Item 6 - Set Public Hearing for Proposed Four Year Water, Recycled Water and Wastewater RatesSeptember 7, 2021, Item #6DATE: TO: FROM: CONTACT: SUBJECT: Summary: AG EN DA REPORT City of Poway September 7, 2021 Honorable Mayor and Members of the City Council Aaron Beanan, Director of Finance ~ Aaron Beanan, Director of Finance (858) 668-4411 or abeanan@poway.org CITY COUNCIL Set Public Hearing for Proposed Four-Year Water, Recycled Water, and Wastewater Rates The City previously adopted new rate structures and two-year rate increases for water, recycled water, and wastewater rates on March 3, 2020 that were effective for calendar years 2020 and 2021. After a review of water, recycled water, and wastewater projections, new rate increases are needed to ensure the financial sustainability of the enterprise systems. This staff report recommends setting the public hearing date on November 2, 2021 for proposed four-year rate increases for water, recycled water, and wastewater rates. The focus of this staff report will be the drivers of the proposed rate increases. Recommended Action: It is recommended that the City Council direct staff to set the public hearing for November 2, 2021 and proceed with the Proposition 218 process which includes mailing the notice of public hearing to ratepayers (Attachment A) pursuant to California law. Discussion: On March 3, 2020, the City adopted new rate structures and two-year rate increases for water, recycled water, and wastewater rates that were effective for calendar years 2020 and 2021. After a review of water, recycled water, and wastewater projections, new rate increases are needed to ensure the financial sustainability of the enterprise system. This staff report will focus on what is driving the proposed four-year rate increases. Proposed Water Rates Four-year revenue increases of 10% in January 2022, 9% in January 2023, 8% in January 2024, and 8% in January 2025 are being proposed for water to cover the increasing costs of providing safe, reliable water on demand to ratepayers. The increases are necessary to fund the costs of imported water, capital expenses, operational expenses, and appropriate reserve levels. Staff will discuss the rate drivers and reasons behind the proposed four-year increases, instead of proposed two-year increases, below. 1 of 18
September 7, 2021, Item #6Imported Water: One of the largest factors driving the proposed revenue increases is imported water costs. San Diego County has a semi-arid climate. Before 1947, the San Diego region relied on rainfall and groundwater to meets its water needs (San Diego County Water Authority "SDCWA", Urban Water Management Plan 2010). As the economy and population grew, local water resources became insufficient to meet the region's water supply needs and required imported water from hundreds of miles away to support the growth. Much of the region's water is imported from northern California near San Francisco and Sacramento (i.e. the Bay-Delta). Importing water is very energy intensive. Over time, the cost to transport this water increases as factors like energy prices increase. Investment by SDCWA into regional water supply and infrastructure projects to reduce reliance on imported water and mitigate the effects of natural disasters, such as earthquakes, is also expensive. For example, SDCWA's investment into the Claude "Bud" Lewis Desalination Plant cost close to $1 B, but it gave the region a new drought-proof, locally controlled supply of water. Imported water represents almost 60% of water operating costs. When imported water costs increase, this impacts City of Poway water rates. The average SDCWA rate and charge increase to the City is 6.87% for calendar year 2022. SDCWA used reserves to temper this increase, otherwise it would have been greater. Their rate increase was driven by an average rate and charge increase of 8.16% from the Metropolitan Water District (MWD), one of SDCWA water suppliers, and the Quantification Settlement Agreement (QSA) increase of 4.1 %. The QSA is a long-term water supply reliability project that secured a major water supply source for San Diego County through the Imperial Irrigation District water transfer. While imported water costs continue to increase, the settlement payment from SDCWA's lawsuit with MWD should provide long-term benefits to member agencies in the San Diego County region. In THE MWD SETTLEMENT PROVIDES AN ESTIMATED $20 BIMONTHLY BENEFIT TO THE AVERAGE RESIDENTIAL CUSTOMER. February 