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. Of particular note this year are the substantial increases to water rates announced by the City’s suppliers, the San Francisco Public Utilities Commission (SFPUC) and the Santa Clara Valley Water District (SCVWD). The projected rate increases for each supplier are 22.2% and 9.5% respectively. These increases will have a direct and substantial affect on the City’s proposed water rates.

As a result of recommendations for FY 2003/2004, monthly costs associated with water, wastewater, and solid waste collection services for an average residential customer would increase by 7% overall. This represents monthly increases to the average residential customer of $1.84 for water, $1.24 for wastewater and $1.04 for solid waste collection services, yielding an average monthly residential utility bill of approximately $65.79 at the new rates. The City’s commercial rates will increase by the same overall percentage as residential rates.

Recommended increases are as follows:

It is important to note that even with the rate changes recommended above, Sunnyvale residents enjoy utility rates that are 28% lower than the average of surrounding communities, (see Attachment 1). This represents annual savings of approximately $307 per household. Commercial customers enjoy rates that are competitive with 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, 2003.

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 or mailed directly to customers. An ad announcing the hearing was placed in the Sunnyvale Sun the week of April 14. The Sunnyvale Chamber of Commerce was notified by phone and received a copy of this report. 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 the City Council adopt the attached resolution establishing the aforementioned water, wastewater, and solid waste collection rates with the proposed cost reductions and corresponding changes to service levels.

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, mitigating volatile swings in rates which would otherwise 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 and long-term outlook for the Water Supply and Distribution, Wastewater Management and Solid Waste Management 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, and operational requirements, and a detailed inspection of significant expenditure areas (e.g. the anticipated cost of purchased water, forthcoming regulations related to solid waste disposal and 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, wastewater and solid waste programs 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 substantially higher than anticipated during last year’s Resource Allocation Plan analyses due primarily to increases in purchased water costs. The recommended rate for wastewater management is also higher than anticipated due to increased employee costs and increases in wastewater treatment permit costs. The recommended increase for solid waste collection is lower than anticipated last year.

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.

Water rates increased by 4.5% in FY 2002/2003. The 2002/2003 Water Supply and Distribution Fund Resource Allocation Plan (RAP) included planned increases of 4.5% for FY 2003/2004 and 4% for the balance of the 20-year planning period.

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), 8% from well water and the remaining 6% 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 Public Utilities Commission and the Santa Clara Valley Water District have announced 22.2% and 9.5% increases, respectively, in the prices they will charge for water in FY 2003/2004. These increases are substantially more significant than anticipated by the 2002/2003 RAP. Projections received last year from the San Francisco Public Utilities Commission indicated that the per unit cost for Hetch Hetchy water would increase by 5% in 2003/2004. Projections from the Santa Clara Valley Water District last year showed an increase of 8.3% for FY 2003/2004.

As a result, the FY 2003/2004 Water Supply and Distribution Fund RAP (Attachment 4) reflects a recommended rate increase of 10% for FY 2003/2004.

In addition to the numbers provided for FY 2003/2004, both agencies provided longer term projected water rates. The SFPUC provided ten years of projections and the SCVWD provided five years. In the past, staff has been reluctant to trust the projections provided by the SFPUC as they have rarely actually turned out as projected. A recent shift in management at the SFPUC has given staff more confidence in the numbers provided by the SFPUC, so they have been reflected in the FY 2003/2004 RAP. This is significant because the SFPUC is projecting a substantial rate increase of 16% in FY 2004/2005 and another set of substantial rate increases in FY 2008/2009 and FY 2009/2010. The projections provided by each agency are as follows:

Fiscal Year                              SFPUC                              SCVWD

FY 2003/2004                          22.2%                                 9.5%

FY 2004/2005                          16.0%                                 7.6%

FY 2005/2006                          5.0%                                   8.1%

FY 2006/2007                          1.9%                                   4.7%

FY 2007/2008                          6.0%                                   6.3%

FY 2008/2009                          25.0%

FY 2009/2010                          17.9%

FY 2010/2011                          11.0%

FY 2011/2012                          10.0%

FY 2012/2013                          6.0%

A significant portion (66.5%) of the Water Fund’s expenditure budget is the cost of purchased water. By FY 2012/2013 that percentage will have climbed to 75.7% of the operating budget. Currently, the City is paying SFPUC $383 and SCVWD $420 per acre-foot of water. The forecast anticipates a cost for FY 2003/2004 of $468 per acre-foot for SFPUC water (plus $213,000 in metering charges for water sources) and $460 per acre-foot for water purchased from SCVWD.

