April 25, 2006

SUBJECT: Proposed Fiscal Year 2006/2007 Rates for Water, Wastewater, and Solid Waste Utilities

REPORT IN BRIEF

As part of the yearly process of reviewing the financial condition of the utility enterprise funds, staff recommends that the City Council adopt annual changes in utility rates.  This report presents an analysis of the current utility policy framework, revenues, expenditures, revenue requirements and utility rates. 

If the proposed rates recommended for FY 2006/2007 are approved by Council, 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 $2.51 for water, $1.25 for wastewater, and $1.62 for solid waste services, yielding an average monthly utility bill of approximately $77.80 at the new rates.  The City’s commercial rates will increase by the same overall percentage as residential rates.

Recommended increases are as follows:

• Water                     11.5%
• Wastewater               6.0%
• Solid Waste               5.5%

The rate recommendations are based on the preliminary FY 2006/2007 budget that is currently being prepared by the City Manager. The primary cause of the recommended increase in water rates is the significant rise in costs for water purchased from the San Francisco Public Utilities Commission (SFPUC) or “Hetch Hetchy” system.  The increase in wastewater rates is necessary to cover needed infrastructure and capital costs for our aging wastewater treatment and collection system.  Finally, solid waste rates are projected to rise to cover our yearly increases in contractual costs for solid waste collection, recycling, transfer, and disposal. 

The Recommended FY 2006/2007 Budget is scheduled to be reviewed by the City Council on May 23, 2006 with final adoption scheduled for June 20, 2006.  It is not anticipated that subsequent changes to the FY 2006/2007 budget will materially impact the rate recommendations. 

It is important to note that even with the rate changes recommended above, Sunnyvale residents enjoy rates that are approximately 25% lower than the average of surrounding communities (see Attachment A).  This represents annual savings of approximately $317 per household.  Commercial customers also enjoy rates that are competitive with surrounding communities (see Attachment B). 

Utility rates for FY 2006/2007, as approved by City Council, will be effective upon adoption of the attached Rate Resolution and will appear on utility bills on or after July 1, 2006.

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 from other funds. No tax revenues are used to cover the costs of utility services, nor are any revenues from Water Supply and Distribution, Wastewater Management or Solid Waste Management 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 Reserve enables the City of Sunnyvale to maintain utility rates at the lowest possible level by spreading the effects of anticipated operational, capital, and infrastructure costs over twenty years. The Rate Stabilization Reserve enables each of the utility funds to maintain a fairly consistent pattern of rate adjustments over the entire twenty years, minimizing 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 reflected in the Long Term Financial Plans for each fund. They include a review of available fund balances, state and federal environmental requirements, anticipated capital, infrastructure, and operational requirements, revenues, 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 these analyses lead to proposed adjustments to rates 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 and efficient services through long term planning. Only rates are being brought forward at this time. Rates are brought forward in April, outside of the regular budget adoption process, to ensure that the new rates are reflected on utility bills beginning on the first day of the new fiscal year. The City bills the large majority of its customers on a bi-monthly basis. This means that a bill issued on July 1^st is for services provided approximately from May 1^st to June 31^st. In order for a July 1^st bill to reflect the new rates, the rates must be effective no later than May 1^st. Therefore, the rate recommendations are based on the preliminary FY 2006/2007 budget.

The Recommended FY 2006/2007 Budget, which will include the full expenditure budgets for the Water Supply and Distribution, Wastewater Management, and Solid Waste Management Programs, is scheduled to be reviewed by the City Council on May 23, 2006 with final adoption scheduled for June 20, 2006. It is not anticipated that subsequent changes to the FY 2006/2007 budget will materially impact the rate recommendations.

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.

DISCUSSION

Water Supply and Distribution Fund

FY 2005/2006 Actual Rate Increase and Future Rate Increase Projections Compared to FY 2006/2007 Recommendations

Water rates increased by 4.5% in FY 2005/2006. The Adopted FY 2005/2006 Water Supply and Distribution Fund Long Term Financial Plan included a planned increase of 4.5% for FY 2006/2007. This year’s recommended rate increase for FY 2006/2007 is 11.5%, seven percentage points higher than projected.  This substantial increase is necessitated by sharply rising costs of water purchased from one of our major wholesalers, the San Francisco Public Utilities Commission (SFPUC) as well as the effects of wet weather over the last two years on our water sales. It should be noted that the weighted increase in purchased water costs from our two wholesale suppliers is 10.65%.

Our Long Term Financial Plan for the Water Supply and Distribution Fund also projects that another increase of 9.5% will be required in FY 2007/2008 to cover the future cost of purchased water and keep our Water Fund in balance.  However, even with these two large increases, Sunnyvale’s water rates continue to be very low compared to our neighboring communities.  It is anticipated that those cities which purchase water from the SFPUC system will also experience large rate increases in the coming years.

The remainder of the rate projections included in the FY 2005/2006 plan and the current rate projections included in the FY 2006/2007 plan are shown in the proposed FY 2006/2007 Water Supply and Distribution Fund Long Term Financial Plan (Attachment C).

Sources of Water

Sunnyvale receives water from four different sources.  Over 80% of our water is purchased from the Santa Clara Valley Water District (SCVWD) and the Hetch Hetchy System operated by the San Francisco Public Utilities Commission. A smaller amount of water is pumped from Sunnyvale wells or produced through our reclaimed water facility at the Water Pollution Control Plant (WPCP).

