SUBJECT:

Proposed 2002/2003 Utility Rates for Water, Wastewater, and Solid Waste (RTC#02-152)

EXECUTIVE SUMMARY

As part of our 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 2002/2003, monthly costs associated with solid waste collection, water, and wastewater services for an average residential customer would increase by $0.67 for wastewater, $0.72 for water and $0.68 for solid waste collection services. This yields an average monthly residential utility bill of approximately $59.97 at the new rates. This adjustment reflects both the changes in revenue requirements for each of the City’s utility enterprise funds, and the effects of the City’s most recent Solid Waste Management Cost of Service Study. The study reallocated charges for solid waste services to the various customer classes based on the City’s actual cost for providing service. The net effect shifts cost from residential customers to commercial customers. The solid waste rates reflect this shift in cost. The City’s commercial rates will increase by the same overall percentage as residential rates, with the exception of rates for solid waste collection, which will vary due to the completion of the Solid Waste Management Cost of Service Study. Recommended increases in revenue requirements for each Utility Enterprise Fund are as follows: Wastewater Management Fund 4.0% Water Supply and Distribution Fund 4.5% Solid Waste Management Fund 4.5% It is important to note that even with the rate changes recommended above, Sunnyvale residents enjoy utility rates that are 31% lower than the average of surrounding communities, (see Attachment 1). This represents an annual savings of approximately $329 per household. Commercial customers also enjoy rates that are, on average, lower than surrounding communities (see Attachment 2). Rates would be effective upon adoption of the attached Rate Resolution and appear on utility bills on or after July 1, 2002.

Fiscal Impact

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

Recommendation

Staff recommends that City Council adopt the attached resolution establishing the aforementioned rates for Water Supply and Distribution, Wastewater Management, and Solid Waste Management.

BACKGROUND

Sunnyvale utility rates are based entirely on the City’s costs for operating and maintaining its water, wastewater and solid waste 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, wastewater or solid waste 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 20 years. The rate stabilization fund enables each of the utility funds to maintain a fairly consistent pattern of rate adjustments over the entire 20 years rather than experiencing volatile swings in rates which would occur due to unanticipated increases or decreases in cost in a particular year. Each year as part of the budget process, staff analyzes the current condition of the Water Supply and Distribution, Wastewater Management and Solid Waste Management Long Term Financial Plans. This includes a review of available fund balances, state and federal environmental requirements, anticipated capital and infrastructure requirements, operational costs, and a detailed inspection of significant expenditure areas (e.g. the anticipated cost of purchased water, forthcoming regulations related to solid waste disposal, wastewater discharge, etc.). The results of this analysis lead to the rate recommendations made to the City Council that 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 brought forward at this time. The full expenditure budgets for the Water Supply and Distribution, Wastewater Management, and Solid Waste Management Funds will be subject to Council review and approval as part of the normal budget process. Generally, rate increases follow inflationary patterns, although at times, other factors such as water and fuel costs increasing at a rate higher or lower than inflation may cause rate increases to vary from the normal pattern. The rate change recommended for water is 4.5%, the same as anticipated during last year’s Resource Allocation Plan analyses. The recommended rates for wastewater and solid waste collection are 4.0% and 4.5% respectively, also the same as anticipated last year, despite a substantial drop in revenues from what was projected for both enterprise activities.

EXISTING POLICY

Sunnyvale Municipal Code sections 8.16.120 (Solid Waste), 12.16.020 (Wastewater) 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. Policy 3.2F.1 of the Solid Waste Sub-Element states that solid waste collection and disposal rates shall be established in a manner that equitably allocates program costs among rate payers and promotes rate stability.

