As part of its yearly process of reviewing the financial condition of the utility operations, staff recommends that the City Council adopt annual changes in utility rates. As a result of recommendations for FY 2000/01, monthly costs associated with refuse collection, water, and sewer services for an average residential customer would increase by 4.8% overall. This represents monthly increases to the average residential customer of $1.12 for sewer, $0.75 for water and $0.71 for refuse collection services, yielding an average monthly residential utility bill of approximately $56.20 at the new rates.

Recommended changes are as follows:

Sewer Usage 7.2 %

Water 5.5 %

Refuse Collection 3.0 %

It is important to note that even with the rate changes recommended above, Sunnyvale residents enjoy utility rates that are 33% lower than the average of surrounding communities (see Attachment 1). This amounts to an annual savings of approximately $331 per household.

Rates would be effective on July 1, 2000.

The recommended rates are required in order to maintain the sound financial condition of the utility enterprises.

Public contact is provided via publication and posting of the City Council Agenda. A utility bill stuffer announcing the date of the Utility Rate Hearing was included in the utility bills sent out between February 14, 2000 and April 11, 2000. Reports to Council are also available in the Sunnyvale Library and on the City’s Website. Once the rates have been adopted, an insert specifying the utility rate changes will be enclosed in every utility bill.

Staff recommends that City Council adopt the attached resolution establishing the aforementioned water, refuse and sewer rates effective July 1, 2000.

Sunnyvale utility rates are based entirely on the City’s costs for operating and maintaining its water, sewer and refuse facilities and services. Each of the City’s utilities is operated as an independent enterprise, and all expenses and revenues for each service are accounted for separately. No tax revenues are used to cover the costs of utility services, nor are any revenues from water, sewer or refuse fees used to support other City programs or services not related to utilities. It is important to note that the practice of long term planning and the use of a rate stabilization fund have enabled the City of Sunnyvale to maintain utility rates at the lowest possible level by spreading the effects of anticipated operational and infrastructure costs over the entire 20 years. The rate stabilization fund enables each of the utility funds to maintain a fairly consistent pattern of rate increases over the entire 20 years rather than experiencing volatile swings in rates which would occur due to unanticipated hikes in cost in a particular year.

Each year as part of the budget process, staff analyzes the current condition of and long-term outlook for the Water, Sewer and Refuse Funds. These analyses are referred to as the 10 and 20 Year Resource Allocation Plans. They include a review of available fund balances, state and federal environmental requirements, anticipated capital infrastructure requirements and operational costs, and a detailed inspection of significant expenditure areas (i.e. the anticipated cost of purchased water, forthcoming regulations related to refuse disposal, sewer discharge, etc.). The results lead to the rate recommendations made to the City Council, in that these rates will generate the revenues necessary to meet planned expenditures. The City attempts to keep utility rates as stable as possible while maintaining high quality services through long-term planning. Only rates are being set at this time. The full expenditure budgets for the Water, Sewer and Refuse Funds will be subject to Council review and approval as part of the budget process.

As a rule, rate increases follow inflationary patterns, although at times, other factors such as water and fuel costs increasing at a rate greater than inflation may cause rate increases to vary from the pattern. The rate change recommended for refuse is actually 1% lower than anticipated during last year’s Resource Allocation Plan analyses due primarily to the cost savings realized from the new SMaRT Stationâ contract.

Sunnyvale Municipal Code sections 8.16.120 (Solid Waste), 12.16.020 (Sewer) and 12.24.010 (Water) authorize the City Council to establish by resolution fees and charges based on cost influencing factors. Policy 7.1B.10c of the General Plan’s Fiscal Sub-Element states that enterprise costs shall be fully offset by user charges and fees derived from enterprise activity.

The City Charter provides for the establishment of various funds. The Council chose to combine both the Water and Sewer Funds into an overall Utilities Fund at the time it adopted the FY 1985/86 budget. As part of the budget strategy recommended in the FY 1991/92 Ten-Year Resource Allocation Plan, City Council also included the Refuse Fund as part of the Utilities Fund. For accounting and rate setting purposes, separate sub-funds have been established. SMaRT Station activities have been organized into a separate fund to improve further data analysis related to refuse activities.

