall continue to be as shown in Table 3, unless otherwise
determined by individual contract, and until subsequently amended by the City Council.
Table 3. Recycled Water Commodity Charge
Commodity Charge on Billings Rendered On or After the
Dates Indicated Below (per het)
Feb. 1, January January 1, January 1, January 1,
2007 1, 2008 2009 2010 2011
$1.46 $1.58 $1.68 $1.77 $L88
SECTION 2.3: PRIVATE FIRE PROTECTION.
(A) Private Fire Protection Services. For services used exclusively for fire protection,
including sprinklers, private hydrants and other fire lines, the service charge shall be as follows:
Table 4. Private Fire Protection Service Charge
CONNECTION SIZE (INCHES) MONTHLY SERVICE CHARGE
I 1/4 $3.90
2 $5.64
3 $8.40
4 $11.22
6 $16.80
8 $22.44
(B) Water Consumed for Fire Protection. In addition, all water consumed for private
fire hydrant testing or fire suppression or other uses shall be charged to the property owner at the
"business" commodity rate in Table 2.
ARTICLE III
OTHER CHARGES
SECTION 3.1: DELINQUENCY AND SERVICE RESTORATION CHARGES.
(A) Delinquency Charges. If payment is not made within thirty (30) days after
mailing, it is delinquent, and a late charge of$10 will be levied.
Resolution No.2011-165 N.C.S. Page 6
(B) Restoration Charges. When service is discontinued because of delinquency in
payment of water bill, the service shall not be restored until all charges, including a restoration
charge, have been paid.
(1) Restoration Charge During Normal Working Hours (8:00 AM — 4:30 PM.
Monday through Friday, excepting City holidays). The restoration charge applicable for
work requested to be performed during normal working hours of the Department of
Water Resources and Conservation will be $40.
(2) Restoration Charge After Normal Working Hours. The restoration charge
applicable for work requested to be performed after normal working hours will be $60. •
SECTION 3.2: CHARGE FOR RETURNED CHECKS. A fee of $25 shall be charged
for each check tendered as a payment to the City that is returned from the bank for non-sufficient
funds.
SECTION 3.3: TURN-ON CHARGE FOR NEW ACCOUNTS. A charge of$15.00 shall
be paid for turning on a service for new accounts during normal working hours. A charge of$60
shall be paid for turning on a service for new accounts after normal working hours.
SECTION 3.4: TEMPORARY WATER SERVICE CONNECTION. Wherever feasible,
recycled water shall be used for temporary construction uses.
(A) Meter Deposit. Deposits are required at the time of application. Lost meters will
result in forfeiture of deposit. The deposit may be applied to the closing bill and any remaining
amount refunded to the customer.
(1) 1" or Smaller Service Meter. A deposit of$100 shall be required for a f-
inch or smaller service meter set at curb stop.
(2) Bridge Meter. Bridge meters are used to "bridge" from the City's water
system to a project's water system for the purpose of testing buried water infrastructure
and for providing site water. A deposit of$600 shall be required for a bridge meter.
(3) Fire Hydrant Meter. A deposit of $1,000 shall be required for a fire
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hydrant meter.
(B) Service Charges.
(1) 1" or Smaller Service Meter. A $1.00 per day service charge shall be
applied for water service, irrespective of the quantity used.
Resolution No. 2011-165 N.C.S. Page 7
(2) Bridge Meter or Hydrant Meter. A $2.00 per day service charge shall be
applied for water service, irrespective of the quantity used.
(C) Commodity Charge. The potable water commodity charge shall be the same as
the "business" class in Table 2. The recycled water commodity charge shall be as shown in
Table 3.
(D) Fees. Fees associated with temporary City meters are shown below.
DESCRIPTION FEE
FIRST TIME METER SET $45
UNABLE TO SET/TEST METER $30
RELOCATE METER S45
RUSH METER SET/RELOCATE (IF SET/RELOCATE REQUEST
IS WITHIN 24 HOURS OF PERMIT ISSUANCE OR $80
RELOCATION REQUEST)
ARTICLE IV
CITY PROVIDED SERVICES
SECTION 4.1: CITY PROVIDED SERVICES.
(A) Hot Taps. Hot tap fees shall be paid prior to service. Hot taps will be charged as
follows:
SIZE OF HOT TAP HOT TAP FEE
(INCHES)
- 2 $200
4 —6 $400
8 $500
10— 12 $750
(B) Other Services. The City may install domestic or lire services, or provide other
related services, upon request. The cost for each service will be based on an estimate prepared
by the City. The requestor will provide a written request accompanied by a drawing to show the
location of the proposed service. The City will provide an estimate to the requestor. When the
check for the service is received from the requestor the work order will be forwarded to City
crews for installation and coordination. Final costs will be based on actual time and materials
costs plus applicable administrative charges.
Resolution No. 2011-165 N.C.S. Page 8
ARTICLE V
PENALTY CHARGES
SECTION 5.1: TAMPERING WITH CITY METERS. The charge for tampering with
City meters or operating a meter valve is $50 for each occurrence.
SECTION 5.2: ILLEGAL OR UNAUTHORIZED USE OF FIRE HYDRANT. The fee
for any illegal or unauthorized use of a City hydrant shall be $500 for each occurrence plus $50
for each additional day that such use occurs.
ARTICLE VI
SECURITY DEPOSITS
SECTION 6.1: AMOUNT. The City may impose a security deposit of $100 to open an
account or for instances of delinquent payments.
SECTION 6.2: APPLICATION OF DEPOSIT. The City may apply the security deposit
to an account owing to the City which is delinquent for more than thirty days.
SECTION 6.3: REFUND. Any amounts remaining in the security deposit will be
returned to the customer without interest upon termination of the service and payment of all
charges, fees and indebtedness owed to the City by the customer.
ARTICLE VII
ADJUSTMENT OF BILLS
SECTION 7.1: GENERAL. The City may, upon written request of a customer,
supported by repair bills or other appropriate documentation, adjust such customer's bill in the
case of loss of water due to circumstances beyond the reasonable control of such customer, such
as mechanical malfunction, blind leak, theft of water, vandalism, unexplained water loss or other
unusual or emergency conditions. A determination of whether an adjustment is granted shall be
made at the sole discretion of the City. In making the determination, the City may take into
account the cause of water loss, the customer's opportunity, if any, to detect it, any negligence or
fault of the customer in connection therewith, and the promptness with which the water loss was
discovered, stopped and repairs made.
Resolution No.2011-165 N.C.S. Page 9
SECTION 7.2: WATER BILL ADJUSTMENT. The customer's adjusted bill shall be
calculated as follows.
(A) Average Usage. The"average usage" shall equal the average used during the
same period in the previous one or two years, whichever is available. If the applicant has not
been a customer for a sufficient length of time to make such determination, then the amount of
water used shall be at the discretion of the City.
(B) Excess Usage. From the total water consumption shown on the bill submitted for
correction, the "average usage" will be deducted. The resulting amount is the "excess usage."
(C) Applicable Rates.
(1) Single Family Residential Customers. The billing adjustment is
calculated at 50% of the "excess usage" multiplied times the Tier 2 rate shown on the bill
submitted for correction.
(2) Multi-Family Residential and Non-Residential Customers. The billing
adjustment is calculated at 50% of the "excess usage" multiplied times the regular water
consumption rate shown on the bill submitted for correction.
(D) Limitations. Water loss adjustments will be limited to two billing periods, and
will also be limited to one adjustment every thirty-six months. The thirty-six month period
begins the first month of the billing period following the last billing period for which the water
loss adjustment was prepared. No adjustments will be made for water delivered after sixty days
after the City issues the water bill with excessive use.
(E) Adjustments Under$25. No adjustments shall be made for an amount less than
twenty-five dollars ($25).
SECTION 7.3: WASTEWATER BILL ADJUSTMENT. This section addresses
adjustments to wastewater bills due to a water leak.
(A) Single Family Residential and Multi-Family Residential Customers. The
"average usage" or the wastewater winter average (whichever is lower) will be deducted from
the wastewater consumption shown on the bill submitted for correction. The result is excess
wastewater usage. The billing adjustment is calculated at 100% of the excess wastewater usage
multiplied by the wastewater consumption rate shown on the bill submitted for correction.
(B) Non-Residential Customers. The billing adjustment is calculated at 50% of the
"excess usage" multiplied times the wastewater consumption rate shown on the bill submitted for
correction.
Resolution No. 2011-165 N.C.S. Page 10
(C) Adjustments Under $25. No adjustments shall be made for an amount less than
twenty-five dollars ($25).
(D) Wastewater Winter Average Calculation. If"excess usage" inflates the system
calculated wastewater winter average, this calculated wastewater winter average will be replaced
with the previous year's winter average. If the customer has not established a wastewater winter
average for the previous year, the winter average amount shall be as determined by the City.
Under the power and authority conferred upon this Council by the Charter of said City. �')
REFERENCE: 1 hereby certify the foregoing Resolution was introduced and adopted by the Apploved as to
Council of the City of Petaluma at a Regular meeting on the 5°'day of December. form:
2011.by the following vote:
ity Attorney
AYES: Albertson, Barrett,Mayor Glass, Kearney, Ren€e
NOES: Harris.Vice Mayor Healy
ABSENT: None
ABSTAIN: None0 Q /� n 1
ATTEST: l��,l.�-� �--`� W/T etc ./L
City Clerk Mayor
Resolution No. 2011-165 N.C.S. Page I I
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EXHIBIT A TO
RESOLUTION 2011-165 N.C.S.
City of Petaluma
WATER AND WASTEWATER
FINANCIAL PLAN AND RATE STUDY
FINAL REPORT
November 4,2011
Fltik
THE REED GROUP, INC.
3053 Freeport Boulevard#158 • Sacramento,CA 95818-4346 • (916)444-9622 • www.TheReedGroup.org
TABLE OF CONTENTS
I. EXECUTIVE SUMMARY 1
INTRODUCTION 1
FIVE-YEAR FINANCIAL PLANS 3
WATER AND WASTEWATER RATES AND RATE STRUCTURES 7
II. FIVE-YEAR FINANCIAL PLANS 12
FUND/RESERVE STRUCTURE AND CASH FLOWS 12
FINANCIAL PLAN ASSUMPTIONS 14
WATER SYSTEM FINANCIAL PLAN 21
WASTEWATER SYSTEM FINANCIAL PLAN 26
III. WATER RATES 33
EXISTING WATER RATES 33
RATE SETTING OBJECTIVES 33
CUSTOMER ACCOUNT DATA AND WATER USE ESTIMATES 34
WATER RATE CALCULATIONS 36
PROPOSED WATER RATE SCHEDULE FOR 2012 42
FUTURE ADJUSTMENTS TO WATER RATES 44
IV. WASTEWATER RATES 47
EXISTING WASTEWATER RATES 47
RATE SETTING OBJECTIVES 49
CUSTOMER ACCOUNT DATA AND WASTEWATER FLOW AND LOADING ESTIMATES 49
WASTEWATER RATE CALCULATIONS 51
PROPOSED WASTEWATER RATE SCHEDULE FOR 2012 56
FUTURE ADJUSTMENTS TO WASTEWATER RATES 58.
THE REED GROUP, INC.
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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Introduction
In 2009, the City of Petaluma (City) contracted with The Reed Group, Inc. to develop financial
plans and to conduct rate studies for the City's water and wastewater utilities. In 2007, the City
adopted 5-year rate plans for both utilities. Those rate plans were intended to provide the
revenues necessary to fund ongoing operations, meet debt service obligations, and fund capital
improvement programs including the construction of the Ellis Creek Water Recycling Facility
(WRF), for both utilities through 2011. A number of significant events transpired since 2007 that
have affected each utility's financial performance, including but not limited to a significant slowdown
in the general economy, restricted water supplies and higher than expected water supply costs,
reduced water demands and sewer flows, and ballot measures potentially affecting utility rates.
Nevertheless, the 5-year rate plans adopted in 2007 proved to be both necessary and sufficient.
The final year of the 2007 5-year rate plans began in January 2011. In the fall of 2010, a Final
Draft of the Water and Wastewater Financial Plan and Rate Study, dated October 27, 2010, was
prepared and presented to the City Council. That report included the following finding:
Finding: The water rates approved in 2007 for 2011 are still necessary and should be
implemented as previously planned. However, The Reed Group, Inc. believes that the
wastewater rate increase of 13 percent approved in 2007 for 2011 could be reduced to 9
percent. In addition, this should also mark the end of significant rate increases for both the
water and wastewater utilities.
Based on this finding, and other information in the 2010 Final Draft report, the City reduced the
January 2011 wastewater rate increase from 13 percent to 9 percent. The City also then took
steps to refinance existing wastewater short-term bridge financing Lines of Credit (LOCs) with the
issuance of new long-term bonds. The decision was made to postpone the completion of the
water and wastewater study until after the completion of the issuance of new debt. During this
time, the City completed the 2010 Urban Water Management Plan (UWMP), and was able to
consider deferral of recycled water projects. Finally, this update also reflects estimated actual
results from FY 10-11 as well as the draft budget for FY 11-12.
The water and wastewater financial plan and rate study, and this revised report, now presents
water and wastewater rate recommendations for the period 2012 through 2016, and reflects the
actions and decisions that have transpired over the past year.
Changes Made Since October 2010
In revising the rate study report a number of changes have been made to update the financial
plans and the rate analyses, as well as the narrative portions of the report. The most significant
changes include the following:
• Incorporate estimated FY 10-11 revenues and expenses, as well as the draft FY 11-12
operating and 5-year capital improvement budgets
• Extend financial plan models through FY 15-16 to maintain a 5-year planning period
consistent with the capital improvement program
• Reflect the City Council's action to reduce the 2011 wastewater rate increase from 13
percent to 9 percent, including revising revenue estimates
THE REED GROUP, INC. PAGE 1
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
• Reflect 2011 Wastewater Revenue Refunding Bonds and the associated debt repayment
schedule, as well as the refunding of prior obligations
• Reflect the anticipated final SRF loan repayment schedule, including a final disbursement
of an estimated$12.774 million as the final reimbursement of costs under the SRF loan
• Include establishment and funding of the Ellis Creek WRF capital reserve fund (ECWRF
CRF)as required by the SRF loan
• Incorporate the deferral of recycled water projects as presented to the City Council on
September 6, 2011
• Eliminate the budgeted FY 11-12 storm drainage costs contained in the wastewater utility
budget to ensure that no storm drainage costs are included in the wastewater utility
budget or wastewater rates, and that the wastewater utility budget includes only
wastewater utility costs.
• Modify assumptions pertaining to interest rates on fund/reserve balances, as well as new
connections to the water and wastewater systems to reflect the continued downward
pressure on interest rates and the slow rebound in the general economy
• Consider the impacts of the increased winter water usage that occurred in the winter of
2011 on the calculation of wastewater rates
• Modify proposed rate and rate structure recommendations to begin in January 2012,
rather than January 2011
• Modify proposed automatic adjustment rate adjustment mechanism for SCWA rate
changes to begin in July 2012, rather than 2011, and automatic water and wastewater rate
adjustments for inflation to begin in January 2013, rather than 2012
• Remove references to and discussion of the potential ramifications of the passage of
Measure U, as the measure was defeated in the November 2010 election.
This report documents the financial planning and rate analyses performed to look at the next five
years (2012 through 2016) for the water and wastewater utilities. The water utility has been
financially challenged by cost increases from the Sonoma County Water Agency (SCWA).
Nevertheless, the water utility appears in a fairly stable financial condition. The wastewater utility
has faced significant financial issues stemming from, in part, construction and start-up operations
of the new Ellis Creek WRF, as well as from the uncertainty created by a ballot initiative (Measure
U), which could have rolled back wastewater rates to the levels that existed in 2006. In addition,
the difficult economic times, reduced water and wastewater demands, and a debt burden
associated with the construction of the Ellis Creek WRF have each contributed to the financial
conditions that exist in the utilities.
Finding: In spite of current circumstances, relative rate stability appears possible for both
utilities.
In addition to examining the financial obligations of the water and wastewater utilities, this study
also included examination of existing water and wastewater rate structures, as well as
development of recommendations to reflect rate setting objectives of (1) reflecting the cost of
providing service, (2) improving equity, (3) continuing to encourage water conservation, and (4)
maintaining rates as low as possible while meeting financial obligations.
THE REED GROUP, INC. PAGE 2
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Finding: Relatively modest water rate structure changes would assist in meeting the City's
rate setting objectives.