Purchased water represents approximately 70% of the Water Supply and Distribution Fund’s projected FY 2006/2007 operating budget.  Currently for FY 2005/2006 the City is paying the SFPUC $444 per acre foot plus meter charges of $267,000, for a total of $468. Current charges for SCVWD purchased water are $420 per acre foot plus a $90 treated water surcharge, for a total of $510 per acre foot. The forecast anticipates costs for FY 2006/2007 of $519 per acre foot plus meter charges for SFPUC water for a total per acre foot of $544.  This represents a 16.2% increase over last year’s cost. The forecast for SCVWD is $535 per acre foot for water purchased from SCVWD, including the water surcharge, for an increase of 4.9%.

The City also receives charges in the form of a pump tax from the SCVWD for pumping ground water from City wells. The unit cost for well water is also influenced by the power costs associated with running the pumps. The projected well water total unit cost (tax plus power) for FY 2006/2007 is $520 per acre foot, an increase of 3.4% over last year’s unit cost of $503.

Finally, the City’s Water Pollution Control Plant provides recycled water as part of the Water Reclamation Project begun in 1993. Recycled water is wastewater that has been treated to very high standards. Recycled water currently provides landscaping water for the Sunnyvale Municipal Golf Course, Baylands Park, Twin Creeks softball complex, the SMaRT Station, and several commercial businesses in the Moffett park commercial/industrial area. The cost for recycled water is borne by both the Water Supply and Distribution Fund and the Wastewater Management Fund. The Water Supply and Distribution Fund distributes and sells recycled water and benefits through reduced reliance on potable water sources. The Wastewater Management Fund produces recycled water and benefits from the resulting diversion of wastewater from discharge to the San Francisco Bay.

In addition to the benefits provided by recycled water discussed above, the City receives a $115 per acre foot rebate from the SCVWD to encourage its use of recycled water. The SCVWD provides this benefit on the premise that the use of recycled water reduces strain on potable water supplies. The rebate is based upon a contractual agreement between the City and the SCVWD entered into in 1997. The original contract envisioned a 25 year period of rebates with renewal at five year increments. However, SCVWD is considering alternative ways to fund recycled water and the City’s current contract only has two years remaining, ending in FY 2007/2008. Information from SCVWD staff indicates that the District will not be renewing the contract. Staff is maintaining a dialogue with SCVWD regarding this issue, and hopes to continue to receive some form of financial subsidy for the production and distribution of recycled water. The projected Long Term Financial Plan for the Water Supply and Distribution Fund includes the presumption that we will continue to receive the rebate or some other form of recycled water incentive throughout the full twenty years. Should this not occur, the negative impact on the Fund would be $195,500 per year.

Recycled water is currently sold at 90% of the base tier of residential water rates.   

Forecasting Water Usage

The first step in setting the revenue requirement for the Water Supply and Distribution Fund is the completion of the Twenty Year Water Production Forecast. This planning tool is used to develop projections for water purchases for the next twenty years.  The Forecast prepared for FY 2006/2007 and beyond is included in this report as Attachment D.

Staff begins the actual preparation of the Twenty Year Water Production Forecast by looking at the total projected amount of water that will be required for the next twenty years, factoring in demand trends, water conservation, growth and projections of population trends and corresponding water usage.

The water usage projection had previously been based upon a certain build out plan for the City developed in the 1980s, updated with a recent analysis done by the SFPUC for the purposes of sizing facilities for their capital improvement plan. The SFPUC study also assumed the impact of the Plumbing Code, which requires the implementation of water conservation measures (like low flow toilets) at different milestones in the next ten to twenty years. On closer review this year, it appears that the build out plan overestimates the amount of water required by Sunnyvale. The City has a tiered rate structure for water in which the lowest two tiers do not cover full costs of water supply and distribution. Therefore, when we overestimate volume and therefore sales, we do not receive as much revenue at the higher tiers.  This results in not meeting necessary revenue requirements to cover full costs of the program.

Actual purchase and sales of water in Sunnyvale have been relatively flat over the past few years, due to a number of factors.  First, actual population growth in the City has been moderate, due to a near build-out condition.  Where residential development has been occurring, other uses such as industrial buildings with large landscaped areas have been displaced, and these were often uses that may have had more overall demand for water. The impact of this situation manifests in lower water sales and usage. Second, water conservation measures have been promoted by the City and the SCVWD, and remodeling work has been to newer plumbing codes using more water efficient fixtures.  Third, the success of the Sunnyvale recycled water system has replaced the use of potable water with recycled water for non-potable uses at many facilities in the northern part of the City, especially on a number of high usage facilities. Recycled water usage has grown from a low of 119 acre feet in FY 1999/2000 to about 1,800 acre feet in FY 2003/2004. Recycled water use has stayed fairly constant since then and is projected at 1,700 acre feet throughout the Twenty Year Water Production Forecast. Finally, water sales have also been down the past two years due to the wet winter and spring seasons. To reflect these various factors, staff has updated the Twenty Year Water Production Forecast for FY 2006/2007 to reflect a modest increase for FY 2006/2007 over the last two wet years and then held water sales flat into the foreseeable future.