2021 the SDCWA Board of Directors announced the distribution of $44.4 million to its 24 member agencies after receiving the settlement payment from MWD lawsuit. The settlement was the result of SDCWA's decade-long rate case litigation seeking to compel MWD to set legal rates and repay overcharges. SDCWA won several issues it was litigating, which will help avoid future overcharges. According to SDCWA, those charges, had they continued, would have cost San Diego County residents over $500 million over the life of the SDCWA water delivery contract with MWD. Poway's share of this settlement was $1,167,915. To understand the positive impact this has on the average residential customer, the potential rate increase needed with and without the MWD settlement was analyzed. This was done by looking at the projected ending position for FY 2021-22 with the MWD settlement and then increasing rates until the same projected ending position was achieved without the MWD settlement. If the City did not receive the MWD settlement, an 18% increase would have been needed, or 8% more than the current proposed rate increase, for calendar year 2022. The $1,167,915 settlement translates to roughly $20 in bimonthly savings for the average residential customer who has a¾" meter and uses 37 units of water bimonthly. Water Capital Improvement Program: The other primary proposed rate increase driver is the City's capital projects. The City of Poway's water system includes over $64M in infrastructure necessary to provide associated services. This 2 of 18
September 7, 2021, Item #6infrastructure includes water assets to transport water from the SDCWA's system to the City's system, assets to treat the water to safe drinking levels, and assets to deliver safe, reliable water on demand to each ratepayer's property. The following are some facts about the water system: • 294 miles of transmission and distribution pipelines • 5,044 water valves, 21 pressure reducing stations and 14 pump stations (designed to raise water to higher elevations) • 19 reservoirs (Lake Poway holds ~one billion gallons of water) • One 24 million gallon/day water treatment plant • 2,435 fire hydrants • Approximately 45,000 tests are performed annually to ensure Poway water meets or exceeds the State and Federal standards for water quality The capital projects are currently proposed to cost approximately $63.2M ($56.7M related to the Water Program) over the next 5 years, or slightly more than $12.6M per year on average, not including the $13.7M ($12M related to the Water Program; $0.8M was incurred prior) in FY 20-21 projects. Historically the City has rate-funded its water capital projects. Rate-funded capital projects are paid for via rates or reserves, not debt. However, as previously discussed at the City Council Meetings on March 18, 2020, June 16, 2020, October 20, 2020, November 17, 2020, March 16, 2021, April 20, 2021, June 1, 2021, July 20, 2021, and August 17, 2021, to improve the reliability, redundancy and resiliency of Poway's water system, the City is embarking on a significant Water Infrastructure Improvement Program (Water Program). The Water Program is comprised of the Clearwell Bypass, the Clearwell Replacement, and the SDCWA Treated Water Connection projects. Preliminary work on these projects has already begun with the completion estimated in FY 2025-26, or roughly 5 years from now. The total cost of this program is anticipated to cost $69.SM. As discussed in the November 17, 2020 staff report, there are several approaches to financing these projects. For example, they can be financed using a pay-go approach (using cash on hand and yearly rate increases to provide the necessary cash flow). They can also be debt or grant funded or a combination of all three. As staff had indicated in that report, comparing cash on hand to the estimated cost of the projects helps determine which funding option may be most appropriate. When cash on hand exceeds the estimated cost of the proposed project, there is a strong argument for pay-go financing. When the estimated cost of the THE LARGEST WATER RATE DRIVERS INCLUDE IMPORTED WATER COSTS AND CAPITAL PROJECTS. proposed capital projects exceed cash on hand, there is a strong argument for debt financing. As detailed above, current cost estimates for the Water Program are $69.5 million, which exceed the current cash on hand (approximately $11 million on hand in the Water Operations Fund as of June 30, 2020). Another factor to consider