Item 1 - Recommendations for Water and Sewer Rate Adjustmentso`,t,l of eoWgr
City of Poway
�F COUNCIL AGENDA REPORT
C� IN THE ��J
DATE: January 8, 2019
TO: Honorable Mayor and Members of the City Council
FROM: Tina White, City Manager
CONTACT: Wendy Kaserman, Assistant City Manager
(858) 668-4502 or wkaserman@poway.org
Donna Goldsmith, Director of Finance
(858) 668-4411 or dgoldsmith@poway.org
APPROVED
❑
APPROVED AS AMENDED
❑
(SEE MINUTES)
DENIED
❑
REMOVED
❑
CONTINUED
RESOLUTION NO.
SUBJECT: Recommendations for Water and Sewer Rate Adjustments
Summary:
This report presents recommended changes to the City's water and sewer rates and charges that
would take effect in March 2019. The rate changes, per Council's direction this evening, would
be subject to the provisions of Article XIIID Section 6 of the California Constitution, commonly
known as Proposition 218 (Prop 218). The proposed timeline for this process is as follows:
January 8, 2019 Rates Workshop
January 16, 2019 Prop. 218 Public Hearing Notice sent to rate payers
Jan. 16 — Mar. 5, 2019 Written Protest Period
March 5, 2019 Public Hearing on rates and adoption of rate resolution
March/May 2019 New rates in effect/First mailing of bills reflecting new rates
In recent years, concerns have been raised by rate payers about the timing of the required
Proposition 218 mailing and the subsequent public hearing. The main concern is the process
occurring during the holidays, when some customers may be out of town or unavailable to attend
meetings. In response to these concerns, beginning in 2019, the rate -setting process has been
adjusted to begin in January of each year. This adjustment in timing of the rate -setting process
also allows staff time to gather all summer water consumption data for future consumption
projections.
The proposed water rates reflect a combination of factors including:
• A slight decrease to the City of Poway to the overall cost of raw water charges adopted
by the San Diego County Water Authority effective January 2019
• The planned discontinuation of the City's Temporary Drought Recovery Surcharge as of
December 31, 2018
• A projected modest increase to the City's operation and maintenance costs for Fiscal
Year 2019-20
• The continued need to rehabilitate our aging water infrastructure
• The policy goal to maintain 20% of the annual operating budget in Water Fund Reserves
Incorporating the above factors into the proposed water rates will continue to support safe and
reliable water services to our customers, as well as capital projects for rehabilitation and
maintenance of the City's water system.
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Recommendations for Changes to Water and Sewer Rates
January 8, 2019
Page 2
On the other hand, the proposed sewer rates would bring the City closer to full cost recovery. A
draw -down of $835,950 of Sewer Fund balance is projected to cover the cost of providing sewer
services. Costs include sewer treatment and disposal, increased pass-through costs projected
for San Diego Metro system participating agencies, and continued support of capital projects for
rehabilitation and maintenance of the City's sewer system.
Recommended Action:
To recover pass-through costs, continue proper maintenance of the City's water and sewer
systems, meet regulatory requirements, and fund necessary capital projects, it is recommended
the City Council direct staff to proceed with the Prop 218 process to implement the following
recommended rate changes, effective in March 2019:
Increase the Water Commodity (use) rate by 4.5% and increase the fixed Water Meter
Charge (service) by 7.5% (effective March 2019)
Increase the Sewer Commodity rate by 3.25% and increase the fixed Sewer Service
Charge by 3.25% (effective March 2019)
The City's largest customer group is comprised of single-family residential customers, which,
based on projected median consumption, would use approximately 25 units bimonthly in FY 2018-
19 from a 3/4 -inch meter, and would be assigned to sewer tier 2.
Customers will no longer see the Drought Recovery Surcharge on their bills beginning in January
2019 and discontinuation of the surcharge will be noted in the Prop 218 notice mailed to rate
payers.
With the implementation of the proposed rates effective March 2019 (reflected on bills beginning
in May 2019) and after the elimination of the Drought Recovery Surcharge, the bi-monthly bill for
a typical single-family residential customer with water and sewer services would still see a net
reduction of $7.74 ($3.87 per month).
Discussion:
Water Rates - Background:
Due to limited local resources, the City buys virtually all of its water supply from the San Diego
County Water Authority (CWA). Rate increases adopted by the Metropolitan Water District
(MWD) are passed on to the CWA, and ultimately to CWA member agencies, including Poway.