DISCUSSION

WATER SUPPLY AND DISTRIBUTION FUND 2001 Actual and Planned Rate Revisions Compared to 2002 Recommendations Water rates increased by 4.5% in FY 2001/2002. The FY 2001/2002 Long Term Financial Plan included planned increases of 4.5% for FY 2002/2003 and FY 2003/2004 and 4% for the balance of the 20-year planning period. No changes are recommended for the FY 2002/2003 Long Term Financial Plan. Factors Influencing Water Fund Expenditures Sunnyvale receives water from four different sources. Approximately 42% comes from the San Francisco Water Department (SFWD/Hetch Hetchy), 44% from the Santa Clara Valley Water District (SCVWD), 7% from well water and the remaining 7% from recycled water. 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, the San Francisco Water Department and the Santa Clara Valley Water District have announced 5% and 2.4% increases, respectively, in the prices they will charge for water in FY 2002/2003. These increases are not as significant as anticipated by the FY 2001/2002 Long Term Financial Plan. Projections received from the San Francisco Water Department indicated last year that the per unit cost for Hetch Hetchy water would increase by 9% in FY 2002/2003 and by 14% in FY 2003/2004. Revised projections show 5% increases in both years. Projections from the Santa Clara Valley Water District from last year showed increases by 2.4% for FY 2002/2003 and 4.8% for FY 2003/2004. Revised projections show an increase in FY 2003/2004 to 8.3%. As a result, the FY 2002/2003 Water Supply and Distribution Long Term Financial Plan (Attachment 3) reflects a recommended rate increase of 4.5% for FY 2002/2003, as projected last year. 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. Currently, the City is paying SFWD $392 and SCVWD $410 per acre-foot of water. The forecast anticipates a cost for FY 2002/2003 of $412 per acre-foot for SFWD water (plus $213,000 in metering charges for water sources) and $420 per acre-foot for water purchased from SCVWD. These increases in the cost of purchased water are typical for both water suppliers and are generally due to needed capital improvements and adjustments to the costs associated with program operations. A significant portion (approximately 70%) 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 Long Term Financial Plan assumes moderate increases of no less than 4% in the cost of purchased water from both suppliers for the balance of the plan. Neither SFWD or SCVWD will provide projections beyond the next five years, nor will either entity guarantee that they have accounted for all potential increases. Any significant changes in water quality regulation or capital improvement needs will increase the charges to Sunnyvale from SFWD and SCVWD and therefore affect the rates in future years. Increases in Operating The Water Program operating budget increased significantly this year due to the projected impacts of the conversion of temporary employees to full time employees. For the past four years, the Water Program has been operating on a frozen budget while it went through a restructure to outcome management. The program has been using temporary employees to help meet changes in service levels that have occurred during the four year period. To address their needs, staff evaluated their current organizational structure and proposed permanent positions in the budget to cover work that temporaries currently are performing. The result of this proposal is the conversion of nine positions to full time city positions. The budget impact to the water program is approximately $600,000 per year. Staff was able to offset the impact of this change through savings in purchased water and other operational areas, enabling the financial position of the Water Fund to remain positive while holding rate increases as projected for FY 2002/2003. Recycled Water Impacts The recycled water project has impacts on both the Water and Wastewater Funds. On April 1, 1999 the Water Pollution Control Plant (WPCP) began producing and delivering recycled water. The WPCP continues to ramp up production. Completion of a 2 million gallon storage tank and related improvements are allowing staff to bring recycled water to more customers than before. The City’s water projections reflect this increase in production, peaking in FY 2004/2005 and then running constant for the balance of the 20 year planning period. Hetch Hetchy Infrastructure Issues As staff has discussed in this report in previous years, the SFWD infrastructure needs $4.6 billion in capital improvements to restore the reliability of the system. The Hetch Hetchy system (the sixth largest in the nation) delivers an average of 206 million gallons of water per day to 2.4 million people in San Francisco, San Mateo, Santa Clara, and Alameda counties. Much of the system was built in the late 1800s and early 1900s and has reached or exceeded its life expectancy. The system crosses three major earthquake fault lines between San Francisco and its sources of water, 160 miles away in the Sierra Nevada mountain range. Seismic studies indicate that a major earthquake could cause system failure resulting in a loss of water for sixty days or more. Sunnyvale is one of twenty nine users outside of the City of San Francisco who make up approximately 70% of the system’s customers (the "Suburban Users"). The San Francisco Public Utilities Commission (SFPUC), the governing body responsible for the Hetch Hetchy system, estimates that $2.9 billion of the total needed capital improvements are directly related to the provision of water to communities outside of San Francisco. The SFPUC has identified the needed improvements and is in the process of evaluating and adopting a Long Term Strategic Plan for Capital Improvements. According to current law, the SFPUC has to go to the ballot to obtain approval from San Francisco voters to sell revenue bonds for the needed capital improvements. This translates to 100% of the decision making power residing with 30% of the system’s users, resulting in the potential for the capital improvement projects to either be unfunded, or only partially funded. To address this issue, apply pressure to the SFPUC to take action, and provide a back up plan in the event that the San Francisco voters turn down the bond measure, three separate bills have been introduced in the State Legislature in Sacramento. The following is a summary of the bills and how they would affect the system: AB 1823: Requires the SFPUC to complete all critical projects by 2015. SB 1870: Allows suburban water users to start a regional agency that could issue revenue bonds to fix the system. AB 2058: Allows suburban water users to start a regional authority that would be allowed to secure funds for critical projects and make those funds available to the SFPUC. Sunnyvale currently supports all three bills and is working with the Bay Area Water Users Association (BAWUA), made up of all 29 Suburban Users, to pressure the SFPUC to address these issues. The bottom line is that the capital improvements needed for the Hetch Hetchy system are required to ensure a safe and reliable water supply. In the future, as the capital plans are developed, the cost of these improvements will have a significant impact on the rates charged to the City by SFWD and therefore a significant impact on future Sunnyvale water rates. WASTEWATER MANAGEMENT FUND 2001 Actual and Planned Rate Revisions Compared to 2002 Recommendations Wastewater rates increased 5.5% for FY 2001/2002. The FY 2001/2002 Wastewater Long Term Financial Plan projected increases of 4.0% for FY 2002/2003 and the remainder of the 20-year planning period. The FY 2002/2003 Financial Plan (Attachment 5) reflects the recommendation that wastewater charges increase by 4.0% for FY 2002/2003 and shows recommended increases of 4.5% through FY 2011/2012 and 4% for the remainder of the 20-year planning period. Factors Influencing Wastewater