As you may recall from last year’s rate presentation, the Hetch-Hetchy water system is facing substantial capital improvement needs over the next ten to fifteen years. Outside of the City and County of San Francisco, the system services the City of Sunnyvale and 27 other agencies, collectively known as the "suburban users." In May 2002, the SFPUC approved a $3.6 billion Capital Improvement Program (CIP) and Long Range Financial Plan. In November 2002, the San Francisco voters approved a $1.6 billion bond measure, the largest ever approved in city history, to fund the San Francisco portion of the project. The remaining portion of the CIP is to be funded by the suburban users.

The SFPUC is focused on implementing the CIP. The current increases in the cost of purchased water are due to capital improvements and related adjustments to the costs associated with program operations. Specifically, our master water sales agreement with the SFPUC stipulates that they cannot add capital improvements to the rate base until the improvements are actually complete. The fact that the purchased water rates are climbing is a sign the SFPUC is finally implementing projects that have been in progress for many years.

The financial plan reflects the projections provided by the suppliers. Beyond the projections the plan includes an annual 6% increase for SFPUC water and 4% for SCVWD water. Neither agency will guarantee that they have accounted for all potential increases. Any significant changes in the cost to supply water will increase the charges to Sunnyvale and therefore affect the rates in future years.

The Bay Area Water Supply and Conservation Agency (BAWSCA)

The City of Sunnyvale, along with 27 other agencies that purchase water on a wholesale basis from the SFPUC, is a member of the Bay Area Water Users Association (BAWUA). BAWUA was organized to represent the agencies’ collective interests in their interactions with the SFPUC.

In order to address the infrastructure issues with the Hetch Hetchy system, and the SFPUC’s lack of action with regards to the repair and maintenance of the system, BAWUA undertook a legislative campaign at the beginning of 2002 by supporting three bills, including assisting legislative staff in their drafting. Two bills were introduced by Assemblyman Lou Papan and one by Senator Jackie Speier. Then-Mayor Fowler sent letters expressing Sunnyvale’s support of all three bills. Testimony was provided by elected officials, including Vice-Mayor Risch, at several hearings, and BAWUA staff and advisors worked with legislative staffs to promote, amending as necessary, all three bills. By the end of August 2002, the legislature passed all three bills. The governor signed each bill into law on September 24, 2002 and they became effective on January 1, 2003.

The result of those bills was the creation of the San Francisco Bay Area Regional Water System Financing Authority and the Bay Area Water Supply and Conservation Agency (BAWSCA). On February 11, 2003, the City Council appointed Vice-Mayor Risch to the Board of Directors for the financing authority. On March 18, 2003, the City Council approved a resolution to create and participate in BAWSCA.

BAWSCA will eventually replace BAWUA as the agency representing the suburban users. Participating in BAWSCA will involve payment of assessments to provide for staff and facilities as needed. Such assessments will be established by the Board of Directors of BAWSCA. Sunnyvale will have a member on the Board and have a direct voice. As a comparison, Sunnyvale currently pays about $77,000 annually as a member of BAWUA. BAWSCA assessments will replace BAWUA assessments, though they will most likely be higher to cover costs related to having a larger Board of Directors. In addition, BAWSCA will have authority and powers well beyond what BAWUA had and will need the additional resources to adequately operate. Future, but significant, costs could include financing of improvements to the regional water system, including bonding, assessments, and other charges.

All BAWSCA related costs will directly impact water rates to City customers, but have not been factored into the RAP as they are yet unknown. As the agency becomes established, more information regarding the actual costs will come to light. Staff anticipates having a better handle on costs for the FY 2004/2005 utility rate setting process.

The Water Rate Survey is presented as Attachment 5. As shown in Attachment 1, Monthly Utility Bill Comparisons-Single Family Residential, the City’s residential water rate remains below average when compared with neighboring cities.

Wastewater rates increased 4.0% for FY 2002/2003. The FY 2002/2003 RAP planned increases of 4.5% for FY 2003/2004 through FY 2011/2012 and 4.0% for the remainder of the 20-year planning period. The Proposed Wastewater Management Fund Resource Allocation Plan (Attachment 6) reflects the recommendation that wastewater charges increase by 7.0% for FY 2003/2004. This year’s RAP shows recommended increases of 5.0% through FY 2008/2009, 4.5% for FY 2009/2010, and 4.0% for the remainder of the 20-year planning period.

Factors Influencing Wastewater Management Fund Expenditures

The Wastewater Management Fund is experiencing the largest increase in personnel costs (an additional $8.2 million dollars in the first 10 years of the plan) of the three utilities because personnel is such a large proportion of the Wastewater Management budget. In addition, environmental regulations continue to ratchet down on numerous pollutants, requiring additional study and increased public outreach efforts to reduce the amount of pollutants reaching the bay. Staff is currently undertaking efforts to renew the City’s discharge permit under these more stringent requirements. Another impact to the Wastewater Management fund is that permit fees charged to the City by the State have more than doubled with further increases anticipated in the coming year.