Poway is unique in that it purchases only raw water, which the City then treats. Other agencies
purchase treated water from the CWA, while some purchase both raw and treated water. Both
the volume of water the City purchases relative to other agencies, as well as the type of water the
City purchases, impact the pricing we receive from CWA.
The City's current water rates went into effect in January 2018, when the fixed water meter
(service) charges were increased by 5.5%, and water commodity (use) charges were increased
by 3.5%. The adopted rates reflected a multi-year outlook that addressed the region's investment
in alternative but more costly water supply sources, including desalination, and the City's
increased annual commitment to funding priority water system rehabilitation projects to ensure
continuation of safe and reliable water service for the City's residents.
Water rates currently include the temporary Drought Recovery Surcharge of $0.75 per unit (748
gallons). As planned, the surcharge will be discontinued in December 2018, reflected on bills
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Recommendations for Changes to Water and Sewer Rates
January 8, 2019
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beginning January 2019. The surcharge was adopted effective January 2016 to address the
temporary loss in revenue resulting from State imposed water conservation, to restore the City's
Water Fund to the policy minimum and ensure the City's ability to recover the cost of operation
and maintenance of the City's water system. To lessen the disproportionate burden of the
surcharge on customers whose conservation efforts were already largely responsible for the City's
compliance with State -mandated reduction levels, Council adopted resolution 16-001 to suspend
the surcharge on the first 22 units of consumption on single family residential bills. This residential
customer surcharge credit was made effective January 2016 through December 2016, with the
full surcharge going into effect January 2017. Council authorized a $401,250 loan from the
General Fund to temporarily cover the residential customer surcharge credits for January 2016
through June 2016 and another loan of $537,622 for surcharge credits for July 2016 through
December 2016. Full repayment of both loans from the Water Fund to the General Fund occurred
in FY 2017-18 ($401,250) and FY 2018-19 ($537,622), respectively.
As part of the City's ongoing commitment to evaluate costs to the Water Fund, at the January 10,
2017 public hearing for the adoption of water rates, the City Council directed staff to return to
Council with information about how overhead costs are attributed to water utilities, and whether
certain revenues received by the General Fund could be redirected to the Water Fund. Based on
this direction, staff evaluated overhead cost allocation and the distribution of certain revenue and
cost savings and made recommendations to the City Council regarding shifting certain costs from
the Water Fund to the General Fund. The result was an estimated savings of $529,800 to the
Water Fund and a permanent shift of certain costs to the General Fund.
After accounting for current consumption trends and raw water rates adopted by CWA, the
updated budget required for water utilities is $26.8 million. Roughly 68% of operating costs
(excluding system rehabilitation) is made up of water supply purchases and other pass-through
charges from CWA. The remaining 32% represents the city's cost for water treatment, operations,
maintenance, and administration. Fixed charges passed through by CWA for FY 2018-19 are
based on 3 to 10 year rolling averages and are declining by 7.31%. This can be attributed to
Poway's successful water conservation efforts in previous years. The CWA water commodity
cost to Poway is increasing 1.98%.
Facts and recent trends for water consumption are as follows
• The City's water customer base is comprised of 14,183 service connections; single-
family residential customers represent approximately 89% of the customer base.
• Median household bi-monthly use has declined by almost 40% since 2007-08, with
median use going from 36 units bimonthly to 25 units in 2017-18.
• In 2017-18, 1,584 bills were issued to customers who reached the second rate block
(200 units or more), representing approximately 7% of all residential water use
billed.
Water Rates - Commodity Charges:
Major factors used to determine commodity rates necessary to recover costs associated with
customer use of the water system include projected consumption levels and pass-through costs
from MWD and CWA in effect beginning January 2019. The state's mandated reduction in water
consumption contributed to a historical low volume of water sales in 2016. Increases in
consumption, which began in 2017 when the state declared the end of the drought, have leveled
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Recommendations for Changes to Water and Sewer Rates
January 8, 2019
Page 4
off in 2018. The multi-year rate outlook beginning with 2019 assumes an ongoing citywide water
volume (raw, potable and reclaimed) at approximately 10,670 acre-feet annually.
To recover increased CWA/MWD commodity charges and support the City's water treatment,
distribution and storage operations, the City's water commodity charge is recommended to
increase by 4.5%. Consistent with projections at the time rates were set for 2016, the reserve
dropped to under 1% of the annual water utilities operating budget by the start of FY 2016-17.