Fund Expenditures The Wastewater Management Fund is experiencing an increase in infrastructure costs for the wastewater collection and treatment system due to the normal deterioration of facilities with age. In order to address this issue the staff has taken a two-pronged approach. On December 19th, 2001, the Sunnyvale Financing Authority sold its Water and Wastewater Revenue Bonds Series 2001. The total amount of the transaction was $34,319,858. The project refunded the Authority’s 1992 Utility Revenue Bonds and provided an additional $12.5 million for new wastewater projects. The bond money is being used to fund the cost of the most pressing infrastructure projects at the plant and throughout the city’s collection system. These projects include sewer and storm main replacements (including the Borregas Sanitary Sewer Trunk Replacement), Water Pollution Control Plant improvements, work on the Power Generation Facility, rehabilitation of the treatment ponds, rehabilitation of pump stations #1 and #2, and many other smaller projects identified in recent years. Additionally, for FY 2002/2003, the capital projects budget reflected an increase of approximately $500,000 due to an unexpected increase in the costs associated with the Chlorinating/De-chlorinating Equipment replacement project. The project is designed to replace obsolete chlorinating and de-chlorinating equipment in the recycled water production system. The other focus of staff is the continued identification of projects for the future. Public Works staff is working to isolate the cost and life span of various pieces of infrastructure, and schedule those into the long term infrastructure replacement plan. Staff anticipates using funding sources such as grants, low interest loans, and debt financing in the future to help minimize the impact of infrastructure renovation and replacement on rate payers. The Wastewater Management fund was also affected by a large decrease in connection fee revenues. The fund is experiencing a decrease in connection fee revenues due to the downturn in the economy. Staff estimates connection fees will come in $1 million less than projected for FY 2001/2002. Our projections have been revised to reflect this decrease throughout the Long Term Financial Plan. The Wastewater Rate Survey is presented in Attachment 6. All other surveyed cities are served by either the San Jose or the Palo Alto treatment plants, which are under similar regulatory requirements as Sunnyvale. As shown in Attachment 1, Monthly Utility Bill Comparisons, the City’s residential wastewater rate is less than average when compared with neighboring cities. SOLID WASTE MANAGEMENT FUND 2001 Actual and Planned Rate Revisions Compared to 2002 Recommendations Solid Waste collection rates for FY 2001/2002 increased 3.2%. The FY 2001/2002 Solid Waste Management Long Term Financial Plan projected an increase of 4.5% for FY 2001/2002 through 2006/2007 and annual increases of 4.0% thereafter. As shown in the proposed Financial Plan (Attachment 7), the overall recommended increase in solid waste rates is 4.5% for FY 2002/2003. Over the long term, the Fiscal Year 2002/2003 Financial Plan anticipates rate increases of 4.5% for FY 2002/2003 through 2010/2011, and 4.0% for the balance of the planning period. Factors Influencing Solid Waste Fund Expenditures Every three to five years, the Solid Waste Program does a cost of service study to re-allocate the costs of the City’s solid waste programs among the various customer classes based on their use of the solid waste collection and disposal system. Staff worked with consultants Hilton, Farnkopf and Hobson, (HF&H) who helped develop the original cost of service model, to identify the current operating and fixed costs. HF&H first reviewed the costs associated with the collection and disposal of solid waste in Sunnyvale. This review included an analysis of Bay Counties Waste Services collection costs, tipping fees at Kirby Canyon Landfill, and operations at the SMaRT StationÒ . They then generated a cost of service for each customer class and recommended adjustments to the solid waste rate structure to ensure costs are recovered on an equitable basis from the different customer classes. Staff has taken these adjustments and then applied the 4.5% across the board increase to each rate class to generate the proposed new rates. In general, as with last year’s Wastewater Cost of Service Study, costs shifted from residential customers to commercial customers. In solid waste rate surveys, the benchmark services typically surveyed are residential curbside service, the rate for a 3 cubic yard bin collected one time per week, and the rate for the delivery and rental of a 30 cubic yard debris bin. While the Solid Waste Management Fund’s revenue requirement increased by 4.5%, the net rate increase (combination of both revenue requirement and effect of cost of service study) on these benchmark rates is: Residential unlimited collection rates increased by 2.65% The rate for a 3 cubic yard bin collected one time per week increased by 10%. The delivery and rental of a 30 cubic yard bin increased by 14.2%. Economic Influences on the Solid Waste Management Fund The Solid Waste Management Fund was influenced negatively in FY 2001/2002 by a reduction in tonnage and corresponding revenues. In the prior 20-Year Plan, it was expected that City of Sunnyvale customers would generate 127,454 tons of solid waste per year which would be delivered to the SMaRT Station. The current plan is updated to reflect recent delivery history and anticipates a substantial (7%) decrease to 118,703 tons in FY 2002/2003. In solid waste collection and disposal, tonnage drives both revenue and expenditures. However, the impact on revenues from a decrease in tonnage is about three times larger than the corresponding decrease in expenditures. This is due mainly to the fixed costs associated with collecting solid waste and maintaining the closed Sunnyvale Landfill. For example, a commercial customer who subscribes to three cubic yards of garbage service, receives service from the same truck as a customer who subscribes to two cubic yards of garbage, yet the city receives less revenue for the smaller amount. While the City may see some savings in SMaRT Station and landfill fees in this example, the collection costs remain fixed, creating a gap between revenues and expenditures. Solid waste revenues are also very responsive to the economy. The less economic activity, the less garbage is produced. The fund has seen a decline in revenues from the FY 2001/2002 Long Term Financial Plan projections for FY 2002/2003 of approximately $1.6 million. The largest impact has been on construction bin revenues, which are down substantially from last year’s projections. The continued rate benefit of the decrease in the cost of operating the SMaRT Station is, to a degree, offsetting losses in revenue. The contractor payment payable to Bay Counties Waste Services, the City’s franchised solid waste collector, is virtually unchanged from the prior year because lower fuel costs balance increased costs in other areas of their operations. Revenue loss is also offset by using the Rate Stabilization Reserve to levelize the rates. As a result, FY 2002/2003 solid waste rates are recommended to increase, as planned last year, by 4.5%. However, in order to maintain the fund in good condition, rates are projected to go up starting in FY 2007/2008 from a 4% increase projected last year to a 4.5% increase projected this year. Increases are anticipated to remain at 4.5% until FY 2011/2012 at which point they return to 4% for the balance of the plan. Attachment 8 shows the comparative rate position of Sunnyvale and other cities for various levels of solid waste 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. Additionally, in Santa Clara 80% of the cost of yard waste collection is supported by Santa Clara’s General Fund.