when specifically looking at capital projects financed by water ratepayers is how pay-go financing impacts the annual water rates. Water rates could be increased over the next three to five years to finance the program. However, based on the estimated cost of the Water Program the annual increases to ratepayers would likely be so large that it would be financially unfeasible for many ratepayers. This would create an undue burden on ratepayers and impact the sustainability of the water enterprise. To raise $69.5M over the next 5 years, the City would need to substantially increase rates to fund these projects. The assumptions used to estimate the required rate increases included the cashflow timing, leaving at least $2M in reserves for emergencies (well below the target reserve of 120 days of 3 of 18
September 7, 2021, Item #6operating expenditures, or approximately $1 OM), and returning reserves to targeted levels by FY 2025-26. Based on these assumptions, four-year revenue increases of 45% in January 2022, 15% in January 2023, 10% in January 2024, and 10% in January 2025 would be needed. Since the rate increases were being used to fund one-time projects, a 25% decrease in rates would need to occur in January 2026 to ensure funds were not being over-collected from ratepayers at the completion of the projects. The following table shows the estimated bimonthly impacts to the average residential customer by year. Table 1a: Estimated Pay-Go Residential Impacts {Not Recommended) Pay-Go Funding Option Existing Jan. 2022 Jan. 2023 Jan.2024 Jan. 2025 Revenue Increase(%) N/A 45% 15% 10% 10% Estimated Water Bill1 $249.33 $362.62 $418.38 $461.73 $509.45 Impact($) N/A $113.29 $55.76 $43.35 $47.72 1. Assumes the average residential customer has a¾" meter and uses 37 units of water bimonthly. As the table shows, the average residential customer would be paying over $260 more per bimonthly billing period for water in January 2025. The following table shows the estimated bimonthly impacts to the average non-residential customer by year. Table 1 b: Estimated Pay-Go Non-Residential Impacts {Not Recommended) Pay-Go Funding Option Existing Jan.2022 Jan.2023 Jan.2024 Jan. 2025 Revenue Increase(%) N/A 45% 15% 10% 10% Estimated Water Bill1 $860.95 $1,588.90 $1,814.91 $1,982.96 $2,165.11 Impact($) N/A $727.95 $226.01 $168.05 $182.15 1. Assumes the average non-residential customer has a 1" meter and uses 148 units of water bimonthly. As the table shows, the average non-residential customer would be paying over $1,304 more per bimonthly billing period for water in January 2025. These short-term rate spikes would put significant burden on residents and businesses impacting their ability to pay and the sustainability of the water enterprise. Additionally, current ratepayers, instead of all ratepayers who will be benefiting from them, would be completely funding improvements that are expected to last upwards of 50 years. Proposed Water Revenue Bond Issuance: Based on the potential cost of the Water Program and the impact to ratepayers under a pay-go approach as described above, debt financing is a reasonable solution. Debt financing provides the cash upfront to construct the projects while spreading the repayments out over a longer time horizon. This helps create intergenerational equity by aligning the Water Program costs to the people who benefit from the projects. When debt is issued, current ratepayers would not be responsible for fully funding projects today that will have a useful life beyond 30 years. In order to understand how issuing debt for the Water Program could impact rates, Fieldman Rolapp & Associates, Inc. ("Fieldman"), the City's municipal advisor, put together three projected debt issuances to provide financing for the Water Program. These were also reviewed by the City's underwriter, Stifel, Nicolaus & Company, Inc. ("Stifel"), to ensure consistency with their view of current market conditions. Three series of debt are proposed to match the potential debt issuances to the cash flow timing of the projects. The three phases would include a 2021, 2023, and 2024 series of debt to generate $14.8M, $30.3M, and $24.5M respectively. Market conditions were projected out for each of the three series and include buffers, similar to the contingency used for construction projects, to 4 of 18