Finding: More significant changes to wastewater rates are necessary to better meet rate
setting objectives.
Any change to rate structures can cause some customers to pay more and others to pay less,
even in a revenue neutral setting. Proposed changes to water rate structures would have minor
impacts on most customers' water bills. Proposed wastewater rates, however, will likely result in
smaller wastewater bill increases for residential customers (relative to an across-the-board rate
adjustment) and larger bill increases for many non-residential customers, including industrial
customers. The proposed rate structure changes reflect cost of service requirements and improve
the proportionate distribution of costs across customer classes. Information on the impact of
proposed rate structure changes on water and wastewater bills for representative customers is
presented in Sections III and IV, respectively.
The remainder of this Executive Summary summarizes financial plan and rate study
recommendations. Other sections of the report provide additional details of the study. Section II
presents information and assumptions related to development of both the water and wastewater
financial plans. Section III describes water rate and rate structure recommendations. Section IV
describes wastewater rate and rate structure recommendations.
Five-Year Financial Plans
The five-year financial plans for the water and wastewater utilities cover the period from FY 11-12
through FY 15-16. The models are based on the City's FY 11-12 draft budget, 5-year capital
improvement plans (including recent deferral of recycled water projects), and existing debt service
obligations. The financial plan models are intended to serve as planning and management tools,
and enable the City to take a multi-year look at its financial needs.
Both the water and wastewater utilities are intended to be self-supporting enterprises of the City.
That is, each utility is expected to generate the revenues(through user charges, capacity fees, and
other revenues)to cover the ongoing costs of: (1)operations, maintenance, and administration, (2)
debt service, (3) capital improvements to provide needed capacity and to rehabilitate and upgrade
the utility systems, and (4)maintaining both prudent and required financial reserves.
Recommendation: It is recommended that the City create separate operating and capital
funds within both the water and wastewater utilities.
With this proposed fund structure and financial framework, all rate revenues as well as operating,
maintenance, and debt service costs would be reflected in the operating funds. All capital
improvement projects would be funded from the capital funds.. Grant and/or debt proceeds would
be deposited into the capital funds, capacity fee revenues would accrue to the capital funds, and
transfers would be made annually from operating funds to the capital funds in support of the capital
improvement program. This fund structure is common among municipal utilities and provides a
useful means of separately assessing the operational and capital needs of each utility, as well as
the sources of funding for each. In addition, this fund structure also provides greater transparency
of the financial condition, as well as the relationship between various types of revenues and utility
costs. The financial plans presented in this report follow this fund structure. It is described in more
detail in Section II of this report.
THE REED GROUP, INC. PAGE 3
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Section II of this report presents details of the five-year financial plans for both the water and
wastewater utilities. The financial plans are used to identify the annual water and wastewater rate
revenue requirements,which are subsequently used in rate calculations.
Water Utility
The water utility appears to be in a relatively stable financial situation with current revenues
generally matching current operating and maintenance expenses, including debt service. The
most significant financial issues impacting the water utility are the increased cost of water
purchases from the SCWA and the need to maintain and rehabilitate the water system by
supporting the capital improvement program with a portion of water rate revenues. During the past
four years the SCWA increased the rate charged to the City for wholesale water purchases by
approximately 10 percent, 10 percent, 7 percent, and 5 percent, respectively. Wholesale rate
increases of this magnitude were not considered when the City developed and implemented the
current financial and rate plans. The utility has managed the increased cost of water supplies, in
part, by meeting peak water demands from groundwater, through water conservation, and by
limiting costs in other parts of the utility's operations and capital program. Reduced overall water
demands have also lessened the need for purchasing water from SCWA.
The water utility has relatively little outstanding long-term debt. Based on the financial plan
information and assumptions no additional long-term debt for the water utility is anticipated within
the five-year planning period. In addition, with proposed water rate adjustments, it is estimated that
about $2.0 million of water rate revenue annually could be contributed to the water capital fund in
support of planned and past-deferred capital improvements. While average annual capital
program expenditures are about $2.5 million over the next five years, existing reserves as well as
estimated capacity fee revenues appear sufficient to generally fund the balance of the current
water capital improvement program without water rate increases beyond those proposed in this
report, and without additional debt financing.
The water system financial plan also reflects maintenance of a 25 percent operating reserve. That
is, the balance in the operating fund is maintained at or above an amount equal to 25 percent of
annual operating and maintenance expenses, excluding debt service and transfers to the capital
fund. For the water utility, this would amount to about $2.66 million in FY 11-12. This operating
reserve would serve as working capital and be available for emergencies or unanticipated
increased expenses or reduced revenues. While operating reserves tend to range from 10 percent
to 50 percent of annual operating and maintenance expenses, a 25 percent reserve is common
among municipal utilities. The Reed Group, Inc. believes a 25 percent operating reserve to be a
reasonable financial target for the near-term. The issue is discussed in greater detail in Section II
of this report.
For January 2012, it is recommended that water rates increase by an overall 4 percent. This
increase represents the overall impact of the 5 percent increase in wholesale water supply costs
from SCWA and the need to provide funding for capital improvement projects. Beyond this
increase, it is recommended that the City adopt two automatic mechanisms for adjusting the water
rates in the future. The first adjustment would be tied to any changes in the rates charged by the
SCWA, which have generally become effective in July of each year. AB 3030, signed into law in
2008, provides for the adoption of automatic pass-through adjustments related to changes in
wholesale water purchase costs. This adjustment would apply only to the water usage rates, and
not to fixed service charges.
The second rate adjustment would be an annual inflationary rate adjustment, and would be applied
to the entire rate structure. Based on the information and assumptions reflected in the 5-year
financial plan, it appears that the water utility's financial stability can be maintained with annual rate
THE REED GROUP, INC. PAGE 4
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
adjustments tied to the rate of general inflation. The City has historically adjusted water rates each
January, and it is recommended that this practice continue (in addition to the pass-through
adjustment related to the wholesale cost of water). The indexing of water rates should be tied to
the San Francisco-Oakland-San Jose consumer price index for all items and all urban consumers
(San Francisco CPI).
Because of the current relatively stable status of the water utility, financial plan recommendations
for the water system are limited to the following:
• Increase water rates in January 2012 by an overall 4 percent to reflect the effects of
SCWA's water rate increase of 5 percent effective in July 2011 and the need to fund
capital improvement projects. Specific changes to the water rate structure, to be
implemented in January 2012, are described later in this report.
• Adopt a mechanism for automatically adjusting water rates to reflect changes in wholesale
water purchase costs from SCWA, as described in Section III of this report. The SCWA
historically has adjusted its water rates annually effective in July of each year. Increased
revenues from automatic rate adjustments are reflected in the financial plan model based
on assumed annual 6 percent SCWA rate increases. The proposed automatic adjustment
formula would, however, tailor the amount of the adjustment to the specific action by
SCWA. Only the City's water usage rates would be affected by this adjustment (not fixed
monthly service charges). As illustrated in Section III of this report, a 6 percent increase in
the wholesale cost of water in FY 12-13 would result in a 2.7 percent increase in the City's
water usage rates.
• Beyond the scheduled 4 percent rate adjustment in January 2012, the City should adopt a
mechanism for adjusting water rates annually, beginning in January 2013, to reflect the
changes in general inflation using the San Francisco CPI for this purpose. The financial
plan assumes general inflation to be 3 percent per year during the 5-year planning period.
Water rate revenue projections reflect annual increases of this magnitude beginning in
January 2013. This rate adjustment would apply to the entire water rate structure.
• Establish and maintain a capital fund with annual transfers from the operating fund, and
capacity fee revenue from new development to pay for planned water infrastructure
improvements and recycled water capital projects.
• Maintain an operating reserve in the operating fund equal to at least 25 percent of annual
operating and maintenance expenses, exclusive of debt service and transfers to the
capital fund.
In conclusion, the water system appears to be in a financially stable condition. However,
anticipated increases in operating and maintenance costs (principally water purchase costs), as
well as capital program needs, justify continuing to adjust water rates to reflect inflationary
pressures. While the assumptions and information used in the preparation of the water system
financial plan are believed to be reasonable, no assurances can be made that actual financial
results will be as presented herein. City staff should continue to monitor the financial condition of
the water utility, as well as changes in water demands and related rate revenues,to ensure that the
utility continues on a sound financial course. Deferred maintenance, contractual obligations, and
regulatory requirements may prioritize additional capital investments.
THE REED GROUP,INC. PAGE 5
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Wastewater Utility
The wastewater utility has been in a more challenging financial situation than the water utility due
primarily to the debt burden associated with construction of the Ellis Creek WRF. Nevertheless, if
the City is able to maintain its present course, financial and rate stability is possible, with the
proposed rate adjustment in January 2012 followed by annual inflationary rate adjustments during
the 5-year planning period.
In FY 08-09 the City began operation of the Ellis Creek WRF and ceased operation of most
components of the Hopper Street wastewater treatment facility. Construction of the Ellis Creek
WRF facility is complete and the wastewater utility has moved into steady-state treatment
operations. The Ellis Creek WRF was financed primarily with a State Revolving Fund (SRF) loan
from the California State Water Resources Control Board (SWRCB). In addition, the City utilized
nearly $25 million from short-term Lines of Credit (LOCs) from two commercial banks. The City
began making principal and interest payments on the SRF loan in April 2010. In February 2011,
the City completed the repayment of the LOCs with the issuance of $22.465 million in new
Wastewater Revenue Refunding Bonds.
The wastewater system financial plan reflects maintenance of a 25 percent operating reserve.
That is, the balance in the operating fund is maintained at or above an amount equal to 25 percent
of annual operating and maintenance expenses, excluding debt service and transfers to the capital
fund. For FY 11-12, this amounts to $2.71 million. This operating reserve would serve as working
capital and be available for emergencies or unanticipated increased expenses or reduced
revenues.
In FY 09-10 the City placed $3.5 million in available wastewater funds in a rate stabilization fund, to
be used to assist in meeting debt service coverage obligations. The financial plan reflects the
partial use of the rate stabilization fund for this purpose. The rate stabilization fund is described in
greater detail in Section II of this report.
In addition, the wastewater financial plan includes the ECWRF capital reserve fund as required by
SRF loan documents. The financial plan includes contributions to the ECWRF CRF of $650,000
annually to meet loan requirements. The funds, including interest earnings, accumulate in the CRF
over the planning period.
For January 2012, it is recommended that wastewater rates increase by an overall 5 percent. This
increase is needed to cover ongoing operation and maintenance costs, meet debt service
obligations, and provide funding for capital improvement projects. The rate increase has been
limited, in part, as a result of eliminating storm drainage costs from the wastewater utility budget.
Based on financial plan analyses, it appears that the wastewater utility's financial condition can
then be maintained with annual rate adjustments tied to the rate of inflation, plus 1.5 percent. The
City has historically adjusted wastewater rates each January, and it is recommended that this
practice continue. The indexing of wastewater rates should be tied to the San Francisco CPI,
which the City has relied upon for other purposes. Minimum rate increases of at least 2.0 percent
are advised (e.g., if general inflation is 0 percent a 2.0 percent rate increase is recommended).
The wastewater utility had significant cash balances at the beginning of FY 10-11 as the Ellis
Creek WRF project concluded construction. About $10 million dollars of the initial balance was
used to repay a portion of outstanding LOCs. In February 2011, the City issued new debt in order
to refinance the outstanding short-term LOC loans with long-term debt.
THE REED GROUP, INC. PAGE 6
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
The wastewater utility is in a more stable financial position than in the recent past. As a result of
these improvements, financial plan recommendations for the wastewater utility include the
following:
• Adjust the overall level of the wastewater rates in January 2012 by 5 percent to support
ongoing operations, meet debt repayment obligations associated with the SRF loan and
2011 Wastewater Revenue Refunding Bonds, and support the capital improvement
program.
• Beyond the rate adjustment in 2012, the City should adopt a plan for adjusting wastewater
rates annually, beginning in January 2013, to reflect the changes in general inflation as
reflected in the San Francisco CPI plus 1.5 percent, as described in Section IV of this
report. This adjustment would be subject to a 2.0 percent minimum to protect the financial
stability of the utility to maintain service levels.
• Establish and maintain a capital fund with money from the final cost reimbursement under
the SRF loan, annual transfers from the operating fund, and capacity fee revenues to pay
for planned wastewater infrastructure improvements and recycled water capital projects.
• Provide annual funding of the Ellis Creek WRF CRF through annual transfers from the
wastewater operating fund.
• Use a portion of funds from the rate stabilization fund, as needed, over the next several
years in order to meet debt service coverage requirements.
• Maintain a minimum operating reserve in the operating fund equal to at least 25 percent of
annual operating and maintenance expenses, exclusive of debt service.
Deferring the construction of recycled water projects does not have an impact on the need to adjust
wastewater rates. Recycled water project are planned to be funded with capacity fee revenue,
rather than rate revenue. In addition, the need to increase wastewater rates is primarily driven by
requirements for meeting debt service coverage obligations, at least in the near-term (i.e., next two
to three years).
In conclusion, with the proposed rate adjustment for January 2012 the wastewater system appears
financially stable. For the remainder of the 5-year planning period, anticipated increases in
operating and maintenance costs as well as continuing debt service obligations and capital
program needs warrant continuing to adjust wastewater rates to reflect inflationary pressures.
While the assumptions and information used in the preparation of the wastewater system financial
plan are believed to be reasonable, no assurances can be made that actual financial results will be
as presented herein. City staff should continue to monitor the financial condition of the wastewater
utility, as well as changes in wastewater demands and related rate revenues, to ensure that the
utility proceeds on a sound financial course.
Water and Wastewater Rates and Rate Structures
Proposed water and wastewater rates and rate structure changes are intended to assist the City
with meeting financial obligations as well as achieving rate setting objectives. The following rate
setting objectives have guided the development of the proposed rate structures for the water and
wastewater utilities:
THE REED GROUP, INC. PAGE 7
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
• Rates should generate sufficient revenues to meet each utility's financial obligations
related to operations, debt service, capital improvement needs, and maintenance of
prudent reserves
• Rates should be equitable by reflecting the cost of providing service to each customer
class
• Rates should continue to encourage water conservation and efficient water use
• Rates should be held as low as possible,while still meeting financial obligations.
Water Rates
Current single family residential water rates include a fixed service charge plus 4-tier water usage
rates. Multi-family, commercial, institutional, industrial, and irrigation customer water rates are
subject to fixed service charges plus a uniform water usage rate.
In general, the water rates are functioning as intended. However, moderate changes to the water
rate structure are proposed to improve equity as well as the conservation incentive embodied in the
single family tiered water rate structure. The proposed water rates for January 2012 are shown in
Exhibit I-1 and, as indicated through financial plan analyses, reflect an overall 4 percent increase
to the water rates relative to the current rates. The rates include a modest increase in the monthly
service charge for the smallest meter size, with larger increases for larger meter sizes. This
change is consistent with the allocation of capacity-related costs across meter sizes in relationship
to the capacity of the meters.
Changes are also recommended for the single family tier rate structure. It is recommended that
the first and second tier break points be reduced slightly, and that the tier steps be adjusted slightly.
In particular, a larger step increase is recommended from the third to the fourth tier. Reasons and
justifications for these changes are described in Section III of this report.
The proposed water rate structure changes are modest. Customer bill increases may be slightly
smaller or slightly larger than the overall rate change of 4 percent as a result of the rate structure
changes. Most residential customers will have slightly smaller increases in water bills relative to
the overall rate adjustment. Exhibit 111-8, near the end of Section III includes a table showing the
impact of proposed water rates on representative monthly water bills.
Wastewater Rates
Current single family and multi-family residential wastewater rates include a fixed service charge
for each dwelling unit, plus a usage charge based on each customer's winter water use. This
practice ensures that summer sewer rates more accurately reflect waste produced by not including
irrigation use volumes. Non-residential wastewater rates include a fixed service charge, plus a
usage charge based on actual water usage. Non-residential wastewater rates also differentiate
customers into low, medium, and high strength categories to reflect the requirements of treatment.
Large industrial customers pay a fixed service charge plus a usage charge based on actual
measured sewer flow and loading based on biochemical oxygen demand (BOD) and total
suspended solids (TSS).
Proposed wastewater rates reflect the cost of providing service and are based on the annual
revenue needs for 2012. The proposed 2012 wastewater rates reflect an overall 5 percent
increase relative to the current (2011) wastewater rates. As with the water rates, because of rate
structure changes the percentage change to individual wastewater bills may vary. Some bill
increases will be smaller than the overall 5 percent, and others will be larger. Proposed
wastewater rates are presented in Exhibit 1-2.