Fiscal Impact

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. Attachment 1 compares Sunnyvale’s proposed rates with current rates in the other cities because information on proposed rates in other cities was unavailable (except where noted) at the time this report was prepared. The same wholesalers provide water to all of the jurisdictions surveyed. Therefore it is likely that the wholesale cost increase will soon be seen in 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.

Conclusion

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.

PUBLIC CONTACT

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 March 1, 2002 and April 16, 2002. Once the rates have been adopted, an insert specifying the utility rate changes will be enclosed in every utility bill.

ALTERNATIVES

Adopt the attached resolution establishing the aforementioned water, solid waste and wastewater rates. Adopt rates other than those proposed. Maintain current rates with no changes.

RECOMMENDATION

Staff recommends adoption of Alternative 1.

Attachments

Monthly Utility Bill Comparison-Residential Monthly Rate Comparison-Commercial Water Supply and Distribution Long Term Financial Plan (Adobe Acrobat® pdf file - You need Adobe Acrobat Reader® to view) Water Rate Survey Wastewater Management Fund Long Term Financial Plan  (Adobe Acrobat® pdf file - You need Adobe Acrobat Reader® to view) Wastewater Rate Survey Solid Waste Management Fund Long Term Financial Plan  (Adobe Acrobat® pdf file - You need Adobe Acrobat Reader® to view) Solid Waste Rate Survey Proposed FY 2002/2003 Utility Rate Resolution (.pdf format)