The combined utility fund approach is used for purposes of budget discussion and presentation only. Rates are based on the enterprise activities of each individual utility. State law prohibits rates that over the long-term generate revenues that exceed the cost of providing services and cross subsidies of funds are not permitted.

The Utilities Fund maintains balances that are adequate to fund operating service levels, contingencies and capital improvements over a 20-year time frame. This approach, which emphasizes long-term planning and appropriate allocations to contingencies/reserves, has allowed the City to minimize and smooth the impact of rate increases.

The recycled water project is a project funded jointly by the Water and Sewer Funds, since both utilities benefit from the project. On April 1, 1999 the City Water Pollution Control Plant (WPCP) started producing and delivering recycled water. The cost to produce this water was higher than planned due to a much greater demand than anticipated. The current cost to make recycled water is more expensive than the current cost to treat the water to be discharged. However, due to the National Pollutant Discharge Elimination System (NPDES) permit limitations on the amount of allowable discharge, production of recycled water is the most effective alternative. The Water utility benefits by having another source of water to offset the increasingly more expensive potable water supply and the increasing demand for water. The Sewer utility benefits by reducing the discharges to the San Francisco Bay, and reducing future operational costs related to higher levels of discharge. Until this year the Water utility has funded the capital costs of the recycled water project. However, due to the benefits reaped by the Sewer utility fund through the reduction in discharge to the bay, the Sewer utility also made a contribution towards the project during Fiscal Year 1999/00. The Sewer Fund bears the operating cost of recycled water production while the Water Fund bears the cost of the distribution of the water. A small portion of the costs incurred by the Water Fund is offset through savings obtained by a reduction in the amount of purchased water.

The first year of production was very successful, with 918 acre feet of recycled water being delivered (4% of total water used). With increasing water rates and increased expansion of the distribution system, we expect the demand for recycled water to increase, further decreasing the amount of discharge into the bay.

The Resource Allocation Plan includes capital improvements that will improve the tertiary treatment capability of the plant and make the recycled water operation more cost effective and flexible in future years. Construction this year of a 2 million gallon storage tank, a new pump station, improvements to the existing pump station and the extension of recycled pipeline will allow operations to meet increased demand and service the additional water customers. These improvements will also allow for the production of recycled water in a more cost-effective "batch and store" process. As mentioned earlier, a one-time contribution of $2.61 million has been made from the Sewer Fund to the Water Fund to more equitably cover the cost of the project.

These capital improvements relate to federal requirements being implemented by the state. The relationship of recycled water distribution to the long-term goals of the City has been explained below in the Water Fund section.

Water rates increased by 18% in FY 1999/00. The 1999/00 Resource Allocation Plan (RAP) included planned increases of 4.0% for the balance of the 20-year planning period. However, last year’s water rate analysis noted that both of the City’s wholesale water suppliers were discussing increases to their charges for water which would result in increased water costs in the future.

The City’s wholesalers, San Francisco Water Department (SFWD/Hetch-Hetchy) and Santa Clara Valley Water District (SCVWD) have announced 3.8% and 7% increases, respectively, in the prices they will charge for water in FY 2000/01. As a result, the FY 2000/01 Water Revenue Fund Balance Analysis (Attachment 3) reflects a recommended rate increase of 5.5% for Fiscal Years 2000/01 and 2001/02. It is anticipated that purchased water costs will continue to increase over the next five years. All known increases have been figured into the 20-year plan, however, our rates are dependent on the rates charged by our wholesale suppliers and historical experience reflects a high probability of unanticipated increases.

Sunnyvale water fees are based on a tiering model where higher volumes of water are charged at higher rates. Attachment 1, Monthly Utility Bill Comparison, shows that even with the proposed increases water rates are the lowest of comparable neighboring cities, with the exception of Milpitas. Further, note that Attachment 4 compares Sunnyvale’s proposed rates with current rates in the other cities because information on proposed rates in other cities was unavailable at the time this report was prepared. Because the same wholesalers provide water to all of the jurisdictions surveyed, it is likely that the wholesale cost increase will soon be seen in sizable water rate increases by other jurisdictions.