THE REED GROUP, INC. PAGE 8
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit I-1
City of Petaluma -- Water Resources and Conservation
Current and Proposed Water Rates (1)
Current Proposed
Water Rates Water Rates
(Jan. 2011) (Jan. 2012)
Monthly Service Charges
Up to 3/4" meter $ 5.69 $ 6.66
1" meter (resid.) $ 6.84 $ 9.70
1" meter $ 7.07 $ 9.70
1 1/2" meter $ 12.40 $ 17.25
2" meter $ 19.46 $ 26.35
3" meter $ 40.19 $ 47.59
4" meter $ 54.13 $ 77.92
6" meter $ 78.19 $ 153.70
Water Usage Charge ($/hcf)
Single Family (3)
Tier 1 $ 2.94 $ 2.91
Tier 2 $ 3.41 $ 3.49
Tier 3 $ 4.35 $ 4.36
Tier 4 $ 4.82 $ 5.66
Other Customers (4)
All water usage $ 3.14 $ 3.24
Notes:
(1) Effective January 1 of each year.
(2) Proposed rates include rate restructuring as well as an overall
4 percent revenue increase over the current rates.
(3) Monthly tier allocations: Current Proposed
Tier 1 0-9 hcf/mo. 0-8 hcf/mo.
Tier 2 10-18 hcf/mo. 9-16 hcf/mo.
Tier 3 19-24 hcf/mo. 17-24 hcf/mo.
Tier 4 >24 hcf/mo. >24 hcf/mo.
(4) Includes multi-family, commercial, institutional, industrial, and irrigation
irrigation accounts. Excludes recycled water accounts.
Wastewater rate calculations are based on estimated wastewater flows from each customer class,
as well as wastewater strength characteristics for BOD and TSS. Under the current rate structure,
all customers(residential dwelling units and non-residential and industrial customers)pay the same
fixed service charge ($16.19 per month in 2011). About 24 percent of the annual wastewater rate
revenue is generated through this charge. This service charge approach does not reflect the fact
that different customers can place very different demands on the wastewater system. Improved
rate equity would be achieved if service charges reflect the capacity associated with the service
provided to customers. This change is strongly recommended.
The proposed wastewater rates include establishing the fixed service charge based on the size of
the water meter (similar to water rates) for non-residential customers. All single family residential
customers would pay the same fixed service charge, and multi-family dwelling units would pay a
slightly lower service charge (multi-family wastewater flows on average are less than single family).
Fixed service charges are also proposed for large industrial customers based on capacity of
wastewater flow meters. Wastewater usage rates reflect the estimated equitable allocation of
costs to customers with different loading characteristics.
THE REED GROUP, INC. PAGE 9
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit 1-2
City of Petaluma --Water Resources and Conservation
Current and Proposed Wastewater Rates (1)
Current Proposed
Wastewater Wastewater
Rates Rates
(Jan. 2011) (Jan. 2012)
Monthly Service Charge
Single Family Residential $ 16.19 $ 17.15
Unmetered $ 78.57 $ 79.55
Multi-Family Resid. (per DU) $ 16.19 $ 14.94
Non-Residential
Up to 3/4" meter $ 16.19 $ 17.15
1" meter $ 16.19 $ ' 25.88
1 1/2" meter $ 16.19 $ 47.52
2" meter $ 16.19 $ 73.59
3" meter $ 16.19 $ 134.47
4" meter $ 16.19 $ 221.41
6" meter $ 16.19 $ 438.57
Metered Industrial
2" Ultrasonic Meter $ 16.19 $ 199.64
10" Ultrasonic Meter $ 16.19 $ 438.61
2" Magnetic Meter $ 16.19 $ 134.47
3" Magnetic Meter $ 16.19 $ 286.54
4" Magnetic Meter $ 16.19 $ 438.61
6" Magnetic Meter $ 16.19 $ 1,090.36
Wastewater Usage Charge ($/hci)
Single Family Residential $ 7.67 $ 7.78
Multi-Family Residential (per DU) $ 7.67 $ 7.78
Non-Residential
Low Strength $ 7.64 $ 7.62
Medium Strength $ 9.09 $ 9.35
High Strength $ 11.76 $ 12.16
Metered Industrial (2)
Flow ($/hcf) $ 5.69 $ 6.06
BOD ($/lb) $ 0.56 $ 0.58
TSS ($/Ib) $ 0.60 $ 0.67
Notes:
(1) Effective January 1 of each year.
(2) Includes customers for which wastewater flows are sampled and tested
to determine appropriate charges.
(3) Proposed rates include rate restructuring as well as an overall 5
percent revenue increase over the current rates.
Under the proposed wastewater rates most single family customers will have smaller wastewater
bill increases relative to the overall 5 percent increase needed for 2012. Most multi-family
customers will have lower wastewater bills under proposed rates for January 2012, relative to
current wastewater rates. Many non-residential customers will also have smaller bill increases
(relative to the overall 5 percent increase) although some (particularly those with large water
meters) could have larger bill increases with the proposed rates. The City's industrial customers
would also bear an increased share of utility costs under the proposed rates. This increase is
THE REED GROUP, INC. PAGE 10
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
consistent with cost of service requirements. In all cases, the proposed wastewater rates are
justified based on cost of service principles, as described in Section IV. Wastewater rate
calculations are presented in Section IV of this report. Exhibit IV-7, near the end of Section IV,
illustrates the impact of proposed wastewater rates on representative monthly bills.
Adopting Proposed Water and Wastewater Rates
It is recommended that the City adopt new water and wastewater rates in accordance with legal
requirements by conducting a public hearing process to: (1) increase the overall level of the water
rates by 4 percent and restructure the water rates as shown in Exhibit I-1, (2) increase the overall
level of the wastewater rates by 5 percent and restructure the wastewater rates as shown in Exhibit
1-2, (3) adopt the mechanism for automatically adjusting water usage rates to reflect any changes
in wholesale water costs from SCWA, (4) adopt the mechanism for automatically adjusting water
rates each January to reflect the changes in the San Francisco CPI, and (5) adopt the mechanism
for automatically adjusting wastewater rates each January to reflect the changes in the San
Francisco CPI, plus 1.5 percent, subject to a 2.0 percent minimum.
Inflationary and automatic adjustment mechanisms can be approved for up to five years and then
need to be re-adopted by the City Council. A comprehensive review of the financial condition of
each utility as well as the need for further rate adjustments is also recommended by the end of the
five-year planning period covered herein, or sooner if significant changes occur to capital
improvement plans or other aspects of utility operations.
THE REED GROUP, INC. PAGE 11
•
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
qll FrveYear Financial,Planr _
This section of the report describes the five-year financial plans developed for the City's water and
wastewater utilities. The financial plans reflect the City's current operation and maintenance costs,
debt service obligations, and capital improvement plans, as well as various sources of revenues
and the reserves maintained by the City for various purposes.
The financial plans are intended to serve as planning and management tools and enable the City
to take a multi-year look at its financial needs. In order of priority, these needs include funding of
ongoing operation and maintenance, meeting debt service obligations (including debt service
coverage requirements), maintaining prudent financial reserves, and supporting each utility's
current capital improvement program. The financial planning models also provide a means to
examine ways to minimize utility rate increases,while still meeting financial objectives.
Financial plan models are based on information provided by the City and assumptions reviewed
with City staff. Efforts have been made to make the analyses as complete and accurate as
possible. However, the City's utilities operate in a dynamic environment in which economic
conditions, customer demands, external costs, and other factors are outside of the City's direct
control. Future conditions and events cannot be known at this time. The financial plan models are
intended to help shape and inform decisions to be made by the City. They are not a prediction of
the future.
Fund/Reserve Structure and Cash Flows
The financial plan is a multi-year cash flow model. As a cash flow model, it differs from financial
accounting income statements and balance sheets. The financial plan models the sources and
uses of funds into and out of the various funds and reserves of the City's utilities.
The water and wastewater utilities are each independent enterprises operated by the City's Water
Resources and Conservation (WRC)division. As enterprises, each utility has an independent set
of financial accounts contained within the Water Fund and the Wastewater Fund, respectively.
Based on discussions with WRC and Finance staff near the outset of the study, it was decided that
the water and wastewater financial plan models should reflect both an operating fund and a capital
fund. Also, near the outset of the study it was determined to be necessary to create a rate
stabilization fund within the wastewater utility, as authorized in bond documents, to help meet debt
service coverage requirements. Each of these funds is described below, as well as the benefits
realized from having this fund structure. The proposed fund structure is common among municipal
utilities and provides a useful means of separately assessing operational and capital needs, as well
as the sources of funding for each. In addition, this fund structure also provides greater
transparency of the financial condition, as well as the relationship between various types of
revenues and utility costs.
Exhibit II-1, on the following page, schematically illustrates the fund and reserve structure used for
financial planning and analysis purposes, as well as the major revenue inflows and expenditure
outflows. An understanding of the fund/reserve structure is helpful in understanding the financial
plan exhibits that model the flow of funds through each utility from one year to the next. Each of
the funds and reserves is described below.
THE REED GROUP, INC. PAGE 12
City of Petaluma --Water Resources and Conservation
Schematic Diagram of Water and Wastewater Fund Structure and Major Cash Flows
'Rate Stabilization
Fund (I)
•
User Rates O&M Costs
OPERATING FUND
Operating Reserve
Other Revenues Debt Service
it
Capacity Fees • Capital Fund Capital Projects
Debt/Grant EIIis:Creek;WRF'
Proceeds Capital Reserve?
Fund. 2 ..
Notes:
(1) Available to both utilities.but currently only used by the wastewater utility.
(2) Applies to the wastewater utility only.
• Operating Funds — The operating fund is the primary fund for each utility. Most water or
wastewater revenues, including user rates and other service revenues, flow into this fund.
All operating and maintenance expenditures, including administrative costs and debt
service payments, are paid out of the operating fund.
o Operating Reserves—The primary purposes of an operating reserve is to provide
working capital sufficient to pay expenses as needed and to provide for
unanticipated or emergency expenditures that could not be reasonably foreseen.
The financial plan maintains minimum operating reserves throughout the 5-year
planning period. Operating reserves equal to from 10 percent to 50 percent of
annual operating expenses is common within the water and wastewater industry.
While maintaining a 50 percent operating reserve may be an appropriate long-
term objective it is not likely possible in the near-term for either utility without
additional rate increases. This issue is discussed more specifically with each
utility later in this section, with a 25 percent minimum operating reserve
recommended for the near term. For perspective, in FY 11-12 a 25 percent
operating reserve is $2.66 million for the water utility and $2.71 million for the
wastewater utility.
o Available Fund Balance — The balance in the operating funds in excess of the
operating reserve is shown in the financial plan model as the available fund
balance. When the total fund balance exceeds the target reserve amount the
available balance is positive. If the fund balance dips below the desired minimum
reserve the available balance is negative. This is a convenient way to monitor the
status of the operating fund over the planning period as various scenario analyses
are performed.
• Capital Fund — The capital fund is used to track capital program expenditures, as well as
the monies available for capital projects. Capacity fee revenue related to new
THE REED GROUP,INC. PAGE 13
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
development is reflected in the capital fund. Grant or debt proceeds obtained for capital
projects are also shown in the capital fund, as is the $12.774 million estimated final
reimbursement of costs under the SRF loan. In addition, the fund is supported through
annual transfers from the operating fund. Capital projects for each utility serve a variety of
purposes including rehabilitation and replacement, upgrade to improve service levels or
comply with regulatory requirements, and expansion to add capacity for new development.
While capacity fees are intended to pay the cost of capacity expansion, water and
wastewater rates should support the costs of rehabilitating and upgrading utility systems.
Contributions to the capital program from user rates are reflected in the financial plan
models as annual transfers from the operating to capital funds. At times, the City requires
developers to construct and then dedicate project-specific needed infrastructure to the
City. Those system additions are not reflected in this analysis.
Because capital funds are not currently included in the City's financial structure, balances
at the beginning of FY 11-12 reflect an initial segregation of the cash (net spendable
assets) within each utility between the operating and capital funds. Subsequent annual
transfers from operating funds are scheduled such that capital expenditure needs are met
while also maintaining a positive balance in the capital funds.
• Rate Stabilization Fund (wastewater)—The rate stabilization fund is a mechanism allowed
by the debt covenants to assist in meeting debt service coverage obligations associated
with long-term debt. The specific obligations for debt service coverage are described later
in this section. In general, however, any money used from the rate stabilization fund can
be counted as revenue for the purpose of debt service coverage calculations. In 2010,
anticipating the requirements of meeting the debt service coverage obligation, the City
established a rate stabilization fund for the wastewater utility and deposited $3.5 million
into it. The financial plan model uses a portion of the money from the rate stabilization
fund to help meet the debt service coverage requirements during the planning period. A
rate stabilization fund is not needed in the water utility.
• Ellis Creek WRF Capital Reserve Fund (wastewater) — The Ellis Creek WRF capital
reserve fund has been established pursuant to SRF loan requirements. The City is
required to contribute funds to build the CRF at a minimum rate of 0.5 percent of the SRF
loan amount each year for ten years. Interest earning on monies in the CRF are to remain
in the fund. The wastewater financial plan includes annual transfers from the wastewater
operating fund to the ECWRF CRF in compliance with this requirement
Financial Plan Assumptions
The five-year financial plans reflect a number of assumptions generally common to both utilities.
The financial plans were developed based on the City's FY 11-12 draft budget, existing long-term
debt obligations and debt service schedules as reflected in official statements and related
documents, and the current five-year capital improvement plans (CIP) for each utility. All
assumptions were reviewed with or were provided by City staff, and are believed reasonable for
the time period covered. As noted below, certain assumptions have been modified from the draft
study report prepared in 2010.
General Assumptions
A number of general assumptions are reflected in the financial plans, including inflation rates,
interest rates, customer growth rates, water demand estimates, etc. Primary assumptions are
described below, and also shown in Exhibit 11-2.
• Inflation and Interest Rates—The financial plan model includes the following assumptions
for annual inflation and interest:
THE REED GROUP, INC. PAGE 14
WATER AND WASTEWATER
CITY OF PETALUMA - FINANCIAL PLAN AND RATE STUDY
Exhibit 11-2
City of Petaluma --Water Resources and Conservation
Water and Wastewater Financial Plan Assumptions
FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16
Financial Assumptions
General Inflation Rate 2.4% 3.0% 3.0% 3.0% 3.0%
Chemical 8 Utility Intl.Rate 5.0% 5.0% 5.0% 5.0% 5.0%
SCWA Rate Increase 6.0% 6.0% 6.0% 6.0%
Construction Inflation Rate 3.0% 3.0% 3.0% 3.0% 3.0%
Interest Earnings 0.5% 1.0% 1.0% 1.5% 1.5%
Target Operating Reserve
Water Utility 25% of annual operating expenses,excluding DS and capital fund transfers
Wastewater Utility 25% of annual operating expenses, excluding DS and capital fund transfers
Customer and Water Usage Assumptions
No.of Water Accounts 19,286 19,301 19,326 19,376 19,426 19,501
No. of Water Equiv. Mtrs. 24,591 24,606 24,631 24,681 24,731 24,806
Annual Water Sales(hcf) 3.206,000 3,208,000 3,211,000 3,218,000 3,225,000 3,235.000
Annual Water Sales(AF) 7,360 7,365 7,371 7,388 7,404 7,427
Water Usage Factor 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Customer Growth Rate 0.0% 0.1% 0.1% 0.2% 0.2% 0.3%
New Customers(Eq. Mtrs) 15 25 50 50 75 75
No.of Wastewater Accounts 18,337 18,352 18,377 18,427 18,477 18,552
No.of Wastewater ESFDs 24,633 24,648 24,673 24,723 24,773 24,848
Customer Growth Rate 0.0% 0.1% 0.1% 0.2% 0.2% 0.3%
No. New Customers(EDUs) 15 25 50 50 75 75
Water Supply Costs
SCWA Water Purchases 7,158' 7,285 7,532 7,789 8,047 8,072
Groundwater Pumping 845 720 481 241 - -
Annual Production (AF) 8,003 8,005 8.012 8,030 8,047 8,072
%Supply from SCWA 89% 91% 94% 97% 100% 100%
% Unacct.for Losses 8.0% 8% 8% 8% 8% 8%
SCWA Water Rate($/AF) $ 604 $ 634 $ 672 $ 712 $ 755 $ 800
GW Pumping Cost($/AF) $ 150 $ 158 $ 166 $ 174 $ 183 $ 192
SCWA Water Purch. Cost $ 4,323,000 $ 4,619,000 $ 5,061,000 $ 5,546,000 $ 6,076,000 $ 6,458,000
GW Pumping Cost $ 127,000 $ 114,000 $ 80,000 $ 42.000 $ - $ -
Total Supply Cost $ 4,450,000 $ 4,733,000 $ 5,141,000 $ 5,588,000 $ 6,076,000 $ 6,458,000
Capacity Charges
Water Capacity Charge $ 12,521 $ 12,897 $ 13,284 $ 13,682 $ 14.092
Water Capacity Charge Rev $ 313,000 $ 645,000 $ 664,000 $ 1,026,000 $ 1,057,000
56.3% <-Portion of water capacity fee related to recycled water projects and
transferred to wastewater capital fund for this purpose.