The City Financial policy calls for a reserve level of 20% of the annual operating budget. Through
slightly increased water sales, prudent rate setting, and implementation of the temporary Drought
Recovery Surcharge, the reserve level is projected to increase to approximately 21% of annual
operating expenditures by the end of FY 2018-19. It is anticipated that future rate increases will
be necessary to maintain the reserves at or near the 20% policy level while also generating
sufficient revenue to maintain safe and reliable water services to our customers and residents.
Service (Meter) Charaes:
The City's rate structure continues to support water conservation by limiting revenue from fixed
(i.e., service charges) as compared to variable (i.e., commodity charges) revenue. The City
currently receives approximately 15% of its water revenue through fixed charges. To reduce rate
volatility caused by unpredictable year-to-year consumption while moving the City closer to full
recovery of CWA fixed costs, the City's multi-year rate outlook calls for incrementally increasing
the ratio of revenue from fixed charges. This target is increased from 20% to 25% of total revenue
to align with restructured CWA rates, which shifted a portion of its revenue from variable charges
to a fixed Supply Reliability Charge. To meet the City's target for recovery of fixed costs, annual
increases in service charges that exceed both annual cost indexes and annual CWA fixed charge
increases are necessary. With this rate setting methodology, we continue to move toward
meeting the targeted ratio of fixed to variable charges. The proposed water rates incrementally
increase the ratio of fixed charges to variable charges to 16% of revenue from fixed charges and
84% from variable charges. These percentages are influenced by the amount of water sold; if
customers buy more water than projected, the percentage of revenue coming from variable
charges will increase.
While the City's plan is to increase the percentage of revenue received from fixed charges to 25%
over time, revenue from variable charges will also be adjusted as necessary to generate sufficient
revenue to meet, not exceed, the amount necessary to recover operating and system
maintenance costs and sustain policy reserve levels. With fixed charges at 25% of total water
revenue, the City's ratio would continue to remain below the 30% industry -recommended
standard for water conservation purposes.
For the City to continue moving toward greater recovery of CWA fixed charges while supporting
priority water system rehabilitation projects, the City's water meter charge is recommended to
increase by 7.5%.
If adopted, the rate increases, as shown in the following tables, would be reflected on customer
bills beginning May 2019, for all water use on or after March 1, 2019. Additionally, as planned,
the $.75 per unit Drought Recovery Surcharge is discontinued in December 2018. As a result,
customers will see a decline in their water bills beginning in January 2019.
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Recommendations for Changes to Water and Sewer Rates
January 8, 2019
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Current and Proposed Fixed Water Meter Charges
(All Customer Classes)
Meter-
5/8", 3/4", 1" Fire
Current Charge
, •
$39.33
Proposed Charge (bimonthly)
$42.28
1"
$65.55
$70.47
1-1/2"
$131.07
$140.90
2"
$209.71
$225.44
3"
$393.23
$422.72
4"
$655.37
$704.52
6"
$1,310.74
$1,409.05
8"
$2,097.17
$2,254.46
Current and Proposed Water Commodity Rates
(1 unit= 748 gallons)
Single -Family _Block_
Residential Block
Multi -Family &
Non -Residential
-- -- - --
--00+ - units 1
Uniform
--------------
�7.32 $7.65
$5.23 1 $5.47
Sewer Rates - Background:
Wastewater generated in Poway is collected by the City's sewer system and conveyed to the City
of San Diego Metropolitan Wastewater System (Metro), where it is treated at the Point Loma
Wastewater Treatment Plant and ultimately discharged to the Pacific Ocean. The City's updated
FY 2018-19 budget for sewer treatment, operations, maintenance, and administration is $8.9
million.
Revenue collected by the City from sewer fees and charges is used exclusively to operate,
administer, maintain, and rehabilitate the sewer system. Approximately 52% of costs for providing
sewer services (excluding rehabilitation projects) are passed through from Metro and other
component systems relied on for sewage transport, treatment, and discharge.
Sewer rates for single-family residential customers are based on a percentage of winter water
use. In the first full billing cycle after January of each year, residential customers are assigned to
one of seven bimonthly tiers based upon a portion of their lowest winter water consumption
averaged over the prior three years. Commercial and other non-residential customers pay sewer
charges based on their water consumption for that billing period. All customers also pay a fixed
bimonthly sewer service charge based on water meter size and customer classification to recover
the City's costs for system capacity, billing, and administrative support.