To complete the purchase analysis, staff looks in detail at each source of water supply. This includes evaluating the associated purchase requirements under the contracts for each wholesale supplier, the unit costs for each source, and the projected need for and availability of, recycled water to supply those customers. The forecast is developed using the cheapest source of water available over the period as much as possible considering contract limitations, sometimes shifting the emphasis on individual supplies dependent on the factors discussed below.  It should be noted that although we do have the ability to move water around the City, we cannot always move water as much as we would like due to system demands and limitations.

Projecting Water Supply Costs

As part of preparing the Twenty Year Water Production Forecast, staff obtains  projections from each of the City’s water wholesalers for the next year and from four to nine additional years, depending upon the wholesaler. These projections are generally received late in our process and are subject to change. The projection for the next year are generally fairly consistent with what is finally adopted. However, the projections for the future years have a history of changing significantly, particularly in the case of the SFPUC. Normally, we receive ten years of projections from SCVWD and five years from SFPUC. Again, the projections from SCVWD have been fairly reliable while the SFPUC rates have been swinging wildly from prior year projections.

Details of the rate projections received from each water wholesaler are discussed below.

SFPUC Wholesale Rate Adjustment

The City of Sunnyvale is a member of the Bay Area Water Supply and Conservation Agency (BAWSCA) along with the 27 other suburban users that purchase water on a wholesale basis from the SFPUC (the “Suburban Users”).  This agency was created in 2003 to address the infrastructure issues with the Hetch Hetchy system, and the SFPUC’s historic lack of action with regards to the repair and maintenance of the system. BAWSCA is tasked with representing the interests of the Suburban Users with the SFPUC and providing a funding mechanism for the share of the capital improvement program for the system attributable to the Suburban Users. 

Last year, City staff received a memo from BAWSCA’s attorney detailing the SFPUC’s staff proposal to BAWSCA that the wholesale water rate be reduced by 9.8% effective April 1, 2005, and remain flat through FY 2006/2007. The purpose of that rate approach was to draw down a substantial credit which existed in favor of the wholesale customers. The approach was designed to avoid sharp rate fluctuations, which would result if the credit was handled through a literal reading of the Master Water Sales Contract. The alternative then to the proposal was a one year 18% reduction, and then a second year 20% increase. Sunnyvale and other BAWSCA Agencies agreed to implement the SFPUC’s proposal and projected a 9.8% decrease in rates for FY 2005/2006 and no increase for FY 2006/2007. These were the projections used to establish our water rates for FY 2005/2006. 

Although we have experienced the 9.8% rate decrease as agreed, the SFPUC projections for FY 2006/2007 have changed dramatically. In January SFPUC staff projected an increase of 12.9% for next year. On February 16, 2006, the SFPUC held a contractually required meeting with the Suburban Users to discuss, among other issues, the projected wholesale rate for FY 2006/2007.  At that time, they indicated that a wholesale rate increase between 12.2% and 16.9% would be required.  This was due mainly to slumping revenues that resulted from a wet year and thus, low water demand combined with unexpected increases in Operations and Management. By early March this projection increased to 14.4%, and the latest estimate is 16.9%.  This last was the maximum of their projected range presented in March, so staff feels that this number is close to what they will actually adopt.

For purposes of the FY 2006/2007 proposed water rates, staff has assumed the full 16.9% increase in base rate, which translates to an overall increase of 16.2% when factored with the meter charges.  This assumption is based on information from SFPUC and the continuing wet weather and decreased water sales.  This would bring projected wholesale SFPUC rates from $468 per acre foot to $544 per acre foot, including meter service charges.

In March SFPUC staff also provided us with ten year projections for wholesale water costs that differed significantly from the projections provided the year previously. These range from a low of 6.5% to a high of 17%. In general, they are higher in the first five years of the plan and lower in the second five years than the previous projections. Staff has included the new projections from SFPUC for the remaining nine years, with one exception.  For FY 2008/2009, SFPUC staff projected a reduction in wholesale water rates. Sunnyvale staff instead reflected a 3% increase in that year over the prior year/s rate and then smoothed the increase for FY 2009/2010 to reach their new stated rate forecast for FY 2010/2011.  Staff believes that this is prudent in light of the large rate increases that SFPUC has actually experienced historically.

The new projections cause SFPUC to change from being the less expensive wholesaler to the more expensive beginning in FY 2006/2007. This will affect the amount of water we project to purchase from SFPUC since our policy is to maximize purchases from the least expensive source. For FY 2006/2007 we are projecting to purchase 10,529 acre feet from SFPUC, representing our contractual minimum.  This equates to 41% of our total water production. This change is reflected in our Twenty Year Water Production Forecast.

SFPUC Water System Improvement Program

As Council is aware, the SFPUC’s water system is facing substantial capital improvement needs over the next ten to fifteen years. In May 2002, the SFPUC approved a $3.6 billion Capital Improvement Program (now the Water System Improvement Program, or WSIP) and Long Range Financial Plan. In November 2002, 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 WSIP is to be funded by the Suburban Users.