Wastewater Capacity Charge $ 8.705 $ 8.966 $ 9.235 $ 9,512 $ 9,798
WW Capacity Charge Rev $ 218,000 $ 448,000 $ 462,000 $ 713.000 $ 735,000
67.5% <-Portion of wastewater capacity fee related to Ellis Creek WRF and
used to help make SRF loan payments.
o The financial plan assumes that general inflation will be 3.0 percent in FY 11-12
and in each year of the 5-year planning period. This general inflation rate applies
to all operating cost items, unless otherwise noted (such as wholesale water rate
increases set by SCWA). Actual inflation was 2.4 percent based on the change in
the San Francisco CPI from June 2010 through June 2011. This is slightly higher
than the 2.0 percent assumed in the 2010 study.
o Inflation on utility and chemical costs is assumed to be 5.0 percent per year due
to conditions present in the petroleum,energy, and electric industries.
THE REED GROUP, INC. PAGE 15
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
o In FY 11-12 the SCWA increased the rate the City pays for wholesale water
purchases by 5 percent, increasing the water utility's operating costs by over
$200,000 annually. Prior year increases had ranged from 7 to 10 percent. The
financial plan model assumes annual SCWA rate increases of 6 percent per year
during the planning period.
o Construction inflation is assumed to be 3.0 percent per year and applies to capital
projects contained in the City's 5-year capital improvement program. The 3
percent inflation rate is the 20-year average increase in the 20cities construction
cost index tracked by the Engineering News Record.
o Interest on general cash balances is assumed to be 0.5 percent in FY 11-12, then
1.0 percent in FY 12-13 and FY 13-14, and then 1.5 percent in FY 14-15 and FY
15-16. This interest rate applies to the average of the beginning and ending
balance of each fund and accrues to each fund. These estimates are also lower
than used in the 2010, and reflect the continued downward pressure on interest
rates, as well as the slow pace of economic recovery.
• Current Customer Base — The City currently has about 19,300 water accounts and about
18,300 wastewater accounts. The City also provides wastewater treatment services to
slightly more than 500 equivalent single family dwellings in Penngrove. Customer account
and water use data was obtained from the City's utility billing system. Customer account,
water use, and estimated wastewater flow data are presented in greater detail in Sections
III and IV of this report.
• Growth Projections — The financial plans conservatively assume annual growth of 0.1
percent (equivalent to about 25 homes) in FY 11-12, 0.2 percent (equivalent to about 50
homes)in FY 12-13 and FY 13-14, and then 0.3 percent(equivalent to about 75 homes)in
FY 14-15 and FY 15-16. These assumptions are somewhat lower than used in the 2010
and reflect the continued slowdown in the economy, as well as an anticipated slow
recovery. Actual growth will be a function of economic conditions, the City's development
policies, and the status of new projects within the development pipeline. While the growth
assumption is low it is reasonable given the current economic climate. It is also a
conservative assumption for financial planning purposes.
• Customer Water and Wastewater Demand—Water demand, as well as wastewater flows,
have been reduced in recent years due to the effects of the current economy, weather
conditions, and water conservation awareness and efforts. Reduced demands have had
an adverse impact on revenues. Statewide policies are increasing the emphasis on water
conservation and efficient water use as well. Detailed water and wastewater usage data
were obtained from the utility billing system. While water and wastewater demands
declined in FY 10-11,they appear to be rebounding in FY 11-12. Vacancies in homes and
businesses have also contributed to reduced system demands in recent years. While new
connections will be added to the water and wastewater systems and vacant homes will be
filled as the economy recovers, no increases in water or wastewater demands, on a per
account basis, are included in the financial plan analyses presented herein. This is a
reasonable assumption given the relatively short (5-year) planning period. Actual
demands may fluctuate up and down due to changing conditions.
• Capacity Fees and Fee Revenue—Current capacity fee schedules for both the water and
wastewater utilities are reflected in financial plan analyses. Each year, the City adjusted
capacity fees based on changes in construction inflation, even when the change is
downward. Capacity fee revenue is based on both the amount of the capacity fees, as
well as the amount of assumed new development. It is assumed that the amount of the
water and wastewater capacity fees will continue to be adjusted annually to reflect change
in construction inflation.
THE REED GROUP, INC. PAGE 16
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
The City conducted a capacity fee study for the water and wastewater utilities in 2008.
That study indicates that approximately 56 percent of the water capacity fee is associated
with the cost of constructing recycled water facilities (water supply component of the fee)
to meet long term potable demand. Because recycled water projects are funded out of the
wastewater utility, 56 percent of water capacity fee revenue is transferred from the water
capital fund to the wastewater capital fund for this purpose.
The 2008 capacity fee study also indicates that approximately 67.5 percent of the
wastewater capacity fee is associated with the cost of the Ellis Creek WRF. As a result, it
is appropriate to direct this portion of wastewater capacity fee revenue to repayment of the
SRF loan and the 2011 wastewater revenue refunding bonds. The financial plan model
shows wastewater capacity fee revenue accruing to the wastewater capital fund, and then
67.5 percent of annual revenue is transferred to the wastewater operating fund to help
cover the cost of annual debt service.
The City is currently reviewing the existing water and wastewater capacity fees, and
changes may be forthcoming. However, this study does not reflect these potential
changes, as they are still in the development stage. Any changes to the capacity fees
could have an impact on the water and wastewater financial plans. However, such
changes would not likely impact water and wastewater rate recommendations, as these
two revenues serve different purposes.
• Water Supplies —The City receives the majority of its water supply from the SCWA. This
supply is also supplemented with groundwater pumped from the City's wells. Due to
recent diversion limitations the City has increased the utilization of groundwater such that
in FY 10-11 about 11 percent of the water supply was from groundwater. Increasing the
use of groundwater also helped the City offset the higher costs of water purchases
resulting from increases in SCWA water rates (groundwater is considerably less
expensive to produce than purchasing SCWA water). Based on direction from City staff
and in compliance with adopted General Plan policies, the financial plan assumes that the
City will reduce its groundwater usage within five years, relying 100 percent on SCWA
water by FY 14-15. The City may rely on groundwater at times, however, for emergency
use and to maintain the integrity and reliability of the well system.
• Water System Losses—The financial plan assumes a water system loss rate of 8 percent
in future years. This is within a normal range for water utilities and is consistent with the
City's 2010 Urban Water Management Plan. System losses include uses for fire
protection, main flushing, sewer cleaning, bill adjustments, and other non-billed uses, as
well as loss from leaks and meter inaccuracies. Increased monitoring and leak detection,
including assistance from the Petaluma Police Department to limit theft from hydrants is
intended to maintain or reduce this loss rate.
• Storm Drainage Costs — The City included storm drainage operating and maintenance
costs in the wastewater utility (about $872,270 in the FY 11-12 draft budget) due to the
benefit received from preventing storm (flood) waters from entering the wastewater
collection system and treatment facilities. Separately, SCWA is funding Zone 2A
(Petaluma Watershed storm drainage system) operation and maintenance services at
$875,500 and has allocated $1,593,000 for identified projects in the Petaluma Watershed.
However, since that time, City staff has taken a closer look at storm drainage costs, and
the extent to which particular costs may be accurately characterized as wastewater
enterprise costs. This has resulted in a reduction in the amount budgeted in the
wastewater utility from $872,270 to $290,000. The City plans to temporarily cover the
difference in costs ($582,270)with a loan from the Storm Drainage Impact Fee Fund. The
THE REED GROUP, INC. PAGE 17
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
City also plans to initiate efforts to create a new mechanism for the funding of storm
drainage costs, and that mechanism is anticipated to repay the loan, as well as support
ongoing costs of storm drainage operations.
For now, the $290,000 cost of preventing stormwater from entering the wastewater
collection and treatment system is assumed to continue as an annual cost (adjusted
annually for inflation).
Capital Improvement Plans
The City's current 5-year capital improvement plans for the water and wastewater utilities are
reflected in the financial plans. This includes recent revisions to defer certain recycled water
projects. Individual projects, project costs, and project timing are summarized in Exhibit II-3, and
are shown in current dollars. Capital improvement projects are funded through a combination of
existing available reserves, water and wastewater rate revenues, and water and wastewater
capacity fee revenues. The financial plans presented herein include no new borrowing for the
purpose of funding capital improvement projects. Planned recycled water projects are anticipated
to be funded through the wastewater utility although, as described previously, a portion of water
capacity fee revenue is used to help pay for recycled water projects.
Capital project costs are carried forward into the financial plan exhibits with the effects of inflation
added in such that project costs are shown in those exhibits in future dollars.
The demolition of the Hopper Street treatment plant is included in the City's 5-year CIP and shown
in Exhibit 11-3. However, the City is exploring various options for the use of the facility/property as
well as the costs of demolition or alternative use. Because these issues require further study and
exploration, the planned demolition of the Hopper Street wastewater treatment plant has been
deferred for financial planning purposes by one year. Costs for this project shown in Exhibit II-8
(wastewater capital fund) through FY 14-15 are for ongoing monitoring, maintenance, and security
of the closed facility, but exclude the significant cost of demolition and site remediation.
Timely implementation of certain wastewater projects is driven by regulatory agency direction in
response to sanitary sewer overflows (SSO's). Future revisions to the capital improvement
program, including catching up with deferred capital improvements, may result in different financial
requirements for the utilities. Any system rehabilitation needs or mandated improvements (not
currently reflected herein) could alter the financial requirements of the utilities over the five-year
planning period.
Existing Debt Obligations
The water and wastewater utilities have three existing debt obligations (primarily wastewater). The
financial plan reflects scheduled debt service payments, as well as requirements for debt service
coverage. Exhibit 11-4 summarizes annual debt obligations during the planning period.
Existing long-term debt obligations of the water utility are summarized as follows:
• 2001 Water Revenue Bonds. These revenue bonds had a par value of $10,165,000
when issued. Annual debt service payments are about $660,000 and will continue until
2031. The outstanding balance on the revenue bonds is$7,725,000. The revenue bonds
were issued to refund prior certificates of participation and to fund water system
improvements.
THE REED GROUP, INC. PAGE 18
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit 11-3
City of Petaluma--Water Resources and Conservation
Five-Year Capital Improvement Program($1,000s)(1)
5-Year Total
FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16 Estimate
WATER PROJECTS(dollars in$000)
067401201 Well Construction and Repair $ 251 $ 251
067401001 E Wash St(101 to Edith)18'Main Replac $ 2,000 r$ 2,000
067401002 E Wash SI(Edith to Bridge)18'Main Replac $ 1,145 S 1,045 $ 2.190
C67401003 E Wash SI North 18'Main Replac S 21 $ 485 $ 506
067401004 Pump Stations Emergency Power $ 19 $ 92 $ 111
067500903 Automatic Meter Read Replacement S 300 $ 300 $ 300 $ 300 $ 300 $ 1,500
067401008 Water Main Replacements-Various 5 15 $ 265 $ 265 $ 290 $ 290 S 1,125
067401006 Casa Grande Rd 16"Main Extension $ 1.350 $ 1.350
000500101 Paula Lane Reservoir S 2,451 $ 2,451
C67401005 Petaluma Blvd North 12'Main Extension $ 200 $ 200
067501007 Hardin Tank Exterior Recoating $ 340 $ 340
TOTAL WATER PROJECTS $ 3,751 $ 2,187 $ 1,915 $ 3,041 S 1,130 $ 12,024
WASTEWATER PROJECTS(dollars in$000)
000500205 C Street Pump Station Upgrade $ 1,922 r$ 1,922
000501400 Wilmington Pump Station $ 2,301 $ 2,301
066401005 Mt View Sewer Replac(Purrington to Pet Blvd S) $ 1,465 '$ 1,465
066501002 Victoria Pump Station Generator Replacement $ 363 $ 363
066401101 Mt View Sewer Main Replac(Halsey to Glendon) $ 390 5 390
066401103 Digester Loadout&Washdown Slab $ 120 $ 120
066401107 Ellis Creek Site Access Improvements $ 80 $ 80
066401201 Pond Influent Pump Station Improvements S 377 $ 377
000500402 Water Recycleing Facility-Ellis Creek $ 4.600 $ 350 $ 4,950
066501004 Lift Station Upgrades $ 200 $ 1,635 $ 1,500 $ 3,335
C66401002 Sewer Main Replacements-Various $ 315 $ 315 $ 315 $ 315 $ 315 $ 1,575
C00500305 Demolition of Hopper Wastewater Treat Facility $ 55 S 55 $ 55 $ 775 $ 10,939 'S 11,879
066501003 Manhole Rehabilitation $ 345 $ 345 S 470 $ 470 $ 497 '$ 2,127
066401001 Oxidation Pond Levee Reinforcement $ 850 $ 850
TOTAL WASTEWATER PROJECTS $ 12,533 $ 3,550 $ 2,340 $ 1,560 $ 11,751 $ 31,734
RECYCLED WATER PROJECTS(dollars in$000)
066400902 Recycled Water Pump Station Main& 1 Improv. $ 840 'S 840
000500505 Phase 2A Recycled Water Pipeline $ 3,142 '5 3,142
000500408 Phase 28 Recycled Water Pipeline&Reservoir $ 419 5 419 'S 838
000500508 Phase 3 Reycled Water Pipeline S -
TOTAL RECYCLED WATER PROJECTS $ 4,401 S - $ 419 $ - $ - $ 4.820
Notes:
(1) From FY 11-12 draft budget,with revisions to recycled water projects as of September 6,2011.
Existing long-term debt obligations of the wastewater utility are summarized as follows:
• 2005 State Revolving Fund Loan from the State Water Resources Control Board.
The City obtained approval for a loan from the State in 2005 for nearly $126 million at an
interest rate of 2.4 percent to assist in construction of the Ellis Creek WRF. As of July 15,
2011, the City expects to receive a final disbursement of funds totaling an estimated
$12,774,000 to reimburse the wastewater utility for final project costs. This would bring
the total principal balance to about$121,334,500. Annual loan payments on this total loan
balance are estimated at nearly $8,375,200 with a repayment term extending through
2029. Full principal and interest payments under the SRF loan commenced in April 2010.
THE REED GROUP,INC. PAGE 19
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit 11-4
City of Petaluma--Water Resources and Conservation
Water and Wastewater Debt Service Payment Schedules
Water Fund(6700) FY 09-10 FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16
Series 2001B Principal 260,000 275,000 285.000 295.000 310,000 320,000 335,000
Series 20018 Interest 388,563 378,123 366,923 355,138 342234 328.214 321,014
Series 20018 Total 648,563 653,123 651,923 650.138 652,234 648,214 656,014
Total Water Debt Service 648,563 653,123 651,923 650,138 652,234 648,214 656,014
Wastewater Fund(6600) 20100 2011 2012 2013 2014 2015 2016
Series 2000 Principal 410,000
Series 2000 Interest 308,374 144,347
Series 2000 Total 718,374 144,347 "(3)
CWSRF Loan Principal 4,672.189 4,780,327 5,544,598 5,596,219 5.730.528 5,868,061 6,008,895
CWSRF Loan Interest 2,829,460 2,721,323 2,830,579 2,778,958 2,644,649 2,507,116 2,366,282
CWSRF Total 7.501,649 7,501,650 8.375,177 8,375,177 8,375,177 8,375,177 8,375,177
BNP Paribas Principal(7-1-2010) 6,193,025
BNP Paribas Interest and Restructure Fees 490,914
BNP Paribas Total 6,683,939 (2)(3)
Zions Principal(7-1-2010) 3.735,659
Zions Interest and Restructure Fees 542,973
Zions Total 4,278.632 (2)(3)
Series 2011 Principal
-
_ _ -
Series 2011 Interest 192,132 1,305,050 1,305,050 1,305,050 1,305,050 1,305,050
Series 2011 Total 192.132 1,305,050 1,305,050 1,305,050 1,305,050 1,305,050
Total WW Debt Service 8,220,023 18,800,700 9,680,227 9,680,227 9,680,227 9,680,227 9,680,227
Notes:
(1) Source: Finance Department for debt service payment schedules on existing debt.