Infrastructure maintenance and replacement continues to be a large issue for this fund. The Resource Allocation Plan reflects large infrastructure expenditures on projects that are underway in the early years of the plan. These projects were largely funded by revenues from the Water and Wastewater Revenue Bonds, Series 2001.

Portions of the treatment plant and collection system are approaching 50 years in age. Staff is continuing to identify projects for the future and is working to isolate the cost and life span of various pieces of infrastructure, both at the treatment plant and in the collection system. When identified, projects will be incorporated into a long-term infrastructure replacement plan which will then drive the financing of the projects and ensure that all wastewater collection and treatment processes are maintained in working order. Potential funding sources are being explored with the goal of minimizing the impact of infrastructure renovation and replacement on rate payers.

The Wastewater Rate Survey is presented in Attachment 7. 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-Single Family Residential, the City’s residential wastewater rate is significantly less than average when compared with neighboring cities.

Solid Waste rates for FY 2002/2003 increased 4.5%. The FY 2002/2003 RAP projected an increase of 4.5% for FY 2003/2004 through FY 2006/2007 and annual increases of 4.0% thereafter.

As shown on the proposed Solid Waste Management Fund Resource Allocation Plan (Attachment 8), the overall recommended increase in solid waste rates is 4.0% for FY 2003/2004, 0.5% lower than projected. Over the long term, the FY 2003/2004 RAP anticipates rate increases of 4.5% for FY 2003/04 through 2007/2008, and 4.0% – 4.5% for the balance of the planning period.

For the second year in a row, the Solid Waste Management Fund was influenced by a reduction in tonnage. Last year there was a corresponding reduction in revenues. This year, that reduction appears to have been mitigated by the rate increase adopted last year.

Overall, the fund is in a good position and was able to accelerate payment of a loan to the General Fund, paying off the loan in FY 2022/2023, 4 years earlier than previously planned.

Attachment 9 shows the comparative rate position of Sunnyvale and other cities for various levels of solid waste collection service. Attachment 1 (Monthly Utility Bill Comparisons-Single Family Residential) 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.

The rate setting analysis has been complicated this year by cost impacts from a variety of sources. Due mainly to the reliance on user fees as a revenue source instead of taxes, the utilities are somewhat insulated from the economic pressures the General Fund is experiencing. However, there are some issues that are shared with the General Fund.

The main City-related cost impact on each of the funds is the increases in salaries and benefits, particularly the climbing costs associated with the California Public Employees Retirement System (PERS). The impacts of these costs have been varied on the three funds dependent on how many employees are required to perform each operation.

In order to mitigate these impacts, the Department of Public Works proposed three budget reduction packages, one for each utility operating program. As the utilities have been, and continue to be, a cost-of-service based operation, these reductions are not possible without changes to the level of service that is provided to the residents.

Staff reviewed the utility rates and proposed reduction packages and determined that the packages for Program 312 (Water Supply and Distribution) and Program 342 (Wastewater Management) would be proposed for City Council consideration. Staff elected to not bring forward the reductions for Program 322 (Solid Waste Management) as the economic impact on the Solid Waste Management fund is minimal due to the very small percentage of total cost that is directly related to the City’s operations.

Attachment 3 contains a discussion of the service level changes to each of the two programs.

These proposed reductions have been included in calculating the recommended rates for FY 2003/2004 Water Supply and Distribution and Wastewater Management Funds. The service level reductions result in a one percent reduction in the proposed rate increase for Water and about 2.5% percent reduction in the proposed rate increase for Wastewater. That is, if the reductions do not occur, the rate increase for water will be 11% instead of 10% and for wastewater the rate increase will be 9.5% instead of 7%. If the proposed reductions were not accepted, FY 2003/2004, monthly costs associated with water, wastewater, and solid waste collection services for an average residential customer would increase by 8.2% instead of 7% overall. This represents monthly increases to the average residential customer of $2.02 for water, $1.67 for wastewater with no change from the recommended increase for solid waste collection services, yielding an average monthly residential utility bill of approximately $66.40 at the new rates.

With these rate changes above, Sunnyvale residents would still enjoy utility rates that are 27% lower than the average of surrounding communities. This represents annual savings of approximately $299, savings of eight dollars less per household per year than if the recommended rates are accepted.

Although these changes seem minor, the real impact is in the future years of the Resource Allocation Plans. The Water Supply and Distribution Fund will realize an approximate $3.4 million savings through FY 2012/2013. The Wastewater Management Fund will realize an approximate $5.5 million savings through FY 2012/2013.

Not accepting these reductions will lead to larger rate increases in the future years, beginning next year the with additional increases mentioned and at least one percent additional in each of the funds on an ongoing basis.

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 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 or mailed directly to customers. An ad announcing the hearing was placed in the Sunnyvale Sun the week of April 14. The Sunnyvale Chamber of Commerce was notified by phone and received a copy of this report. 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 adoption of Alternative 1.