The SFPUC is slowly moving forward on implementing the WSIP. Over the past year, they have been working on and receiving public comment on a Programmatic Environmental Impact Report (PEIR).  The PEIR addresses the potential environmental impact of the SFPUC’s entire WSIP, dealing with areas of system sizing, total water deliveries, reliability, redundancy and other issues that drive the project in whole. 

Sunnyvale provides input into this process through the Bay Area Water Supply and Conservation Agency (BAWSCA).  Staff has a representative and alternate to the BAWSCA Technical Advisory Committee, and regularly attends BAWSCA Board Meetings to monitor developments in the work with the SFPUC. 

Santa Clara Valley Water District Wholesale Rate Adjustment

SCVWD has so far projected only one set of numbers for their rate increase for FY 2006/2007: a $15 increase in the treated water base rate and the pump tax, and an increase in the treated water surcharge from $90 to $100. This amounts to a total acre foot cost of $535 for FY 2006/2007, which represents a 4.9% increase in total unit cost.

Last year, the SCVWD gave City staff a projection of future rate increases in the out years ranging from a low of 2.8% annually to a high of 5% annually. These projections were included in the Twenty Year Water Production Forecast that was prepared for the FY 2005/2006 budget. In a March 2006 meeting, SCVWD staff distributed a rate projection that reflects a range of potential water rates over the next five years.  The lower end of the range is the same as the projections prepared last year.  However, the higher end of the range represents a substantial increase in rates in order to fund additional operations and capital costs and an increase in discretionary reserves.

The Santa Clara Valley Water District is currently working to recover from a significant financial challenge in FY 2005/2006. The State of California has shifted approximately $51 million in Property Tax revenue over two years from the District to the state budget as part of the Educational Revenue Augmentation Fund III (“ERAF III”) shift experienced by all cities, counties, and special district statewide during the last two years.

The SCVWD has two distinct missions: one is to provide wholesale water to public and private water utilities in Santa Clara County and the other is to manage the county’s water resources and provide for flood control management. Only the water utility side of their business has the ability to generate revenue through user fees. The flood control side is paid for from Property Tax assessments that can’t be raised without a two thirds vote of county residents. The total water utility share of the Property Tax shift is $15 million over two years.

Although the ERAF III shift is significant, the SCVWD has implemented a flattened rate strategy that absorbs the impact of the Property Tax loss while keeping rates competitive with other supplies. This has been accomplished through reductions in staffing, the deferral of non-critical capital projects, and the use of reserves. The District projects a steadily growing water rate for the next ten years, but has also expressed concern with the delay of various projects.

SCVWD staff is recommending that the District Board adopt the lower range of rates for FY 2006/2007. However, there is some interest by the District Board to increase the rate beyond the staff recommendation because of projects being delayed and the ERAF III Property Tax shift. In order to determine which range of rates to include in our Twenty Year Water Production Forecast for FY 2006/2007, staff analyzed the financial statements of the SCVWD.  Because the SCVWD financial position shows a strong cash and unrestricted reserve position for the District, City staff believes that the lower rate forecast will be the more realistic alternative.

For purposes of setting the FY 2006/2007 water rates, staff has used the original projection of a 4.9% increase in SCVWD wholesale water for FY 2006/2007 as well as annual increases ranging from 2.8% to 4.9% over the remaining nine years.  These more moderate increases cause SCVWD to become the less expensive provider of wholesale water to Sunnyvale from FY 2006/2007 onward. For FY 2006/2007 we are forecasting that we will purchase 11,471 acre feet from SCVWD, which equals 45% of our total water production. Our forecasts for usage now maximize use of SCVWD water within our contractual obligations to each water wholesaler over the remainder of the twenty year plan.  The remaining water production is made up of 7% recycled water and 7% from the City’s wells.

Water Fund Capital and Infrastructure Improvement Projects

Over the past few years, Sunnyvale staff has been working to identify and scope projects to improve the City’s water supply and distribution capital and infrastructure. $26.9 million in capital and infrastructure projects are included in the first ten years of the FY 2006/2007 Long Term Financial Plan, and $12.9 million in fully identified water infrastructure and capital projects are included in the second ten years of the Plan.

Public Works staff have proposed a methodical and measured repair and rehabilitation plan for the water supply facilities with the goal of extending infrastructure life by up to 100 years. Some of the major projects in the first ten years of the long term financial plan include $5.5 million to replace old waterlines, $1.8 million for reconstruction of the Central Water Plant building, $1 million for mechanical reconstruction at the Mary/Carson Water Plant, and $1 million for mechanical reconstruction at the Wolfe/Evelyn Water Plant.  Approximately $7.8 million has been programmed for various improvements to the system’s ten water tanks. Staff is currently evaluating the necessity and cost-benefit of maintaining all aspects of the water system infrastructure, including pipes, tanks, pump stations, and control valves and will include the results of this evaluation in the capital improvement project process beginning next year.   

Water Cost of Service Study

Utility rates are intended to capture the cost of providing service to each category of customer.  However, because the composition of both costs and customers change over time, staff periodically updates the cost allocation methodology underlying the rates.

Cost of service studies were completed for the Wastewater Utility in 2001, and the Solid Waste Utility in 2002, and the Water Utility was last evaluated before 1990.  Staff identified a need to update the methodology for each utility on a more regular basis as a reliable way to ensure that each utility continues to generate sufficient and stable revenues to pay for all related current and future expenses.  During the last project budget process, staff programmed studies every five years in an effort to meet this goal.