(2) On July 1,2010 the City repaid principal of$6,193,025 to BNP Paribas and$3,735,659 to Zions Bank from available cash. Periodic
interest payments were also made during the year,
(3) In February,2011 the City issued wastewater revenue refunding bonds. Bond proceeds were used to pay off the 2000 wastewater
bonds and the remaining LOC balances. Payments made from bond proceeds are not reflected in this exhibit,
• 2011 Wastewater Revenue Refunding Bonds. Wastewater revenue refunding bonds
were issued in February 2011 with a par value of $22,465,000. Proceeds were used
primarily to pay off outstanding LOCs that had been required to help fund construction of
the Ellis Creek WRF. Bond proceeds were also used to refund the 2000 wastewater
bonds. Annual interest-only debt service payments are about $1.31 million and will
continue until 2029. Beginning in 2030 principal and interest payments totaling about
$4.01 million annually will continue through 2036. This repayment of principal would occur
following final repayment of the SRF loans. This repayment schedule more effectively
spreads the costs of financing over the life of the facilities, as well as lessens the impact on
wastewater rates during the period of SRF loan repayment.
Each of the City's long-term debt obligations are subject to debt agreements containing various
terms and conditions. Summarized below are some of the key debt covenants contained in the
agreements intended to reduce risk to the City's creditors.
The 2001 Water Revenue Bonds require the City to maintain charges for the water system during
each fiscal year which are sufficient to yield net revenues, excluding capacity fees, at least equal to
THE REED GROUP, INC. PAGE 20
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
100 percent of the water enterprise debt service, as well as net revenues including capacity fees at
least equal to 125 percent of the water debt service.
The 2011 Wastewater Revenue Refunding Bonds require the City to maintain charges for the
wastewater system during each fiscal year which are sufficient to yield net revenues, excluding
capacity fees, at least equal to 120 percent of the wastewater enterprise debt service. Transfers
out of the wastewater rate stabilization fund may be considered as revenue for purposes of
determining debt service coverage.
The agreement with the State Water Resources Control Board governing the SRF loan requires
the City to maintain a user charge system sufficient to pay the total operation and maintenance
costs necessary for the proper operation, maintenance and replacement of treatment works, and
requires each recipient of wastewater services to pay its proportionate share of the costs. Other
provisions of the SRF loan agreement require the City to set rates sufficient to yield net revenues
equal to the debt service of the wastewater enterprise. The agreement also prohibits the City from
reducing wastewater service rates, unless the net revenues from such reduced rates will, at all
times, be sufficient to meet debt repayment obligations.
City finance staff is monitoring market conditions to determine whether it might be advantageous to
restructure existing long-term debt.
Water System Financial Plan
The water system financial plan is an annual cash flow model that reflects beginning balances,
revenues and transfers in, expenditures and transfers out, and ending balances for each fund each
year of the planning period. The financial plan reflects actual FY 09-10 revenues and
expenditures, estimated FY 10-11 revenues and expenditures, and the draft budget for FY 11-12.
Future year operating and maintenance expenses are based on the FY 11-12 draft budget, with
adjustments for inflation and growth. The water system financial plan model is presented in
Exhibit 11-5 (operating fund)and Exhibit 11-6(capital fund).
Current Situation
The estimated balance (net spendable assets) in the water utility as of June 30, 2011 is
approximately $8.86 million. As previously described, the capital fund is proposed as a new fund,
with the financial plan model showing the beginning balance for FY 11-12 split between the
operating and capital funds. The operating fund is shown to have a balance of about$5.36 million,
and the capital fund is shown to have a beginning balance of$3.50 million in order to provide initial
funding for planned capital improvements. Fund balances are calculated for the end of each year
based on annual revenues, expenditures, and transfers.
Water Utility FY 11-12 Beginning Balances
Operating Fund $5,360,000
Capital Fund (new in FY 11-12) $3,500,000
Total Water $8,860,000
In January 2011, the City implemented the fifth of five annual 5 percent water rate increases.
These rate increases were necessary to cover the increasing costs of operations, including
significant cost increases in wholesale water costs from the SCWA, in the face of reduced water
demands,and growing maintenance costs of an aging infrastructure system.
THE REED GROUP, INC. PAGE 21
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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THE REED GROUP, INC. PAGE 22
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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THE REED GROUP, INC. PAGE 23
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
The most significant anticipated increases in costs within the water utility are the cost of water
purchases from SCWA, and the need to support the capital improvement program with a portion of
water rate revenues. Between assumed 6 percent annual increases in the wholesale cost of water
and the assumed gradual shift away from using groundwater during the planning period, annual
water purchase costs are estimated to increase from about $4.65 million in FY 10-11 to about
$6.46 million in FY 15-16. As described in greater detail in Section III of this report, the City has the
ability to adopt a mechanism for automatically adjusting water rates to reflect the affects of changes
in the cost of wholesale water purchases. This would be a prudent action to help reduce the
financial risk within the water utility from unexpected or underfunded increases by Sonoma County
Water Agency.
At present(FY 11-12), the water utility is estimated to have an operating surplus of about$900,000
after covering operating and maintenance expenses and debt service payments. However, due to
an available balance in excess of the 25 percent operating reserve, it is recommended that the City
transfer $2.0 million annually from the water operating fund to the capital fund in support of the
capital improvement program. As a point of reference, the average planned water capital program
expenditure for the next five years is about $2.5 million. The difference between the annual
expenditures and the transfer from the operating fund will be met with capacity fee revenues and
the initial balance available in the capital fund.
In addition to the $3.5 million initial balance in the capital fund, capacity fee revenues accrue to the
capital fund. With the assumed growth reflected in the financial planning analysis (see Exhibit 11-2)
annual capacity fee revenues accruing to the water capital fund may total about $3.7 million over
the five year planning period, with the current capacity fee structure and annual inflationary
adjustments.
In order to support the water capital improvement program annual transfers to the capital fund are
shown to remain steady at $2.0 million per year through the planning period. The capital fund is
shown to maintain a positive balance throughout the 5-year planning period, indicating sufficient
funding for the planned capital improvement program. In addition, no new debt appears necessary
to fully fund planned water system improvements over the next five years. If there are significant
changes to the capital improvement program, then higher water rates and/or new long-term debt
might be needed to fund the program.
Because the water system has relatively little outstanding long-term debt, debt service coverage
requirements are easily met and do not impact the need for further water rate increases. An option
may exist, if deemed economical, to refinance existing debt within the 5-year period to lower
interest rates and costs. City finance staff is currently monitoring market conditions to determine
whether such restructuring of debt would be beneficial.
Water System Operating Reserves
Municipal water and wastewater utilities generally maintain operating reserves equal to from 10 to
50 percent of annual operating costs. The water system financial plan maintains the operating
fund at or above the target 25 percent operating reserve throughout the planning period. This can
be accomplished with water rates adjusted to match changes in the cost of SCWA water
purchases, as well as a modest annual rate adjustment equal to the rate of general inflation.
Given the nature of the City's water system (primarily distribution of treated water purchased from
SCWA, with limited groundwater usage), a 25 percent operating reserve should be sufficient for
working capital and emergency purposes, particularly if mechanisms for adjusting water rates for
THE REED GROUP, INC. PAGE 24
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
changes in SCWA costs and for general inflation are implemented, as well as a positive balance is
maintained in the capital fund.
Water System Conclusions and Recommendations
The water utility appears financially stable. Current water rates and other revenues are sufficient to
meet current operating costs and debt service obligations, and contribute to the ongoing pay-as-
you-go capital improvement program. A moderate rate adjustment is proposed for 2012 to ensure
continued adequate funding for the utility. As noted previously, any change to the capital
improvement program could result in different financial needs, including increased water rates
and/or the need for debt financing.
Based on the analyses performed, it appears that the most significant financial risk to the water
utility is related to the cost of wholesale water purchases from the SCWA (as well as the need to
support the capital improvement program). This risk can be reduced by adopting a mechanism for
automatic water rate adjustments that would offset the impact of SCWA water rate changes (see
Section III for details). However, because this automatic adjustment mechanism is not yet in place,
the proposed rate increase for January 2012 must also make up for higher water purchase costs
that have been in effect since July 2011, when SCWA last increased their rates. Beyond a rate
adjustment in January 2012 to bring rates back in line with costs (including increased funding for
the capital improvement program) it appears that indexing of annual water rate increases to the
pace of general inflation may be sufficient during the 5-year planning period under review.
Because of the current relatively stable status of the water utility, financial plan recommendations
are limited to the following:
• Increase the overall level of water rates by 4 percent in January 2012 in order to: (1)
recover costs associated with increased water purchases costs associated with SCWA's
July 2011 rate increase, (2) provide for additional pay-as-you-go funding of the capital
improvement program, and (3)help keep rates in line with changes in general inflation.
• Adopt a mechanism for automatically adjusting water rates to reflect changes in wholesale
water purchase costs from SCWA, as described in Section III of this report. The SCWA
historically has adjusted its water rates annually effective in July of each year. Increased
revenues from automatic rate adjustments are reflected in the financial plan model based
on assumed annual 6 percent SCWA rate increases. The proposed automatic adjustment
formula would, however, tailor the amount of the adjustment to the specific action by
SCWA. Only the City's water usage rates would be affected by this adjustment(not fixed
monthly service charges). As illustrated in Section III of this report, a 6 percent increase in
the wholesale cost of water in FY 12-13 would result in a 2.7 percent increase in the City's
water usage rates.
• Beyond the scheduled 4 percent rate adjustment in January 2012, the City should adopt a
mechanism for adjusting water rates annually, beginning in January 2013, to reflect the
changes in general inflation using the San Francisco CPI for this purpose. The financial
plan assumes general inflation to be 3 percent in future years. Water rate revenue
projections reflect annual increases of this magnitude beginning in January 2013. This
rate adjustment would apply to the entire water rate structure.
• Establish and maintain a capital fund with annual transfers from the operating fund, and
capacity fee revenue from new development to pay for planned water infrastructure
improvements and recycled water capital projects.
THE REED GROUP, INC. PAGE 25
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
• Maintain an operating reserve in the operating fund equal to at least 25 percent of annual
operating and maintenance expenses, exclusive of debt service and transfers to the
capital fund.
In conclusion, the water system appears financially stable. However, anticipated increases in
operating and maintenance costs (principally water purchase costs) justify continuing to adjust
water rates to reflect inflationary pressures. While the assumptions and information used in the
preparation of the water system financial plan are believed to be reasonable, no assurances can
be made that actual financial results will be as presented herein. City staff should continue to
monitor the financial condition of the water utility, as well as changes in water demands and related
rate revenues, to ensure that the utility continues on a sound financial course.
Wastewater System Financial Plan
The wastewater system financial plan is an annual cash flow model that reflects beginning
balances, revenues and transfers in, expenditures and transfers out, and ending balances for each
fund each year of the planning period. The financial plan reflects actual FY 09-10 revenues and
expenditures, estimated FY 10-11 revenue and expenditures, and the draft budget for FY 11-12.
Future year operating and maintenance expenses are based on the FY 11-12 draft budget with
adjustments for inflation and growth. The wastewater system financial plan model is presented in
Exhibit 11-7 (operating fund)and Exhibit 11-8(capital fund).
Current Situation
The estimated working balance (net spendable assets) in the wastewater utility as of June 30,
2011 is approximately $10.04 million. As the capital fund is a new fund, the financial plan model
shows the beginning balance of$0 for FY 11-12. However, the City anticipates receiving $12.774
million from the state as a final disbursement under the SRF loan and the final reimbursement of
costs, and that amount is shown coming into the capital fund in FY 11-12 to be used for capital
projects. The ECWRF CRF is also a new fund for FY 11-12 with a $0 beginning balance. Annual
transfers into the ECWRF CRF beginning in FY 11-12. In addition, the City established a rate
stabilization fund for the purposes of assisting in meeting debt service coverage obligations. The
rate stabilization fund had a June 30, 2011 balance of$3.5 million. Fund balances are calculated
for the end of each year based on annual revenues, expenditures, and transfers.
Wastewater Utility FY 11-12 Beginning Balances
Operating Fund $10,040,000
Capital Fund (new in FY 11-12) $0
Ellis Creek WRF CRF (new in FY 11-12) $0
Rate Stabilization Fund $3,500,000
Total Wastewater $13,540,000
Operating costs for the new Ellis Creek WRF are lower than originally projected. Part of the reason
is that the City was able to purchase power and chemicals through group purchase agreements.
As a result of lower costs On treatment operations and elsewhere), in January 2011 the City
implemented a 9 percent wastewater rate increase. This was a reduction from a previously
approved increase of 13 percent.
THE REED GROUP, INC. PAGE 26
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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THE REED GROUP, INC. PAGE 27
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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THE REED GROUP, INC. PAGE 28
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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THE REED GROUP, INC. PAGE 29
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
The financial situation in the wastewater utility in FY 09-10 and FY 10-11 was complicated by the
repayment of LOCs. Nearly $10 million dollars of the beginning fund balance in FY 10-11 was
used to make initial repayment of LOCs on July 1, 2010. Then in February 2011, the City repaid
the remaining $14.75 million principal balance owed to LOC banks using proceeds from the 2011
wastewater revenue refunding bonds. The information on the wastewater operating fund for FY
10-11 in Exhibit 11-7 does not reflect the pay-off of LOCs as they were made directly with debt
proceeds. Exhibit 11-7 does reflect all operating activities and other debt service obligations of the
utility.
The City is required to maintain certain debt service coverage levels as part of its debt obligations.
In FY 09-10, the City established and funded a rate stabilization fund with $3.5 million. The
financial plan shows a portion of the rate stabilization fund being used during the next two years to
help make debt service payments and to provide the required level of coverage.
After considering the above financing activities, as well as ongoing operation and maintenance
costs and annual debt service obligations, the wastewater operating fund is estimated to have
available about a $2.5 million in FY 11-12 to transfer to the capital fund. In subsequent years, the
available balance continues to support the transfers to the capital fund. The financial plan indicates
$3.25 million transferred in FY 12-13, and $4.0 million transferred in each remaining year of the
planning period. As a point of reference, the average planned capital program expenditure for the
next five years is about $5.3 million, excluding demolition of the Hopper Street wastewater
treatment plant. Annual transfers to the capital fund are intended to help address the long-deferred
maintenance of major infrastructure components, such as wastewater pump stations and failing
pipelines.
As mentioned previously, the City anticipates receiving a final loan disbursement of$12.774 million
from the SWRCB as final reimbursement of costs under the SRF loan. In addition, it is estimated
that capacity fee revenue may total about$400,000 in FY 11-12 and grow to about$1.35 million by
FY 15-16. This includes both wastewater capacity fee revenue, as well as the portion of the water
capacity fee revenue (transferred from the water capital fund) related to recycled water projects.
Capacity fee revenue estimates are also directly related to assumptions on new development
activity (as previously described); actual development activity could be higher or lower than the
amount reflected in the analysis. Because a portion of the wastewater capacity fee is related to
costs of the Ellis Creek WRF 67.5 percent of wastewater capacity fee revenue is shown transferred
from the capital fund to the operating fund in support of annual debt service on the SRF loan. This
is an appropriate use of this revenue and consistent with the intended purpose and use of the fee
revenue.
Between the final SRF loan disbursement, annual transfers from the operating fund, and capacity
fee revenues, it is estimated that the wastewater utility will have sufficient funds to cover all
currently planned capital program costs for the next five years. The exception is the demolition and
site remediation of the Hopper Street wastewater treatment plant. However,as discussed earlier in
this section, final decisions regarding that facility require further analysis, and demolition costs have
been excluded from the analysis herein. The significant finding, however, is that it appears that the
City may not need additional long-term debt financing for currently planned wastewater and
recycled water projects for the five-year planning period covered by this study. The deferral if
recycled water projects does not have an impact on the need to adjust water rates, as recycled
water projects are planned to be funding with capacity fee revenues.