Currently, the City is paying San Francisco Water Department $371 and Santa Clara Valley Water District $355 per acre-foot of water. The forecast anticipates a cost for FY 2000/01 of $389 per acre-foot for SFWD water (plus $213,000 in metering charges for water sources) and $380 per acre-foot for water purchased from SCVWD. These increases in the cost of purchased water are due to capital improvements needed by both water suppliers. A significant portion (75%) of the Water Fund’s expenditure budget is the cost of purchased water. The City’s water usage from providers has been projected over the next ten years to optimize the use of the least expensive sources of water within the terms of the contracts.

The financial plan assumes significant increases in the cost of purchased water from SFWD and more moderate increases from SCVWD over the next five years based on the projections provided by each supplier. Neither SFWD or SCVWD will provide projections beyond the next five years, nor will either entity guarantee that all potential increases have been accounted for. The potential for costly water treatment requirements continues to exist, pending finalization of new drinking water quality regulations. Any significant changes in water quality regulation will increase the charges to us from SFWD and SCVWD and therefore affect the rates in future years. Additionally, the 75-year old SFWD infrastructure has been identified to need $2.5 billion in capital improvements to restore the reliability of the SFWD system. These improvements are not fully funded or scheduled at this time, and as these improvements are completed, there will be additional significant impacts on the wholesale water rates.

Other noteworthy issues affecting the Water Fund, which have influenced rate-setting recommendations, are the City’s capital and infrastructure projects. As mentioned earlier, one of the major projects currently underway is the Water Reclamation Project. Currently, recycled water is available to Baylands Park, the Municipal Golf Course, and 54 businesses in the Moffett Industrial Park. With the completion of Phase II, more areas in the Moffett Industrial Park, Highway 237 landscaping, Fair Oaks Park, Encinal Park, Baylands Park and the Municipal Golf Course will also be receiving recycled water. The water reuse project will be able to deliver more than two million gallons a day for landscape irrigation and industrial uses when the system is completed.

The FY 2000/01 financial plan also reflects efforts to fund a small portion of Phase II of the Long-Range Infrastructure Plan. These initial efforts represent immediate renovation and replacement needs of 6" and 24" water mains at various locations throughout the City.

Sewer rates increased 3.0% for 1999/00. The 1999/00 RAP planned increases of 3.0% for Fiscal Years 2000/01 and 2001/02, and increases of 4.0% for the remainder of the 20-year planning period.

The Sewer Revenue Fund Balance Analysis (Attachment 7) reflects the recommendation that sewer charges increase by 7.2% for Fiscal Year 2000/01. This year’s RAP shows recommended increases of 4.0% for the remainder of the 20-year planning period. Again, recommended rates reflect revised estimates regarding improvements to Water Pollution Control Plant (WPCP) facilities and enhanced sewage treatment efforts. The cost of chemicals used in the treatment process has increased dramatically over the past year, increasing the overall cost of operations. Additionally, the FY 2000/01 financial plan reflects initial efforts to fund a small portion of Phase II of the Long Range Infrastructure Plan addressing the immediate renovation and replacement needs at the WPCP. The cost of the emergency repairs required by the Borregas sewer trunk line and the construction of the new Fair Oaks interceptor sewer were also factored into the fund’s financial plan.

As shown on the Refuse Fund Balance Sheet Analysis (Attachment 5), the overall recommended increase in refuse rates is reduced to 3.0% for FY 2000/01. Over the long term, the Fiscal Year 2000/01 RAP anticipates rate increases of 3.5% for Fiscal Year 2001/02, and 4% for the balance of the planning period.

Attachment 6 shows the comparative rate position of Sunnyvale and other cities for various levels of refuse collection service. Attachment 1 (Monthly Utility Bill Comparisons) demonstrates that Sunnyvale’s rates remain among the lowest in the area. It is important to remember when comparing surveyed agencies that many do not have garbage rates based on the cost of service to each class of customer, frequently reducing actual rates to residential customers by having higher rates for commercial and industrial customers. In addition, Santa Clara does not reflect a true comparison. In that city, there is separate rubbish and garbage pick-up. Garbage services are billed but that city’s General Fund supports rubbish services.

The refuse collection rate structure remains largely unchanged from the current structure. The recommended rates do contain two modest changes intended to better align charges with the City’s cost of providing service.