The study underway in FY 2005/2006 includes a detailed and forward looking review of the City’s current water and wastewater services in order to:

• Reflect the City’s policies regarding effective and efficient use of water and wastewater services 
• Generate sufficient and stable revenues to pay for current and future water and wastewater services and related expenses 
• Develop a rate structure that legally allocates direct, indirect, fixed, and variable costs to each customer class, based on its proportional use of the system
• Provide an overview of the City’s water and wastewater capital and infrastructure programs and propose funding mechanisms to fund replacement of aging infrastructure 
• Develop an emergency rate structure to address loss of water supply through disaster, infrastructure failure, or drought. 

A draft of the study has been completed and is being reviewed by staff.  The study should be completed by the end of this fiscal year and will be helpful in projecting future usage and rates for both potable and recycled water. Elements being reviewed include changes in the tiered rate structure, allocations of cost to each customer class, and an analysis of each phase of the recycled water master plan.  That information will be included in next year’s analysis of water rates.

Recommended FY 2006/2007 Water Rate Increase

The proposed Water Supply and Distribution Fund Long Term Financial Plan (Attachment C) reflects the recommendation that water charges increase by 11.5% for FY 2006/2007. This is seven percentage points higher than the 4.5% increase that was projected last year for FY 2006/2007.  This larger rate increase is necessitated in large part by the fact that the SFPUC wholesale water rate for FY 2006/2007 has increased by 16.9% and the SCVWD wholesale water rate has increased by almost 5%. Additionally two years of wet weather have caused a slump in the City’s water sales.  The net effect of this is a reduction not only in overall revenue, but in per unit revenue as sales have shifted to the bottom tier of the rate structure where rates per unit are lower and do not cover direct costs.

Because of the large increase in wholesale water costs projected by SFPUC for the next several years, our Long Term Financial Plan for the Water Fund includes a rate increase of 9.5% for FY 2007/2008 followed by rate increases of 7% to 5.5% over the first ten years.

Projections for the remainder of the Water Supply and Distribution Long Term Financial Plan are included on the bottom of Attachment C.  It should be noted that the rate increases shown for the Water Fund during the second ten years of the Plan are in the range of 3% to 5% and are substantially lower than the first ten years. However, there are three uncertainties which may lead to higher rates in next year’s long term forecast.

First, staff is still finalizing the Long Range Infrastructure Plan (LRIP) for the Water Utility. Although the City began development of an LRIP several years ago, the full scope and cost of utility-related fixed assets was not included in the first phase of the plan.  These utility-related fixed assets have now been identified and inventoried, and the capital projects process beginning next year will further refine the costs and schedules for the various components.  In particular, the Water fund has a large number of varied assets, including water mains, valves, reservoirs, etc.  Depending upon assumptions regarding useful life and conditions, costs for infrastructure repair and replacement may exceed funds currently projected for this purpose.

Second, the rates that we have included from the City’s two wholesale suppliers are likely to be higher than they have projected, based on past experience.

Finally, a cost of service study has just been completed for the Water and Wastewater Utilities and is currently under review by staff. This study may lead to changes in rate tiers, costs for recycled water, changes in allocation of costs to various customer classes, and recommendations for funding capital and infrastructure requirements.

The Water Rate Survey is presented as Attachment E.  As shown in Attachment A, Monthly Utility Bill Comparisons – Single Family Residential, the City’s residential water rate remains well below average when compared with neighboring cities. In general, the Attachment compares the City’s proposed rate with the existing rates of the other cities because they have not yet completed their rate analyses for next year.  It is expected that the large increase in SFPUC wholesale rates will cause our neighboring cities that purchase water from SFPUC to raise their rates substantially during the current year. Information on what percentage of our comparator cities that use SFPUC water is included in Attachment E.  For example, those cities such as Palo Alto which purchases 100% of its wholesale water from the SFPUC may experience even larger increases than ours because our rate increase is a mix of multiple, lower cost supplies.

Wastewater Management Fund

FY 2005/2006 Actual Rate Increase and Future Rate Increase Projections Compared to FY 2006/2007 Recommendations

Wastewater rates increased by 5.5% in FY 2005/2006. The FY 2005/2006 Wastewater Management Fund Long Term Financial Plan included a planned increase of 7.5% for FY 2006/2007. This year’s recommended rate increase for FY 2006/2007 is 6%, which is 1.5 percentage points lower than planned. The FY 2006/2007 wastewater rate is lower than expected due to several factors.  These include higher than anticipated connection fee revenues, a 3.5% reduction in operating costs, and lower than anticipated expenditure on capital and infrastructure projects.

The remainder of the rate projections included in the FY 2006/2007 plan and the proposed rate projections to be presented to Council for adoption with the FY 2006/2007 plan are shown in the FY 2006/2007 Wastewater Management Fund Long Term Financial Plan (Attachment F).

Factors Influencing Projected Wastewater Management Fund Expenditures

The City of Sunnyvale owns and operates an extensive system for management of wastewater within city limits and in a small area in Northern Cupertino (known as the Rancho Rinconada Service Area). The system includes approximately 327 miles of sewer pipes and a 29.5 million gallon-per-day Grade V Water Pollution Control Plant. Operations include the conveyance of sewage to the treatment plant, wastewater treatment, recycled water production, industrial discharge inspection and enforcement, and many other services related to wastewater.