The financial plan also reflects annual transfers of$650,000 per year beginning in FY 11-12 from
the operating fund to the ECWRF CRF. This transfer meets the requirements of the SRF loan for
the Ellis Creek WRF.
THE REED GROUP, INC. PAGE 30
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Wastewater System Operating Reserves
Municipal water and wastewater utilities often maintain operating reserves equal to from 10 to 50
percent of annual operating costs. The wastewater system financial plan maintains the operating
fund at or above the target 25 percent operating reserve throughout the planning period. This can
be accomplished with wastewater rates adjusted to match changes in the rate of general inflation,
plus 1.5 percent (subject to a 2.0 percent minimum). Should the wastewater utility recognize
higher than anticipated rate revenues as a result of a rebound in usage, the City might find it
possible to establish and then maintain a higher operating reserve, or meet debt service coverage
obligations without dipping into the rate stabilization fund.
Given that nearly one-half of the wastewater utility's annual operating expenses are fixed debt
service payments, a 25 percent operating reserve should be sufficient for working capital and
emergency purposes, particularly if a positive balance is maintained in the capital fund.
Wastewater System Conclusions and Recommendations
As a result of financing activities, the wastewater utility has simplified and consolidated its long-term
debt obligations providing an opportunity for rate stability in the near term. It appears, based on the
financial analyses presented herein, that an overall 5 percent increase in wastewater rates in
January 2012 is adequate to cover operating costs, meet debt service obligations, contribute
towards the capital improvement program, and maintain an operating reserve. The rate increase
has been limited, in part, as a result of eliminating storm drainage costs from the wastewater utility
budget.
Financial plan recommendations for the wastewater utility include the following:
• Adjust the wastewater rates in January 2012 to reflect an overall increase of 5 percent to
meet the financial obligations of the utility, as well as restructure the rates to better achieve
rate setting objectives(rate restructuring is described in Section IV of this report).
• Beyond the rate adjustment in January 2012, the City should adopt a plan for adjusting
wastewater rates annually, beginning in January 2013, to reflect the changes in general
inflation as reflected in the San Francisco CPI plus 1.5 percent, as described in Section IV
of this report. This adjustment would be subject to a 2.0 percent minimum.
• Establish and maintain a capital fund with money from the final SRF loan disbursement,
annual transfers from the operating fund, and capacity fee revenue from new development
to pay for planned wastewater infrastructure improvements and recycled water capital
projects.
• Provide annual funding of the Ellis Creek WRF CRF through annual transfers from the
wastewater operating fund.
• aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaUse funds from the rate
stabilization fund as needed to meet debt service coverage requirements.
• Maintain a minimum operating reserve in the operating fund equal to at least 25 percent of
annual operating and maintenance expenses, exclusive of debt service.
In conclusion, with the proposed rate adjustment for January 2012 the wastewater system would
be in a financially stable condition. Thereafter, anticipated increases in operating and maintenance
costs as well as continuing debt service obligations and capital program needs warrant continuing
THE REED GROUP, INC. PAGE 31
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
to adjust wastewater rates annually for up to five years to respond to inflationary pressures. While
the assumptions and information used in the preparation of the wastewater system financial plan
are believed to be reasonable, no assurances can be made that actual financial results will be as
presented herein. City staff should continue to monitor the financial condition of the wastewater
utility, as well as changes in wastewater demands and related rate revenues, to ensure that the
utility proceeds on a sound financial course.
THE REED GROUP, INC. PAGE 32
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
°III WaterrRates r a � � -
'^ Y. r n's --r•,.r_ ..z s ' r_, �` ._ 3,:,n'. r a r v- .. . .� : .5 _he" d
This section of the report describes and presents recommendations for updating water rates to
provide sufficient revenues for the water utility's ongoing operations, debt service obligations, and
capital improvement needs. Modification of the water rate structure is also proposed to reflect the
costs of providing service, improve equity, and further encourage water conservation and water
use efficiency among the City's water customers.
The financial plan model presented in Section II reflects revenues and expenses on a fiscal year
basis. However, the City has historically adjusted water rates in January of each year. Therefore,
rate analyses must consider calendar year revenue needs.
An overall water rate increase of 4 percent is proposed for January 2012. The water rates and rate
schedule presented in this section are intended to result in an overall increase in revenues, relative
to the current rates, of 4 percent. It should be noted, however, that any rate structure change, even
in a revenue neutral situation, can cause some customer bills to increase while others decrease.
These changes are in the interest of improved equity and improved rate structure performance in
relation to rate setting policy objectives(shown on the next page).
Existing Water Rates
Exhibit III-1, on the following page, summarizes the City's current (2011) water rates. The rate
schedules shown in Exhibit III-1, as well as all rate schedules presented in this report, show rates
on a monthly basis. Utility billing within the City occurs on a monthly basis with meters currently
read bi-monthly until completion of the conversion to Automatic Read Meters (ARM) is achieved.
From 2007 through 2011, the City increased water rates by 5 percent each January.
Single family residential customers are subject to monthly service charges based on the size of the
water meter, as well as a 4-tier water usage rate structure. The tier allocations shown in Exhibit III-
1 are shown as monthly amounts. Multi-family, commercial, institutional, industrial, and irrigation
accounts are also subject to monthly service charges based on meter size, and a uniform water
usage rate for all water usage.
Current (FY 09-10) water demands reflect that approximately 87 percent of water rate revenue is
generated from water usage charge and about 13 percent from fixed service charges. Water
conservation best management practices, as promulgated by the California Urban Water
Conservation Council (CUWCC), requires at least 70 percent of revenue to be generated by usage
charges. The City exceeds this requirement. Proposed water rates would slightly increase the
percentage of revenue coming from fixed service charges.
Rate Setting Objectives
The development of water rate recommendations has been guided by several rate-setting
objectives. These objectives were reviewed with City staff and include:
• Rates should generate sufficient revenues to meet the utility's financial obligations related
to operations, debt service, capital improvement needs, and maintenance of prudent
reserves
• Rates should be equitable by reflecting the cost of providing service to each customer
class
THE REED GROUP, INC. PAGE 33
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit III-1
City of Petaluma -- Water Resources and Conservation
Current Water Rates (1)
Current
Water Rates '
(Jan. 2011)
Monthly Service Charges
Up to 3/4" meter $ 5.69
1" meter (resid.) $ 6.84
1" meter $ 7.07
1 1/2" meter $ 12.40
2" meter $ 19.46
3" meter $ 40.19
4" meter $ 54.13
6" meter $ 78.19
Water Usage Charge ($/hcf)
Single Family
Tier 1 (0-9 hcf) $ 2.94
Tier 2 (10-18 hcf) $ 3.41
Tier 3 (19-24 hcf) $ 4.35
Tier 4 (25+ hcf) $ 4.82
Other Customers (2)
All water usage $ 3.14
Notes:
(1) Effective January 1, 2011.
(2) Includes multi-family, commercial, institutional, industrial, and
irrigation accounts. Excludes recycled water accounts.
• Rates should continue to encourage water conservation and efficient water use
• Rates should be held as low as possible,while still meeting financial obligations.
These objectives guided the review of and recommendations on water rates and rate structures.
Customer Account Data and Water Use Estimates
Water rate calculations are based on a number of factors related to the City's customer base.
Factors include the number of customers, customer classes, meter size, and actual water usage.
Exhibit 111-2 summarizes customer account from the City's utility billing system. Customer account
data is summarized by customer class and meter size.
THE REED GROUP, INC. PAGE 34
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit III-2
City of Petaluma--Water Resources and Conservation
Summary of Water Utility Customer Accounts
No. of Connections by Meter Size(1) Total
Customer Class Up.to 3/4" 1" 1 1/2" 2" 3" 4" 6" Accounts
Single Family 15,720 1,575 3 6 - - - 17.304
Multi-Family 105 53 45 69 29 5 5 311
Commercial 463 243 121 209 14 3 4 1,057
Institutional 24 35 26 48 6 8 - 147
Industrial 2 3 4 9 1 2 - 21
Irrigation 55 143 113 123 5 6 1 446
Total Connections 16,369 2,052 312 464 55 24 10 19.286
Hydr. Capac. Factor 1.00 1.67 3.33 5.33 10.00 16.67 33.33
No.of 3/4" Equiv. Mtrs. 16,369 3,427 1,039 2,473 550 400 333 24,591
Notes:
(1) From utility billing system as of August 17,2010.
Customers of different meter sizes can place different demands on the water system. Much more
water can be delivered through a 4"water meter than through a 3/4" meter. To relate the potential
demands on the water system from customers with different sized water meters, hydraulic capacity
factors are used to determine the number of 3/4" (typical single family dwelling) equivalent water
meters represented by the total customer base with variable meter sizes. The ratios of
instantaneous flow capacities of the various meter sizes to the capacity of a 3/4" meter are used to
determine the 3/4" equivalencies. This capacity relationship across meter sizes is generally used
to allocate capacity-related costs to various customers.
In FY 09-10, the City's water service customers used approximately 3,205,000 hcf(-7,359 AF) of
water. About 59 percent of the water was used by single family customers and about 41 percent
by other customer classes.
The analysis of tiered water rates required detailed water use data for all customers subject to the
tiered rates. The detailed water use data is used to develop information on the distribution of water
usage across the range of use. Exhibit 111-3 shows single family residential water use data on an
annual basis using data from FY 09-10. The bars making up the bell-shaped curve indicate the
number (or percentage) of water bills using various amounts of water. The line on each graph
indicates the percentage of total water usage (using the right scale) that is at or below any given
level of usage. For example, median monthly water usage for single family customers over the
year is 7.5 hcf. Water usage of up to 7.5 hcf per month accounts for about 65 percent of all water
used by single family customers. This data and the information supporting these graphs are critical
to tier rate design. With this information it is possible to anticipate the amount of water sales, and
therefore revenues,which will result from any tier structure.
THE REED GROUP, INC. PAGE 35
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit III-3
City of Petaluma--Water Resources and Conservation
Summary of Single Family Water Use Characteristics
5% --- - -- - 100%
I90%
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0 5 10 15 20 25 30 35 40 45 50
Monthly Water Use (hcf)
For reference purposes, median and average annual water use among single family customers is
approximately 7.5 hcf and 9 hcf monthly, respectively. During winter months, when irrigation
demands are minimal, average single family water use is about 5.5 hcf monthly. All of these
values are somewhat lower than normal, owing to the current weather pattems and economic
conditions.
The foregoing customer account and water use data have been used in water rate analysis that is
presented in the remainder of this section.
Water Rate Calculations
There are three steps to determining water rates. These are:
• Determine annual water rate revenue requirements
• Analyze the cost of providing service to each customer class
• Design water rates to recover costs from each customer class.
Water Rate Revenue Requirements
The 5-year financial plan was used to identify the water rate revenue required to meet financial
obligations for each fiscal year of the five-year planning period. However, as described previously,
water rates are adjusted on a calendar year basis. Water rate calculations presented herein are
based on the revenue to be generated in 2012. While total annual water rate revenues for FY 11-
12 and FY 12-13 shown in the financial plan (see Exhibit 11-5) are about$11.52 million and $12.36
THE REED GROUP, INC. PAGE 36
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
million, respectively, the revenue requirement for calendar year 2012 is $12.20 million. This is the
annual water rate revenue requirement used for water rate calculation purposes for 2012. It should
be noted that this revenue requirement is exclusive of any adjustment to water rates and revenue
needs that may occur from changes in the cost of wholesale water purchases. An adjustment to
water rates for that purpose is described later in this section.
Cost of Service Analysis
Once the annual water rate revenue requirement has been determined using the financial plan
model, the next step in the rate setting process is.to evaluate the cost of providing service. Water
rate calculations contained herein are intended to generate the level of revenue commensurate
with the revenue requirement from the City's water service customers. The manner in which each
customer is responsible for the water utility's costs is the determining factor in the cost of service
analysis.
The water utility incurs certain types of costs associated with making water service available to
customers. Other costs are incurred as a direct result of customer water usage. A cost of service
analysis is intended to allocate the costs of providing water service to customers in proportion to
the extent to which each customer causes the costs to be incurred. There are many approaches
to cost of service analysis; some are more complex than others. The approach used herein is
commensurate with the data available, the distinctions currently made between various types of
customers, the requirement to fairly and reasonably reflect differences in service provisions to
differently situated customers.
The cost allocation methodology used herein begins by assigning all costs to one of three
categories. The cost allocation process is performed with data available in the City's budget and
accounting documents. The three categories include:
• Customer costs, such as meter reading and billing, are fixed costs that tend to vary as a
function of the number of customers being served. Customer costs are allocated to
customers based on the number of accounts. That is, every customer will pay an equal
share of customer-related costs.
• Capacity costs are also fixed costs; however, these tend to vary in relation to the capacity
of the water system. Customers that place greater or lesser burdens on the capacity of
the water system should bear greater or lesser shares of these costs. The sizing of the
water system is based on the potential demand that each customer could place on the
water system. Capacity costs are allocated to customers based on the size (hydraulic
capacity) of the water meter. The hydraulic capacity reflects the potential demand that a
customer could place on the water system at any given time. A customer with a large
meter size will be assigned a large share of fixed capacity-related costs than one with a
smaller meter. Capacity costs include costs associated with the water system's capacity
including contributions to the capital program, debt service, maintenance costs, etc.
• Commodity costs are variable costs that vary with the amount of actual water use. Water
purchase costs and energy costs are two primary examples. However, in an effort to
encourage water conservation, fixed costs are frequently included in commodity
components such that a majority of costs are recovered on the basis of usage. Even
though some commodity costs are fixed, rather than variable, it is reasonable to allocate
these costs to customers on the basis of usage, rather than the capacity relationship
expressed by meter size. A significant portion of the water utility's fixed costs is recovered
through water usage charges.
THE REED GROUP, INC. PAGE 37
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
The water conservation best management practice for retail water rates (now BMP 1:4 and
formerly BMP 11), as promulgated by the CUWCC, requires that at least 70 percent of water rate
revenue be generated through usage charges. The City's current water rates generate about 87
percent of revenue from usage (commodity) charges, even though usage based revenue has
declined commensurate to reduced water demands. Maintaining the City's policy objective of
encouraging water conservation, but also recognizing that the standard established by the
CUWCC has been exceeded, the allocation of costs presented herein slightly shifts this
relationship with 85 percent of the revenue requirement allocated to the commodity component.
Based on the FY 11-12 draft budget.for the water utility, customer service costs represent about 4
percent of the annual water rate revenue requirement. This leaves 11 percent of the revenue
requirement allocated to capacity costs. In summary, the cost allocation resulted in a distribution of
costs to customer, capacity, and commodity categories at about 4 percent, 11 percent, and 85
percent, respectively.
Water Rate Design
The third step in the.rate setting process is the design of water rates to recover costs from each
customer class and generate the revenue needed for the utility. The City's water rates include both
fixed service charges and water usage rates. The calculation of each of these is described below.
Service Charges
Service charges are intended to recover the customer and capacity costs identified through the
cost of service analysis. Service charges apply to all customer water bills, regardless of the
amount of water actually used. In calculating service charges customer costs are allocated equally
to all customers and capacity costs are allocated based on meter size in relation to the hydraulic
capacity associated with the various meter sizes.
Exhibit 111-4 presents the calculation of service charges for the water rates proposed for 2012. The
monthly service charge for a standard '/,"water meter would be $6.66. This is $0.97 higher than
the current service charge of $5.69. Other service charges are also higher than current service
charges. The variation of service charges through meter sizes reflects the fact that a small portion
of water system costs are directly related to the number of customers served. A majority of fixed
costs are allocated on a capacity basis as reflected by the meter size. The changes to the service
charges across the range of meter sizes better reflects the cost of providing service to customers of
varying meter sizes. At present, this capacity relationship is not adequately expressed in the
service charges.
Water Usage Rates
Upon review of the City's current tier structure, it is recommended that.the City maintain a 4-tier
structures for single family customers, but with slight modifications to tier allocations. Under the
proposed water rates, the monthly single family water usage allocations within each tier would
change as follows:
Current Proposed
Tier Allocations Tier Allocations
Tier 1 0-9 hcf/mo. 0-8 hcf/mo.
Tier 2 10-18 hcf/mo. 9-16 hcf/mo.
Tier 3 19-24 hcf/mo. 17-24 hcf/mo.
Tier 4 >24 hcf/mo. >24 hcf/mo.