The adopted sewer rates reflect a multi-year outlook that projects a sufficient ongoing sewer fund
balance after absorbing the City's share of increased capital and operating costs associated with
Metro's Pure Water project. Pure Water will offload wastewater flows to the Point Loma
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Recommendations for Changes to Water and Sewer Rates
January 8, 2019
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Wastewater Treatment Plant by converting it to potable water through a complex treatment
process, and initially produce 30 Million Gallons per Day (MGD) of high quality potable water for
the region by 2023. Metro member agencies, including Poway, will share project costs. The
project is designed to eliminate the need for substantial long-term costs of upgrading the Point
Loma Wastewater Treatment Plant from primary only to secondary treatment and provides a new
potable water supply for the region.
The City's current sewer rates went into effect in January 2018, when service (fixed meter)
charges were increased by 4.75%, and commodity (volumetric) charges were increased by 4.5%.
Sewer Rates - Findinns:
Sewer rate increases are necessary to continue the multi-year plan for reaching full recovery of
costs for day-to-day operations and ongoing rehabilitation of the aging system. Cost projections
demonstrate that the sewer use (commodity) rates and sewer service (fixed) charges would
require future annual increases averaging approximately 4.5% to incrementally achieve full cost
recovery.
For 2018, recommended rates for sewer services reflect a 3.25% increase for the sewer use
(commodity) rate, and a 3.25% increase to the City's fixed sewer service charge. Even with these
proposed increases, we expect to use a portion of the Sewer Fund balance to fully cover annual
expenses. If adopted, the rate increases would appear on customer bills beginning May 2019, as
shown in the following tables:
Residential Bimonthly Sewer Rates
Non -Residential Sewer Rates
5/8" and 3/4"
ServiceCharge
$27.27
$20.67
$21.34
Sewer Rate
Tiers
Tier 1
Winter Water Usage
I
0-5 Units$28.61
Current
Proposed
$29.54
Tier 2
6-12 Units
$50.48
$52.12
Tier 3
13-19 Units
$75.98
$78.45
Tier 4
20-26 Units
$83.28
$85.99
Tier 5
27-37 Units
$97.86
$101.04
Tier 6
38-50 Units
$112.44 1
$116.09
Tier 7
51+ Units
$123.38
$127.39
Non -Residential Sewer Rates
5/8" and 3/4"
ServiceCharge
$27.27
Proposed
$28.16
1"
$37.03
$38.23
1-1/2"
$61.44
$63.34
2"
$90.74
$93.69
Y
$168.86
$174.35
4"
$256.73
$265.07
6"
$598.52
$617.97
8"
$793.82
$819.62
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Recommendations for Changes to Water and Sewer Rates
January 8, 2019
Page 7
In addition to recovering Metro pass-through costs, the proposed rate increases are necessary to
continue proper maintenance of our aging sewer system; fund necessary capital projects; and
continue to provide the best quality service to our customers.
Combined Water and Sewer Rates:
Due to the planned elimination of the Drought Recovery Surcharge in December 2018, the
combined proposed increase to water and sewer rates for a single-family residential customer
with projected median water use (25 units), the most common residential meter size (3/4 -inch),
and most common sewer tier (2), would be a decrease of $7.74 bimonthly ($3.87 month).
Single -Family Residential Customer
Combined Bimonthly Water and Sewer Bill
(25 Units, Most Common 3/4 -inch Meter, Tier 2)
Environmental Review:
This item is not subject to CEQA review.
7 of 8 January 8, 2019, Item #1
Current Proposed
Increase/Decrease
March
I
(ref ed
2019
beginning
May •.
Water Service
$39.33
$42.28
$2.95
Meter
Water Commodit
$128.25
$134.00
$5.75
Temporary Drought
Recovery Surcharge
$18.75
$0.00
$18.75
(Discontinued Dec
2018)
Sewer
$71.15
$73.46
$2.31
Bimonthly
Total Combined
$257.48
$249.74
-$7'74
Bill
Monthly
-$3.87
Environmental Review:
This item is not subject to CEQA review.
7 of 8 January 8, 2019, Item #1
Recommendations for Changes to Water and Sewer Rates
January 8, 2019
Page 8
Fiscal Impact:
There is no fiscal impact from this workshop. If the proposed rates are adopted following a Prop
218 hearing, the Water Fund reserve in FY 2018-19 will be $5.6 million, bringing the balance to
21% of annual operating costs, which meets the City Council adopted annual operating policy
level of 20%. Sewer revenues are expected to be supported by approximately $835,950 from the
Sewer Fund reserve balance to meet operational and system rehabilitation needs in FY 2018-19,
The Sewer Fund reserve exceeds the City Council policy level.
Public Notification:
None.
Reviewed/Approved By: Reviewed By: Approved By:
Wend <aserman Alan Fenstermacher Tina M. White
Assistant City Manager City Attorney City Manager
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