For FY 2005/2006 operations of the Wastewater Management Fund are lower than current year by 3.5% to reflect actual lower costs experienced in FY 2004/2005. Reductions have occurred in costs for WPCP chemicals and hours required for operational activities.

Infrastructure maintenance and replacement has been and remains the largest issue for the Wastewater Management Fund. As identified in previous utility rate reports, in order to address this issue staff took a two pronged approach. First, in FY 2001/2002 the Sunnyvale Financing Authority sold its Water and Wastewater Revenue Bonds Series 2001 in the amount of $34.3 million. 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 or has been used to fund the cost of the most pressing infrastructure projects at the plant and throughout the city’s collection system. Major projects that are underway or have been completed include the Borregas sanitary sewer trunk replacement, rehabilitation of the treatment ponds, pond levy improvements, rehabilitation of storm pump stations #1 and #2, resurfacing of the sludge drying beds, chlorinating and decholorinating equipment replacement, rehabilitation of the digesters, and laboratory roof and air exchange equipment replacement.

Second, staff has been focused on the continued identification of projects for the future. In the past two years, Public Works staff have worked to identify and isolate the cost and life span of various pieces of infrastructure and schedule those into the Long Range Infrastructure Plan. Also underway is the WPCP Infrastructure Assessment Study being performed by Corollo Engineers.  The internal analysis is complete and the completion of the WPCP Infrastructure Assessment Study is anticipated by end of this fiscal year.

The FY 2006/2007 Long Term Financial Plan reflects large infrastructure and capital expenditures on projects that have been identified through both the internal review and the preliminary findings of the Infrastructure Assessment Study with a focus on the most critical projects. Some highlights that are funded in the first ten years of the plan are Renovation of the Primary Sedimentation Basins ($10.8 million), Pond Sediment Removal ($7.1 million), Rehabilitation of Digesters and Replacement of Digester Lids ($7.6 million),  Rehabilitation of the Fixed Growth Reactors ($2.5 million), Replacement or Rehabilitation of Sewer Pipes ($4.5 million), Air Floatation Tanks Rehabilitation ($3.3 million), Expansion of Storm Pump Station #1 (($1.9 million), and Rebuilding of Sewer Lift Stations ($1 million).

During FY 2006/2007 staff will be undertaking a comprehensive review of the operation of the Wastewater Utility and in particular the WPCP.  Due to the age of the Wastewater facilities, replacement or renovation will be required.  Rather than simply replacing existing assets in kind, the review will identify best  management practices that can be adopted to ensure that our facilities are state of the art and minimize costs in the long run.  For example, the size and capacity of the WPCP will be considered along with automation of various processes. Results of this comprehensive review will be included in the Long Range Infrastructure Plan and Capital Improvement Plan to be developed during next year’s projects budget process.

Recommended FY 2006/2007 Wastewater Rate Increase

The proposed Wastewater Management Fund Long Term Financial Plan (Attachment F) reflects the recommendation that wastewater charges increase by 6% for FY 2006/2007. This is 1.5 percentage points lower than projected last year.  This lower rate is possible because of higher than anticipated revenues in FY 2004/2005 with moderated spending on operations and capital and infrastructure projects.

Projections for the remainder of the Long Term Financial Plan are included on the bottom of Attachment F.

The Wastewater Rate Survey is presented as Attachment G. As shown in Attachment A, Monthly Utility Bill Comparisons – Single Family Residential, Sunnyvale’s residential wastewater rate remains below average when compared with neighboring cities.

Solid Waste Management Fund

FY 2005/2006 Actual Rate Increase and Future Rate Increase Projections Compared to FY 2006/2007 Recommendations

Solid Waste rates increased by 5.5% in FY 2005/2006. The FY 2005/2006 Solid Waste Management Fund Long Term Financial Plan included a planned increase of 5.5% for FY 2006/2007. This year’s recommended rate increase for FY 2006/2007 is 5.5%, unchanged from last year’s projection. The remainder of the rate projections included in the FY 2006/2007 plan are shown in the FY 2006/2007 Solid Waste Management Fund Long Term Financial Plan (Attachment J).

Factors Influencing Solid Waste Fund Expenditures

Sunnyvale’s solid waste collection and disposal system is comprised of three primary components. Solid waste collection is performed under an exclusive franchise granted by the City (through 2018) to Bay Counties Waste Services, doing business as Specialty Solid Waste and Recycling (Specialty).  Solid waste processing and transfer is carried out at the Sunnyvale Materials Recovery and Transfer Station (SMaRT Station^®) under a seven-year contract with GreenTeam/Zanker that expires at the end of 2007.  Solid waste is disposed of at the Kirby Canyon Landfill in San Jose under a long-term contract with Waste Management, which operates Kirby Canyon.  The landfill contract expires in 2021.

In budgeting for municipal solid waste management expenses, the most significant factor driving revenues and expenses is tons of solid waste collected, transferred and disposed. Much like the analysis of purchased water costs in the Water Supply and Distribution Fund, staff begins preparation of the Solid Waste Long Term Financial Plan by projecting the amount of material that is anticipated to be delivered to the SMaRT Station.