THE REED GROUP, INC. PAGE 38
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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THE REED GROUP, INC. PAGE 39
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
The revised tier allocations for single family customers are recommended for the following reasons.
• The first tier allocation of up to 8 hcf per month (about 200 gpd)is a slight reduction in the
current first tier allocation. The first tier is intended to represent indoor water need and is
generally determined by examining the winter water use characteristics of customers.
Based on water usage data about 80 percent of all single family customers use 8 hcf or
less per month during winter months. Reducing the tier allocation also makes it possible to
limit the amount of increase in the first tier rate. On an annual basis approximately 57
percent of all single family residential water bills will only have first tier water usage, even
with the reduction in the tier allocation. Also, more than two-thirds of the single family
water usage is within the first tier.
• The second tier allocation of up to 16 hcf per month (about 400 gpd) is intended to provide
a reasonable amount of water for outdoor irrigation purposes. With this tier allocation
about 72 percent of single family customer bills would remain within the first two tiers of
the rate structure during peak summer irrigation months. On an annual basis about 88
percent of the single family water bills would be within the first two tiers and about 90
percent of all single family water usage would be within the first two tiers.
• The third tier with water usage up to 24 hcf per month (about 600 gpd) is an indicator to
customers that their water use is beyond the range of typical water use, even during peak
summer months.
• The fourth tier includes all water usage in excess of 24 hcf per month (over 600 gpd) and
represents excessive usage. With this tier allocation about 9 percent of single family
customer bills would have some usage at this highest tier during peak summer irrigation
months. On an annual basis about 3.5 percent of the single family water bills would be in
the highest tier and about 4 percent of all single family water usage would be in this
highest tier.
Just as important as the tier allocations is the setting of tier rates. To maintain equity across the
customer classes, each customer class within the City has the same effective uniform water usage
rate. For multi-family, commercial, institutional, industrial, and irrigation customers within the City it
is recommended that the uniform water usage rate be adjusted to $3.24/hcf in 2012 from the
current usage rate of$3.14/hcf for 2011.
Tiered rates for single family customers have been designed such that the weighted average water
usage rate across all tiers is equal to the uniform water usage rate for other customers. To achieve
this, the rate for the first tier is lower than the uniform rate and the rates for the second, third, and
four tiers are all higher than the uniform rate. It is recommended that the rate step adjustments
(rate increase from one tier to the next)through the four tiers be adjusted as follows:
Current Proposed
Tier Steps Tier Steps
1st to 2nd Tier +16% +20%
Z 3`d Tier +28% +25%
3'd to 4t Tier +11% +30%
The proposed changes (1) help maintain lower rates for base water usage, (2) create better
uniformity in the tier structure, and (3) facilitate the City's water conservation objectives by
THE REED GROUP, INC. PAGE 40
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
increasing the rate for the highest use tier. About 90 percent of all single family water usage occurs
within the first two tiers. The overall weighted average cost per unit of single family water usage,
across all four tiers, is $3.24 per hcf. Therefore, the tier structure is in balance with the uniform rate
paid by other customer classes.
The tier structure for single family residential customers is justified on a cost basis by allocating a
portion of water conservation costs to peak usage rates. The additional revenue generated in the
third and fourth tiers (above the second tier)represents about 75 percent of the water conservation
program costs allocated to single family customers. The remaining 25 percent of water
conservation costs is reflected in base (first two tiers)water usage.
Exhibit III-5 presents tiered water usage rate calculations for single family residential customers.
Exhibit III-6 presents graphically the changes to the single family tier structure. The lower right
corner of Exhibit III-4 presents water usage rates for each customer class and associated revenue
calculations.
Exhibit 111-5
City of Petaluma -- Water Resources and Conservation
Sumary of Single Family Tiered Water Rate Calculation
Brk. Pt. (1) % Bills % Use Rate ($/tg) Rate Step
Proposed Residential Water Rate Structure
Tier 1 8 57.3% 67.9% $ 2.91
Tier 2 16 30.9% 21.8% $ 3.49 20%
Tier 3 24 8.3% 6.2% $ 4.36 25%
Tier4 3.5% 4.1% $ 5.66 30%
Weighted Average Rate--> $ 3.24
Notes:
(1) Monthly water use allocations.
THE REED GROUP, INC. PAGE 41
WATER AND WASTE WATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit 111-6
CitymfPeta|unna -VVat,rResouncesandCvnsenaUnn
Proposed Single Family Tiered Water Rate Structure (2012)
510.00
59.00 H • ~~ ~. CunnmTier Ka�s --- - - -
--
--'
5810 / —Proposed Tier Rates ----- -
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Monthly Water Use(hct)
Proposed Water Rate Schedule for 2012
Exhibit III-7 summarizes current and proposed water rate schedules. The proposed water rates
for 2012 reflect an overall 4 percent increase in revenue relative to the current water rate schedule
adopted for 2011.
Impact of Proposed Rates on Representative Customer Bills
Exhibit 111-8 summarizes the impact of the proposed water rates relative to the current water rates.
Any rate structure change will result in changes in customer bills, even when applied in a revenue
neutral situation. The opodfioimpact to any individual customer will depend on the customer class,
meter size, and actual water usage. The increase in most water bills will be smaller than the
overall average of 4 percent under the proposed rates, while others will be larger. In all cases, the
bills under the proposed water rates are intended to better reflect equity across customers, the cost
of providing service, and the City's goals for encouraging water conservation.
THE REED GROUP, INC PAGE 42
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit III-7
City of Petaluma -- Water Resources and Conservation
Current and Proposed Water Rates (1)
Current Proposed
Water Rates Water Rates
(Jan. 2011) (Jan. 2012)
Monthly Service Charges
Up to 3/4" meter $ 5.69 $ 6.66
1" meter (resid.) $ 6.84 $ 9.70
1" meter $ 7.07 $ 9.70
1 1/2" meter $ 12.40 $ 17.25
2" meter $ 19.46 $ 26.35
3" meter $ 40.19 $ 47.59
4" meter $ 54.13 $ 77.92
6" meter $ 78.19 $ 153.70
Water Usage Charge ($thct)
Single Family (3)
Tier 1 $ 2.94 $ 2.91
Tier 2 $ 3.41 $ 3.49
Tier 3 $ 4.35 $ 4.36
Tier 4 $ 4.82 $ 5.66
Other Customers (4)
All water usage $ 3.14 $ 3.24
Notes:
(1) Effective January 1 of each year.
(2) Proposed rates include rate restructuring as well as an overall
4 percent revenue increase over the current rates.
(3) Monthly tier allocations: Current Proposed
Tier 1 0-9 hcf/mo. 0-B hcflmo.
Tier 2 10-18 hcf/mo. 9-16 hcf/mo.
Tier 3 19-24 hcf/mo. 17-24 hcf/mo.
Tier 4 >24 hcf/mo. >24 hcf/mo.
(4) Includes.multi-family, commercial, institutional, industrial, and irrigation
irrigation accounts. Excludes recycled water accounts.
THE REED GROUP, INC. PAGE 43
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit III-8
City of Petaluma -- Water Resources and Conservation
Water Bill Impacts for Representative Customers
Monthly Current Proposed
Water Use Water Rates Water Rates % Change
(hcf) (Jan. 2011) (Jan. 2012) (1)
Single Family Residential
Low Use 6 $ 23.33 $ 24.12 3.4%
Typical Use 10 $ 35.56 $ 36.92 3.8%
High Use 18 $ 62.84 $ 66.58 6.0%
Very High Use 50 $ 214.26 $ 239.90 12.0%
Non-Residential
20-unit Apt. Bldg. (2" mtr.) 100 $ 333.46 $ 350.35 5.1%
Office Bldg. (2" mtr.) 120 $ 396.26 $ 415.15 4.8%
Restaurant (1" mtr.) 60 $ 195.47 $ 204.10 4.4%
Landscape Irrig. (1 1/2" mtr.) 100 $ 326.40 $ 341.25 4.5%
Notes:
(1) Proposed rates include rate restructuring as well as an overall 4 percent revenue increase over
the current rates.
Future Adjustments to Water Rates
Two automatic adjustments are proposed for the City's water rates to help cover the costs of
providing water service to customers for the next five years.
Automatic Water Rate Adjustments for Changes in SCWA Costs
The City obtains nearly all of its water supplies from the Sonoma County Water Agency. SCWA
typically increases its wholesale water rates (including the rate charged to the City) in the spring of
each year, with the rates effective in July of each year. In the spring of 2011 the rate applicable to
the City's water purchases increased by 5 percent. For FY 11-12, it is estimated that the City will
purchase about 7,285 AF of water from the SCWA. SCWA's increased water rate will result in
increased costs to the City of about $220,000 in FY 11-12. City staff has indicated that future
annual SCWA water rate increases in the range of 6 percent may be anticipated for the next five
years.
In the fall of 2008, the Governor signed into law Assembly Bill (AB) 3030. AB 3030 authdrizes the
City to adopt water rate schedules that authorize automatic adjustments that pass through
increases in wholesale charges for water and/or inflation. It is recommended that the City adopt
procedures for implementing automatic adjustments to water rates based on SCWA water
charges, as allowed by AB 3030. Automatic adjustment procedures may be adopted for up to five
years, and then need to be re-approved.
Exhibit III-8 includes a worksheet that could be used to calculate the automatic rate adjustments
for changes in SCWA water charges on an annual basis. The worksheet shows the calculation for
hypothetical 6 percent water rate increase by SCWA for FY 12-13. The worksheet, however,
would be used for any future changes in SCWA's wholesale water rate to the City. The adjustment
to the City's water rates would only affect water usage rates. Monthly service charges would not
THE REED GROUP, INC. PAGE 44
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
be impacted. In the example provided, a 6 percent increase in SCWA's water rate to the City
would result in a 2.7 percent increase in the City's water usage charge to customers in FY 12-13.
In effect, any change in the rates charged by SCWA for wholesale water purchases could be
reflected in the City's water rates as soon at SCWA rates go into effect. This would help keep the
water utility financially whole. In addition, the automatic adjustment procedure allows the 5-year
study and rate hearing process to address the annual adjustment of water rates in response to
SCWA rate changes. It also avoids the need to anticipate SCWA's future rate actions and
attempts to allow the City's rate to respond to appropriately to SCWA rate changes.
Exhibit III-9
City of Petaluma --Water Resources and Conservation
Sample Calculation of Automatic Rate Adjustment for FY 12-13 Changes in SCWA Water Charges (1)
SCWA Water Charges
Petaluma Aqueduct
Current Rate (FY 11-12) $ 634.11 (AF
Estimated Future Rate (FY 12-13) $ 672.15 /AF
Change $ 38.04 /AF
6.0%
Estimated SCWA Water Purchases (annual)
SCWA Water Purchase Volume 7,532 AF
Impact of SCWA Cost Change $ 286,506
Petaluma Water Usage Rate Impact
Est.Annual Water Usage Revenue (2) $ 10,661,000
Impact of SCWA Cost Change 2.7%
City's
Proposed 2012
Water Usage Pass-Through
Petaluma Water Usage Rates Rates Adjustment(3)
Single Family Residential
Tier 1 $ 2.91 /hcf $ 0.08 /hcf
Tier 2 $ 3.49 (hcf $ 0.09 /hcf
Tier 3 $ 4.36 /hcf $ 0.12 /hcf
Tier 4 $ 5.66 /hcf $ 0.15 /hcf
MF, Comm., Inst., Indus, & Irrig. $ 3.24 /hcf $ 0.09 /hcf
Notes:
(1) Assumes the City adopts the proposed 2012 water rates,which is then followed by a SCWA FY 12-13
rate increase of 6 percent.
(2) Based on current usage rates and estimated annual water sales.
(3) Pass through adjustments would be added to the then current water usage rates.
Legend:
Data input fields-->
Resulting rate adjustments --> Bold Italics
THE REED GROUP, INC. PAGE 45
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
The City is required to go through the formal water rate setting process, including 45-day
notification to all customers, when adopting the pass-through formula. It is recommended that this
be included in the action to approve the proposed new water rate structure.
Automatic Water Rate Adjustments for General Inflation
Wholesale water costs represent the single largest operating cost of the water utility, and currently
represents about 47 percent of operating costs and about 43 percent of current water rate
revenues. While the automatic adjustment for wholesale water costs will provide a means for
recovering SCWA water purchase costs, other cost changes will necessitate periodic increases in
the City's water rates.
At present (and with the SCWA automatic adjustment), the City's water utility is financially stable.
To maintain this stability, it is recommended that the City annually adjust water rate based on the
changes in general inflation. While changes in water utility costs are not directly aligned with
changes in general inflation, this method of indexing water rates should be adequate for several
years(periodic review of the utility's financial situation is recommended).
Consistent with the requirements of AB 3030, which allows for inflationary adjustments to water
and wastewater rates, the City should adopt a formula for annually adjusting water rates (in
January of each year) based on the change in the San Francisco consumer price index (CPI).
This indexing would begin in January 2013. The financial plan presented in Section II of this report
reflects this indexing recommendation. Like the automatic adjustment procedure for SCWA cost
increases, the inflationary automatic adjustment procedure may be adopted for up to five years;
and then need to be re-approved.
THE REED GROUP,INC. PAGE 46
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
II . Wastewater4Rates m3 .
This section of the report describes and presents recommendations for updating the City's
wastewater rates to provide sufficient revenues for the utility's ongoing operations, debt service
obligations, and capital improvement needs.
The annual wastewater rate revenue requirement was presented in Section II of the report as a
result of the development of the 5-year financial plan. Annual wastewater rate revenue
requirements for 2012 were used to perform rate analyses and to develop wastewater rate
schedules presented herein. They reflect a 5 percent increase, overall, relative to the current
(2011)wastewater rates.
The wastewater rate analyses presented herein include changes to improve equity across
customer classes, reflect the cost of providing service, and continue to encourage water
conservation.
Existing Wastewater Rates
Exhibit IV-1, on the following page, summarizes the current wastewater rates of the City's
wastewater utility. Wastewater rates were last adjusted. in January 2011. The rate schedule
shown in Exhibit IV-1, as well as all rate schedules presented in this report, presents rates on a
monthly basis. From 2007 through 2010, the City had increased wastewater rates by 13 percent
each January. In 2010, a previously approved 13 percent increase was reduced to 9 percent.
Single family and multi-family residential customers are subject to fixed monthly service charges
plus a usage charge based on winter water usage. Each year, the City monitors water usage
during the winter (low use) months and then determines the minimum usage for each residential
customer. Winter water usage is assumed to be primarily indoor water usage. In July of each
year, the City calculates a new wastewater bill amount for each residential customer based on the
prior winter water use. In 2010, because of a cool and wet spring, water use from April/May billing
cycles were also included in the winter water use analysis. Winter water use for 2011 has returned
to a level similar to 2009.
Non-residential wastewater customers are subject to usage-based rates utilizing actual water
usage within each billing cycle. Non-residential customers are assigned to low, medium, or high
strength category depending on the type of business and the strength of wastewater generated
using standard factors for biochemical oxygen demand (BOD) and total suspended solids (TSS).
By relating wastewater rates to the strength characteristics of wastewater produced by customers
the rates more equitably reflect the costs of providing service. The rates are determined based on •
standard strength characteristics for each category. Non-residential wastewater rates apply to
actual water usage. A fixed service charge is also included in non-residential wastewater bills.
The City provides wastewater service to about 30 customers that do not receive water service.
Flat wastewater rates have been established for these customers based on average residential
usage. The City also provides wastewater treatment service to Penngrove. Wastewater charges
are collected through the county, with the rate based on the flat rates for residential customers.
There are about 514 equivalent single family dwelling units (ESFDs) in Penngrove currently
connected to the City system.
THE REED GROUP, INC. PAGE 47
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit IV-1
City of Petaluma -- Water Resources and Conservation
Current Wastewater Rates (1)
Current
Wastewater
Rates
(Jan. 2011)
Monthly Service Charges
Single Family Residential $ 16.19
Unmetered $ 78.57
Multi-Family Resid. (per DU) $ 16.19
Non-Residential
Low Strength $ 16.19
Medium Strength $ 16.19
High Strength $ 16.19
Metered Industrial (2) $ 16.19
Wastewater Usage Charge ($/hcf)
Single Family Residential $ 7.67
Multi-Family Residential $ 7.67
Non-Residential
Low Strength $ 7.64
Medium Strength $ 9.09
High Strength $ 11.76
Metered Industrial (2)
Flow ($/hcf) $ 5.69
BOD ($/Ib) $ 0.56
TSS ($/Ib) $ 0.60
Notes:
(1) Effective January 1, 2011.