September 7, 2021, Item #6allow for adverse market changes (e.g. rising interest rates over time). For example, Series 2021 includes a 25 basis point ("BP", 100 BPs = 1 %) buffer, the Series 2023 include a 75 BP buffer, and the Series 2024 include a 125 BP buffer over August 20, 2021 market rates. The projected annual debt service for the three series of debt would total approximately $3.8M. Given the timing of the proposed issuances to accommodate the cash flow needs of the Water Program, staff is recommending four-year rate increases this rate setting cycle. This will give investors assurances that the City will have a sufficient revenue stream to pay the annual debt service. The longer the term of an approved rate increase, the more comfortable investors are debt service will be paid. This generally translates to a lower total cost of debt as they are more willing to accept a lower interest rate given the perceived risk of the deal is lower. Staff believes a four-year rate increase strikes a good balance between investor DEBT FINANCING MINIMIZES NEAR~ERMIMPACTSTO RATEPAYERS AND CREATES INTERGENERATIONAL EQUITY. preferences and flexibility. The four-year period is long enough to increase investor confidence while still short enough to allow rate changes if future projections are different than anticipated. As part of a revenue bond issuance, the City will also seek a credit rating for the water enterprise. A high credit rating can also positively impact the cost of debt. In general, the higher the underlying credit rating the lower the cost of debt, all else being equal. The longer four-year rate increase cycle gives rating agencies the assurances the water enterprise can meet its anticipated obligations over the near-term. This in turn would help strengthen the credit of the water enterprise helping promote a lower cost of debt. The proposed revenue increases of 10%, 9%, 8%, and 8% over the next four years include estimates to finance the $69.5M Water Program estimate using water revenue bonds. The following table shows the estimated bimonthly impacts of the proposed increases to the average residential customer by year. Table 2a: Estimated Residential Impacts of Water Program Debt Funding (Recommended) Debt Funding Option Existing Jan. 2022 Jan. 2023 Jan. 2024 Jan. 2025 Revenue Increase(%) N/A 10% 9% 8% 8% Estimated Water Bill1 $249.33 $275.08 $300.70 $325.90 $353.09 Impact($) N/A $25.75 $25.62 $25.20 $27.18 1. Assumes the average residential customer has a¾" meter and uses 37 units of water bimonthly. As the table shows, the average residential customer would be paying over $103 more per bimonthly billing period for water in January 2025. However, this is approximately $157 less than what they would be paying if the City pursued a pay-go financing approach for the Water Program as shown in Table 1 a. The following table shows the estimated bimonthly impacts of the proposed increases to the average non-residential customer by year. Table 2b: Estimated Non-Residential Impacts of Water Program Debt Funding (Recommended) Debt Funding Option Existing Jan. 2022 Jan.2023 Jan.2024 Jan. 2025 Revenue Increase(%) N/A 10% 9% 8% 8% Estimated Water Bill1 $860.95 $1,204.98 $1,304.34 $1,399.29 $1,500.01 Impact($) N/A $344.03 $99.36 $94.95 $100.72 1. Assumes the average non-residential customer has a 1" meter and uses 148 units of water bimonthly. 5 of 18
September 7, 2021, Item #6As the table shows, the average non-residential customer would be paying over $639 more per bimonthly billing period for water in January 2025. However, this is approximately $665 less than what they would be paying if the City pursued a pay-go financing approach forthe Water Program as shown in Table 1 b. This rate increase structure helps smooth the rate increases to current ratepayers which helps reduce the burden on residents and businesses and increases the sustainability of the water enterprise. Additionally, the payment for the improvements is more closely aligned to the ratepayers benefiting from the improvements as they are expected to last upwards of 50 years. This promotes intergenerational equity. As discussed above, the debt estimates include projections for future market conditions to allow for adverse market movements. If the market is more favorable when debt is issued, it lowers the cost of debt and the annual revenue needed to support the annual debt service payments. Additionally, the City is scheduled to receive a $1 M grant from Congressman Scott Peters office for use towards the Clearwell Bypass portion of the Water Program. The City should receive official word on whether it will THE