As Council is aware, the City of Sunnyvale is party to a Memorandum of Understanding (MOU) with the cities of Palo Alto and Mountain View for the operation of the SMaRT Station.  The MOU includes provisions that describe the garbage and recyclables delivery obligations of each city, how SMaRT Station revenues and expenses are allocated among the cities, and how the cities will coordinate (with Sunnyvale playing the lead role) their three identical landfill contracts with Waste Management.  Sunnyvale and Mountain View are required to deliver to the SMaRT Station all of their franchisee-collected garbage and residential recyclables, including yard trimmings.  Because it continues to operate its own landfill, yard trimmings and compost facility, and recycling facility, Palo Alto is required to deliver only specific amounts of garbage that vary from year to year and has no delivery obligations for recyclables and yard trimmings.

In projecting the tons to be brought to the SMaRT Station, staff first sets a base tonnage (which is set using the most recent 12 months of data), then works with the other two cities to project tonnage through the first ten years of the plan. In prior years, the long-term tonnage projections have shown Palo Alto deliveries of garbage to the SMaRT Station more than doubling beginning in 2011.  All of Palo Alto’s yard trimmings, currently composted at the Palo Alto Landfill, were also projected to begin coming to SMaRT in 2011. This was based on Palo Alto’s stated intent to close its landfill in 2011 and divert the landfill flows to the SMaRT Station.  The effects of this projected increase in Palo Alto garbage deliveries was to raise its SMaRT Station “operations share” and lower those of Sunnyvale and Mountain View in the later years of the financial plan.  The operations share for each city is based on its ratio of garbage deliveries to the total deliveries and determines each city’s percentage of SMaRT Station operating costs and materials recovery revenues and landfill disposal costs.  The net effect of Palo Alto’s plan was to lower Sunnyvale’s net cost at the SMaRT Station beginning in 2011.

This year’s projections have changed significantly as a result of new projections from the City of Palo Alto.  In the past year, Palo Alto adopted a “Zero Waste” policy that set a goal of ultimately diverting 90% of Palo Alto waste.  To put this in context, the most recent California Integrated Waste Management Board calculations show Palo Alto’s 2004 diversion rate as 62% (for comparison, Sunnyvale’s rate is 61%).  Details of the methods Palo Alto will use to achieve its ambitious goals are still being developed, but Palo Alto staff has reduced that city’s SMaRT Station projection for the amount of municipal solid waste it will be delivering in future years.  The new projection shows Palo Alto deliveries that simply meet its minimum quantity obligations in the MOU and its Kirby Canyon disposal contract.  Palo Alto still intends to close its landfill in 2011, but the new projection eliminates the large 2011 tonnage increase previously projected.

The net effect of this change is to increase Sunnyvale’s (and Mountain View’s) projected SMaRT Station expenses for budget years 2011/2012 and beyond, compared to last year’s financial plan.  The Solid Waste financial plan has been revised to reflect Palo Alto’s intent, although the extent to which Palo Alto succeeds in increasing its diversion rate remains to be seen.  Staff will closely watch this situation in order to refine future tonnage estimates in line with anticipated and actual changes in how Palo Alto handles its waste.

Current tonnage trends at SMaRT indicate that FY 2004/2005 was the low point in the economic downturn as it relates to tons of solid waste disposed, ending a steady tonnage slide that began in mid-2001.  The most recent twelve month period available shows an upward trend in tons delivered by all three cities and the public to the SMaRT Station.  Revised Sunnyvale tonnage projections for FY 2006/2007 are 105,117, up 1% from the 104,076 tons now expected for FY 2005/2006.  Year to year decreases and increases in garbage tonnage are difficult to project accurately, so the financial plan “smoothes” future trends into a 1% per year increase throughout the term to provide a more reliable long-term projection.

It should be noted that the three cities that participate in the SMaRT Station have individual agreements with Kirby Canyon for landfill services that require the payment for disposal of a minimum quantity of solid waste each year.  This provision is commonly referred to as a “put or pay” requirement. Additionally, the Kirby Canyon contract contains an “excess quantity” charge that increases the price per ton if the tonnage exceeds a certain level. Solid Waste staff tracks the tonnages and trends closely to operate at a minimum cost over the contract term, which ends in 2021.  In October 2011 the cities will be able to modify the level of put or pay required, and it is Sunnyvale’s intention to lower its solid waste allocation quantity by the maximum allowable 10%.  This modification is reflected in the tonnage projections beginning in FY 2011/2012.  

Payment to Specialty Solid Waste and Recycling

As mentioned earlier, the City contracts with Specialty for the collection of solid waste and recyclables throughout the City. Specialty is paid on a monthly basis, but their payment is determined for a year based largely on formulas that take necessary and actual expenses (“allowable expenses” in contract terms) in the last completed fiscal year and, where appropriate, adjust them for inflation.  For example, the FY 2006/2007 payment amount is driven largely by FY 2004/2005 allowable expenses for labor, fuel, and other operating costs, as described in detail in the franchise agreement.  Other factors in the payment amount include depreciation and insurance expenses, incentive payments for efficiency measures proposed by the company and approved by the City and a profit of 8.5% of expenses.  Each January, Specialty submits a contractor payment request to the City for the coming fiscal year.  The City, with assistance from a financial consultant, then reviews that request for conformance with the franchise agreement and works with Specialty to determine the final payment.