(2) Includes customers for which wastewater flows are sampled
and tested to determine appropriate charges.
The City also provides wastewater service to six large industrial customers for which wastewater is
measured and sampled to determine loading characteristics. Monthly wastewater bills are based
on actual wastewater flow and loading for each customer. The City provided data on actual flow
and loadings by industrial customers. This data is used in rate calculations presented herein.
Approximately 24 percent of wastewater rate revenue is derived from the monthly service charges.
The service charge is the same for all residential dwellings (including multi-family dwelling units)as
well as all non-residential customers, including industrial customers, regardless of demand or
potential demand on the wastewater system (with the exception of unmetered service charges
that, in effect, include a usage charge). The equity of the current rate structure could be improved
if service charges reflect the.capacity associated with each connection. The issue is illustrated with
the following statistics:
THE REED GROUP, INC. PAGE 48
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
• Residential customers (including Penngrove) currently generate 72 percent of the
wastewater flow, 53 percent of the BOD loading and 71 percent of the TSS loading, but
generate 77 percent of wastewater rate revenues.
• Non-residential customers currently generate 17 percent of the wastewater flow, 25
percent of the BOD loading and 22 percent of the TSS loading, but generate 14 percent of
wastewater rate revenues.
• Industrial customers currently generate 11 percent of the wastewater flow, 22 percent of
the BOD loading and 7 percent of the TSS loading, but generate 8 percent of wastewater
rate revenues.
A more standard way to assess service charges is to relate them to the size of the water meter
(like is done with water rates). This approach, common among municipal utilities, provides a
means of allocating capacity related costs to the potential demand each customer can place on the
wastewater system.
Rate Setting Objectives
The development of wastewater rate recommendations has been guided by several rate-setting
objectives. These objectives were reviewed with City staff and include:
• Rates should generate sufficient revenues to meet the utility's financial obligations related
to operations, debt service, capital improvement needs, and maintenance of prudent
reserves
• Rates should be equitable by reflecting the cost of providing service to each customer
class
• Rates should continue to encourage water conservation and efficient water use
• Rates should be held as low as possible, while still meeting financial obligations.
These objectives guided the review of and recommendations on wastewater rates and rate
structures.
Customer Account Data and Wastewater Flow and Loading Estimates
Wastewater rate calculations are based on a number of factors related to the City's customers.
Factors include the number of customers, customer classes, water usage and wastewater flows,
and strength characteristics of wastewater as determined by BOD and TSS. Exhibit IV-2
summarizes customer account and water usage data obtained from the City's utility billing system,
as well as estimates of resulting wastewater flow and loading characteristics.
Residential wastewater flows are estimated based on water usage during winter months. Non-
residential wastewater flows are based on actual water usage, as most non-residential irrigation is
separately metered. There are about 312 multi-family residential wastewater accounts comprised
of about 5,081 dwelling units. Average winter water use for single family dwellings is about 5.4 hcf
per month (about 136 gpd). The average winter water use for multi-family dwellings is about 4.5
hcf(about 113 gpd), or about 83 percent of that of single family residences.
THE REED GROUP, INC. PAGE 49
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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THE REED GROUP,INC. PAGE 50
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Residential flat rate customers (not receiving water service), including the Penngrove area, are
assumed to have higher winter water usage than customers receiving water service. This is
appropriate for rate setting purposes for two reasons. First, flat rate customers do not have the
same financial incentive to reduce winter water use, and therefore can be expected to have higher
water demands than those not on flat rates. Second, current winter water use patterns are lower
than historical norms for a variety of reasons and a rebound is indicated and likely to continue.
Wastewater bills for customers with usage-based rates will self-adjust based on changes in winter
water usage patterns. That self-adjustment mechanism doesn't exist for flat rate customers.
Winter water use of 8 hcf per month(about 200 gpd)is assumed for flat rate customers.
Non-residential wastewater customers are classified into user groups with similar wastewater
strength characteristics of BOD and TSS. This rate study did not include a review of the specific
assignment of each non-residential customer into the low, medium, or high strength categories.
Representative BOD and TSS strength concentrations utilized in a previous rate study for the City
were also used in this study. These factors had been based on guidelines published by the
California State Water Resources Control Board (SWRCB)and other sources.
Wastewater Rate Calculations
There are three steps to determining wastewater rates. These are:
• Determine annual wastewater rate revenue requirements
• Analyze the cost of providing service to each customer class
• Design wastewater rates to recover costs from each customer class.
Water Reclamation Rate Revenue Requirements
The 5-year financial plan was used to identify the wastewater rate revenue requirements for each
fiscal year of the five-year planning period. However, as described previously, wastewater rates
are adjusted on a calendar year basis. Wastewater rate calculations presented herein are based
on the revenue to be generated in 2012 and reflect a recommended overall 5 percent increase
from the current wastewater rates. While total annual wastewater rate revenues for FY 11-12 and
FY 12-13 shown in the financial plan (see Exhibit 11-7) are about $20.61 million and $21.64 million,
respectively, the revenue needed to meet financial obligations for calendar year 2012 is about
$21.174 million. This is the annual wastewater rate revenue requirement used for wastewater rate
calculation purposes for 2012.
Cost of Service Analysis
Once the annual wastewater rate revenue requirement has been determined, the next step in the
rate setting process is to evaluate the cost of providing service. Wastewater rate calculations
contained herein are intended to generate the level of revenue commensurate with the revenue
requirement from the City's wastewater service customers. This includes the City's general
wastewater customers, industrial customers, and customers in Penngrove. The manner in which
each customer is responsible for the wastewater utility's costs is the determining factor in the cost
of service analysis.
To develop equitable wastewater rates, the revenue requirement is allocated to various customer
classifications according to the services provided and the demands placed on the wastewater
system. The City has allocated a majority of wastewater costs on the basis of water usage
THE REED GROUP, INC. PAGE 51
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
(wastewater flows), BOD, and TSS, resulting in usage charges generating about 76 percent of
wastewater rate revenues. Fixed service charges account for about 24 percent of wastewater
revenues. This revenue mix is consistent with the City's water conservation objective, but also
creates a certain level of revenue volatility and uncertainty as water demands can vary from year to
year. As an example, low water use in the winter and spring of 2010 resulted in lower winter water
use being used to calculate residential wastewater bills. The lower use resulted in a reduction in
FY 10-11 wastewater revenue below what had been previously forecast.
Exhibit IV-3 summarizes how the 2012 wastewater rate revenue requirement is allocated to fixed
charges as well as to flow, BOD, and TSS components that end up in usage charges. Once total
costs are allocated, unit costs were determined by dividing the total cost for each component by
the number of units identified in Exhibit IV-2. These unit costs become the basis for then assigning
costs to customer classes.
The cost of service analysis for wastewater is more complicated than water rate analysis in that
treatment costs are separated from collection system costs. Collection system costs are allocated
entirely on the basis of flow, whereas treatment costs are allocated on the basis of flow, BOD, and
TSS.
While the City's budget structure does lend itself to the segregation of costs into collection and
treatment components, a more challenging part of the analysis is the allocation of treatment costs
to flow, BOD and TSS parameters. Wastewater rate analyses performed in 2002 by the City
included factors for allocating both operating and maintenance costs and capital costs for rate-
setting purposes. This information, as well as standard estimating practices used in rate setting,
has been used to allocate costs across flow, BOD, and TSS parameters. Wastewater treatment
operating and maintenance costs have been allocated 60 percent based on flow, 20 percent based
on BOD, and 20 percent based on TSS. While most of the capital investment is in treatment
facilities, the wastewater system also includes significant investment in collection (including
pumping)and disposal facilities. For this reason, capital costs were allocated 70 percent based on
flow, 15 percent based on BOD, and 15 percent based on TSS. We believe these allocations are
reasonable, and are within the ranges found in other wastewater rate analyses.
Unit costs are applied to the annual wastewater flows, as well as BOD and TSS loadings
associated with each customer class to arrive at the allocation of total costs to each customer
class. Exhibit IV-4 presents the allocation of costs to each user class.
Exhibit IV-5 presents the final wastewater user rates and charges recommended for each
customer class. Rates for residential customers include a fixed service charge for each dwelling
unit, plus a usage charge to be applied to winter water usage. Unmetered (sewer only) residential
accounts will have a flat monthly wastewater charge based on estimated average winter water
usage. Non-residential (low, medium, and high)customers are subject to a monthly service charge
and wastewater usage rates applied to actual monthly water usage. Metered industrial customers
are subject to a monthly fixed service charge as well as wastewater usage charges based on
actual sewer flows and individual strength characteristics.
THE REED GROUP, INC. PAGE 52
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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PAGE 53
THE REED GROUP, INC.
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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THE REED GROUP, INC. PAGE 54
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
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THE REED GROUP, INC. PAGE 55
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Wastewater Rate Design
It is recommended that the wastewater rate structure be modified in one important way. Rather
than charging all wastewater customers (and residential dwelling units) the same monthly service
charge, it is recommended that monthly service charges for non-residential customers be related to
the size of the water meter. This allows the charge to each customer to reflect the potential
demand that can be placed on the wastewater system. The current approach is not balanced, and
poses a disproportionate burden on residential customers. In addition, it is recommended that the
service charge for multi-family dwellings be smaller than for single family dwellings. Average winter
water use•for multi-family dwellings is about 83 percent of the winter water use for single family
dwellings. Because multi-family dwellings place a smaller demand on the wastewater system, the
capacity portion of the service charge should be correspondingly smaller.
Monthly service charges for industrial customers are also currently identical to residential
customers. It is proposed that fixed monthly service charges for industrial customers be related to
flow capacity associated with wastewater flow meters. A charge is calculated for various flow
meter sizes based on capacity considerations.
Customers receiving wastewater service, but not water service, from the City (including customers
in Penngrove) should continue to be charged for service based on a flat monthly service charge.
• The sewer-only residential wastewater rate for single family customers was determined to be
$79.55 per month based on estimated winter water use among flat rate customers.
Proposed Wastewater Rate Schedule for 2012
Exhibit IV-6 summarizes current wastewater rates for 2011, as well as the proposed wastewater
rate schedule for 2012. The proposed wastewater rates are, overall, 5 percent higher than the
current rates. That is, the rate structure taken as a whole is expected to generate about 5 percent
greater revenue than the current rate structure.
Monthly service charges for all residential customers and non-residential customers with 3/C meters
will increase moderately under the proposed rates. Service charges for non-residential customers
with larger meters will increase in relation to capacity provided by the meter. The increases are
significant, but justified based on cost of service principals and rate-setting practices in the industry.
Wastewater usage rates increase by smaller percentages under the rate proposal. Small
increases in the usage rates may more than offset larger service charge increases for many non-
residential customers.
Impact of Proposed Rates on Representative Customer Bills
Exhibit IV-7 summarizes the impact of the proposed wastewater rates relative to the current
wastewater rates for a variety of typical customers. Most customers (primarily residential
customers) will have smaller bill increases than the overall average increase of 5 percent while
other customers (primarily non-residential and industrial) will have larger bill increases than the
overall 5 percent. The proposed wastewater rate structure improves the equity between customer
classes and provides an improved distribution of costs across customers and customer classes.
THE REED GROUP, INC. PAGE 56
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit IV-6
City of Petaluma --Water Resources and Conservation
Table 3. Current and Proposed Wastewater Rates (1)
Current Proposed
Wastewater Wastewater
Rates Rates
(Jan. 2011) (Jan. 2012)
Monthly Service Charge
Single Family Residential $ 16.19 $ 17.15
Unmetered $ 78.57 $ 79.55
Multi-Family Resid. (per DU) $ 16.19 $ 14.94
Non-Residential
Up to 3/4" meter $ 16.19 $ 17.15
1" meter $ 16.19 $ 25.88
1 1/2" meter $ 16.19 $ 47.52
2" meter $ 16.19 $ 73.59
3" meter $ 16.19 $ 134.47
4" meter $ 16.19 $ 221.41
6" meter $ 16.19 $ 438.57
Metered Industrial
2" Ultrasonic Meter $ 16.19 $ 199.64
10" Ultrasonic Meter $ 16.19 $ 438.61
2" Magnetic Meter $ 16.19 $ 134.47
3" Magnetic Meter $ 16.19 $ 286.54
4" Magnetic Meter $ 16.19 $ 438.61
6" Magnetic Meter $ 16.19 $ 1,090.36
Wastewater Usage Charge ($/hcf)
Single Family Residential $ 7.67 $ 7.78
Multi-Family Residential (per DU) $ 7.67 $ 7.78
Non-Residential
Low Strength $ 7.64 $ 7.62
Medium Strength $ 9.09 $ 9.35
High Strength $ 11.76 $ 12.16
Metered Industrial (2)
Flow ($/hcf) $ 5.69 $ 6.06
BOD ($/lb) $ 0.56 $ 0.58
TSS ($/lb) $ 0.60 $ 0.67
Notes:
(1) Effective January 1 of each year.
(2) Includes customers for which wastewater flows are sampled and tested
to determine appropriate charges.
(3) Proposed rates include rate restructuring as well as an overall 5
percent revenue increase over the current rates.
THE REED GROUP, INC. PAGE 57
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit IV-7
City of Petaluma -- Water Resources and Conservation
Wastewater Bill Impacts for Representative Customers
Current Proposed
Monthly Wastewater Wastewater
Sewer Flow Rates Rates % Change
(hcf) (Jan. 2011) (Jan. 2012) (1)
Single Family Residential
Low Use 4 $ 46.87 $ 48.27 3.0%
Typical Use 6 $ 62.21 $ 63.83 2.6%
High Use 10 $ 92.89 $ 94.95 2.2%
Very High Use 15 $ 131.24 $ 133.85 2.0%
Non-Residential
20-Unit Apartment Building 100 $ 1,090.80 $ 1,076.80 -1.3%
Office Bldg. (2" mtr., low strength) 120 $ 932.99 $ 987.99 5.9%
Restaurant (1" mtr., high strength) 60 $ 721.79 $ 755.48 4.7%
Metered Industrial
Small Industrial Service Charge $ 16.19 $ 286.54
700 hcf $ 3,983.00 $ 4,242.00
1,100 lbs BOD $ 616.00 $ 638.00
650 lbs TSS $ 390.00 $ 435.50
$ 5,005.19 $ 5,602.04 11.9%
Large Industrial Service Charge $ 16.19 $ 438.61
4,000 hcf $ 22,760.00 $ 24,240.00
13,000 lbs BOD $ 7,280.00 $ 7,540.00
6,000 lbs TSS $ 3,600.00 $ 4,020.00
$ 33,656.19 $ 36,238.61 7.7%
Notes:
(1) Proposed rates include rate restructuring as well as an overall 5 percent revenue increase over
the current rates.
Single family wastewater customers will have smaller bill increases than the overall 5 percent
under the proposed wastewater rates. Typical single family residential wastewater bills will
increase by 2 to 3 percent. Most multi-family residential customers will have bill decreases due to
the reduction in the multi-family service charge. These results stem from the more equitable
allocation of fixed charges to customers (based on capacity). Industrial customers as well as non-
residential customers with large meter sizes will be impacted by the change in service charge
calculation. The City's six industrial customers are estimated to see annual cost changes
averaging about 8 percent as a result of the proposed wastewater rates. All wastewater rates are
justified on a cost of service basis.
Future Adjustments to Wastewater Rates
An annual automatic adjustment is proposed for the City's wastewater rates to help cover the costs
of providing wastewater service to customers for the next five years.
THE REED GROUP, INC. PAGE 58
WATER.AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Automatic Wastewater Rate Adjustments for General Inflation
Similar to the water utility, an annual adjustment to the City's wastewater rate based on changes in
general inflation is recommended beginning in January 2013. Based on financial plan analyses
presented in Section II, following the rate adjustments in 2012 it appears that the City should be
able to limit annual rate increases to the rate of general inflation, plus 1.5 percent, and meet
financial obligations for operations and maintenance, debt service, the current capital improvement
program, and maintenance of financial reserves.
Indexing wastewater rates to changes in general inflation plus 1.5 percent should be adequate for
several years (after which a review of the utility's financial situation would again be warranted).
Minimum annual rate increases of at least 2.0 percent are recommended. Therefore, if the San
Francisco CPI is 0 percent, then the annual adjustment would be 2.0 percent.
THE REED GROUP, INC. PAGE 59