• Debris box rates (for open-topped containers of 15, 20, and 30 cubic yards) are recalculated to reflect the varying densities of the materials typically collected by each container size. A study conducted by the Solid Waste Program staff found that refuse densities for 30 cubic yard boxes are, on average, significantly lower than those for 15 and 20 cubic yard boxes. This is because the smaller boxes are more often used for heavy construction wastes such as concrete. Adjusting the rates to reflect this fact lowers the rates charged for the 30 cubic yard size relative to the two smaller box sizes. Also added to the rate structure is a new category for an 8 cubic yard "rock box." This will allow Specialty to respond to customer demand for these small debris boxes for those customers who generate very dense loads of dirt, concrete, and the like.
• A monthly bin rental fee has been implemented for customers utilizing the City’s cardboard collection service. Customers presently receive cardboard collection free of any charges. This has led some to oversubscribe to service, thus reducing the efficiency of the collection routes when measured on a "pounds per stop" basis. Although the monthly bin rental charge is a minimal fee, any charge, no matter how small, will help customers use the service more efficiently.

In the prior 20-Year Plan, it was expected that City of Sunnyvale customers would generate 118,355 tons of refuse per year which would be delivered to the SMaRT Station. The current plan is updated to reflect recent delivery history and anticipates 118,654 tons in Fiscal Year 2000/01, an increase of 0.2%. An additional 13,187 tons of residential yard waste is projected to be collected and processed at the SMaRT Station for composting and mulch. The two largest influences on rates for 2000/01 and beyond are:

• A decrease in the pricing of the contract for operation of the Sunnyvale Materials Recovery and Transfer (SMaRT) Station. The RFP for operation of the SMaRT Station has yielded a new contractor at a significantly lower cost than the existing, budgeted contract price. On April 11, 2000, the City Council awarded the SMaRT operations contract to GreenTeam/Zanker. As a result, the Refuse Fund will achieve bottom line savings of approximately $1,650,000 per year.
  
• Inflation-driven increases in the contractor payment that the City pays to Bay Counties Waste Services (doing business in Sunnyvale as Specialty Solid Waste and Recycling). The prior 20-Year Plan estimated inflation for this budget item at 3% per year. However, the actual changes to the various inflation indices used to calculate the contractor payment have been substantially larger. For example, through December 1999, the Consumer Price Index used to adjust labor and other costs increased 4.4% during the reference period. The Producer Price Index rose 5.5%, and the Motor Fuel Index rose 92.1%. Applying these inflators to Specialty’s FY 1998/99 actual expenses in the manner specified by the contract results in a contractor payment of $12,933,486 for FY 2000/01, a 13.9% increase since FY 98/99.

The rate benefit of the decrease in the cost of operating the SMaRT Station is, to a degree, canceled out by the increase in the cost of refuse collection. However, on balance, the position of the Refuse Fund is improved compared to last year’s projections. As a result, FY 2000/01 refuse rates are recommended to increase just 3% rather than the 4% anticipated at this time last year.

The proposed utility rate changes are necessary to maintain the funds in a sound financial condition. Again, even with the proposed rate changes, Sunnyvale’s utility rates are among the lowest when compared to current rates charged in other cities. As noted, Attachment 1 compares Sunnyvale’s proposed rates with current rates in the other cities because information on proposed rates in other cities was unavailable at the time this report was prepared. Because the same wholesalers provide water to all of the jurisdictions surveyed, it is likely that the wholesale cost increase will soon be seen in sizable water rate increases by other jurisdictions. This will make the utility bill savings enjoyed by Sunnyvale ratepayers even larger as compared to other local cities.

The proposed utility rate changes, which reflect the cost of operations, are recommended in order to continue to maintain high quality service, meet the obligations of state and federal environmental requirements, and maintain the funds in a sound financial condition.

Notice has been provided through the publication and posting of the City Council agenda. In addition, all reports to Council are available in the Library and on the City Internet home page. A utility bill insert announcing the date of the hearing was included in the utility bills sent out between February 14, 2000 and April 11, 2000. Once the rates have been adopted, an insert specifying the utility rate changes will be enclosed in every utility bill.

Staff recommends adoption of Alternative 1.

Prepared by:

Karen Miller

Revenue Systems Supervisor

Reviewed by:

Mary J. Bradley

Director of Finance

Reviewed by:

Marvin Rose
Director of Public Works

Approved by:

Robert S. LaSala
City Manager