The projected FY 2006/2007 contractor payment is $16.1 million, an increase of 1.9% from the current (FY 2005/2006) contractor payment.  The FY 2006/2007 payment is up 1.1% from the amount projected last year, primarily due to higher than anticipated increases in fuel costs.

SMaRT Station Equipment Replacement Fund

The SMaRT Station MOU establishes a fund for the replacement of City-owned equipment at the Station.  The three participating cities contribute to these replacement efforts based on fixed percentages identified in the MOU.  Staff from the Refuse Collection Program annually meet with staff from Palo Alto and Mountain View to coordinate the replacement program.

Last year, as part of the adoption of the project budget, the City Council appropriated an expenditure of $5 million over two years to fund replacement of the SMaRT materials recovery lines.  Costs of the project are paid from the SMaRT Station Equipment Replacement Fund, which accumulates contributions from the three cities to fund periodic replacement and refurbishment of the City-owned equipment at the SMaRT Station, major building and pavement repairs, etc.

On January 10, 2006, the Council awarded a design contract to URS Engineers and the design work is in progress.  The project will replace both material recovery lines with new equipment that will meet the following goals:

• Update the facility with current materials recovery technology.  
• Reduce the amount of equipment downtime and repair.  
• Increase the diversion of recyclables from the waste stream.  
• Increase the revenues from the sale of recyclables.  
• Reduce landfill disposal costs.  
• Reduce operating (labor) costs.  

On completion, the project is expected to reduce ongoing costs and increase revenues so as to provide the City a net present gain of approximately $11 million through the end of the MOU term in 2021.  The specific financial effects of the project are reflected in the various affected revenue and expense components of the financial plan.

SMaRT Station Request for Proposals

On March 21, 2006, Council conducted a study session regarding the SMaRT Station Request for Proposals process that is currently underway.  From both a financial and operational perspective, it is a good practice to periodically use competitive processes to procure solid waste collection, disposal, and materials recovery contracts.  Although these contracts tend to be longer term (at least five years) due to the significant capital investment that an operator must make to perform the contracted functions, using a competitive process to award the contracts forces private companies to reevaluate their business practices to ensure they are providing competitive pricing.  Periodic bidding provides the City with the benefits of the competitive market with minimal risk and also allows the City to update the scope of work and other contract terms to reflect updated City policy directions, changes in law, and lessons learned. 

The FY 2006/2007 Long Term Financial Plan does not assume any savings from the bidding of the SMaRT Station contract.  However, it is anticipated that the City will receive more favorable pricing than is shown beginning with the second half of FY 2007/2008.  At a minimum, the new contract will provide the city with an updated cost of operations.  The contract is currently scheduled to be awarded in February 2007, with the new contract taking effect on January 1, 2008. 

Recommended FY 2006/2007 Solid Waste Rate Adjustment

The proposed Solid Waste Management Fund Long Term Financial Plan (Attachment I) reflects the recommendation that Solid Waste rates increase by 5.5% overall for FY 2006/2007. This is unchanged from the 5.5% increase projected for FY 2006/2007 last year.

Projections for the remainder of the Long Term Financial Plan are included on the bottom of Attachment I.  It should be noted that projected Solid Waste rates beginning in FY 2007/2008 are from .5% to 2% higher than anticipated last year because of the change in Palo Alto tons coming to the SMaRT Station and the resultant increase in Sunnyvale’s share of SMaRT operating costs.  

The Solid Waste Rate Survey is presented as Attachment J. As shown in Attachment A, Monthly Utility Bill Comparisons – Single Family Residential, Sunnyvale’s residential solid waste rate remains below average when compared with neighboring cities.

FISCAL IMPACT

The proposed utility rate changes are necessary to maintain the Utility Enterprise funds in a sound financial condition. Again, even with the proposed rate changes, Sunnyvale’s utility rates remain competitive when compared to current rates charged in other cities. Attachment A 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 in varying percentages to all of the jurisdictions surveyed. Therefore it is likely that trends seen in the water rate for Sunnyvale will also be seen in other jurisdictions.

Conclusion

Each year City staff reviews the current financial condition and long-term outlook for the three utilities and proposes rate adjustments that will keep rates as stable as possible while maintaining high quality and efficient services.  Based on these analyses, the recommended increases to utility rates for FY 2006/2007 are as follows:

• Water 11.5%
• Wastewater 6.0%
• Solid Waste 5.5%  

As a result of these changes, monthly costs associated with water, wastewater, and solid waste collection services for an average residential customer would increase by 7% overall.  This overall increase was calculated by applying the new rates to an average monthly bill for a residential customer. The average residential bill includes water usage of 12 ccf, a flat monthly wastewater charge, and unlimited garbage service.  The total projected monthly bill at the new rates is $77.80.  This compares to an average monthly bill last year of $72.42.

The proposed utility rates reflect all costs including operations, capital projects, and infrastructure projects. No tax revenues are used to cover the costs of utility services, nor are any utility revenues used to support other City programs or services not related to the utilities.

Even with these proposed increases, Sunnyvale citizens enjoy utility rates that are lower than those of surrounding communities.