PROPOSED RATES ARE MAXIMUMS. THEY CAN BE ADMINISTRATIVELY REDUCED BASED ON ACTUAL NEED. be awarded this grant later this year. City staff is committed to pursuing every available grant opportunity these projects may be eligible for. Additionally, the $1 trillion Federal Infrastructure Bill approved by the Senate on August 10, 2021, if passed by the House and signed by the President, could also impact the necessity of future debt issuances. Each of these can decrease the proposed revenue increases over the four-year rate setting cycle. For example, if debt issuance costs are lower than anticipated, less revenue is needed to ensure the City's ability to pay the annual debt service. If the grant is received or the City receives money from an adopted Infrastructure Bill it would help reduce the amount of debt issuance anticipated in turn reducing the required rate increase. Pursuant to the California Constitution, rates cannot be increased beyond the rates established upon the conclusion of the Public Hearing without proceeding through the Proposition 218 process again. However, rates can be administratively reduced at a staff level if the adopted rates increases are too high. Staff will analyze the necessity of the proposed rates, if adopted, each year to ensure ratepayers are not being charged more than necessary. The proposed rate increases ensure the Water Enterprise has the solutions in place to ensure financing for the Water Program but do not preclude the pursuit of other financing options as the Water Program projects progress over the next several years. Looking at potential rate increases without the Water Program helps people understand the impact of the Water Program on the proposed rate increases. If the Water Program did not exist, increases of 7%, 7%, 7%, and 5% as shown in the following table would be necessary to fund the costs of imported water, capital expenses, operational expenses, and appropriate reserve levels. The table also shows the estimated bimonthly impacts of the proposed increases to the average residential customer by year. Table 3a: Estimated Residential Impacts Without Water Program Without Water Program Existing Jan. 2022 Jan.2023 Jan.2024 Jan. 2025 Revenue Increase(%) N/A 7% 7% 7% 5% Estimated Water Bill1 $249.33 $267.72 $287.30 $308.51 $324.96 Impact($) N/A $18.39 $19.58 $21.22 $16.45 1. Assumes the average residential customer has a¾" meter and uses 37 units of water bimonthly. As the table shows, the average residential customer would be paying over $75 more per bimonthly billing period for water in January 2025. However, this is approximately $185 less than what they 6 of 18
September 7, 2021, Item #6would be paying if the City pursued a pay-go financing approach for the Water Program as shown in Table 1 a or approximately $28 less than if the City pursued a debt financing option as shown in Table 2a. The following table shows the estimated bimonthly impacts of the proposed increases to the average non-residential customer by year. Table 3b: Estimated Non-Residential Impacts Without Water Program Debt Funding Option Existing Jan. 2022 Jan.2023 Jan.2024 Jan. 2025 Revenue Increase(%) N/A 7% 7% 7% 5% Estimated Water Bill1 $860.95 $1,173.39 $1,246.83 $1,325.52 $1,382.05 Impact($) N/A $312.44 $73.44 $78.69 $56.54 1. Assumes the average non-residential customer has a 1" meter and uses 148 units of water bimonthly. As the table shows, the average non-residential customer would be paying over $521 more per bimonthly billing period for water in January 2025. However, this is approximately $783 less than what they would be paying if the City pursued a pay-go financing approach for the Water Program as shown in Table 1 b or approximately $118 less than if the City pursued a debt financing option as shown in Table 2b. Therefore, pursuing the $69.5M Water Program to improve the reliability, redundancy and resiliency of Poway's water system costs the average residential customer approximately $28 more per bimonthly billing period in January 2025 and the average non-residential customer approximately $118 more per bimonthly billing period. Given the benefits afforded by debt financing the Water Program, staff believes this is the least impactful and most equitable approach to funding the Water Program. Staff will return to Council for their consideration of a 2021 series debt issuance on October 19, 2021. IMPORTANT This recommendation does not obligate the Council to issue debt and does not authorize the issuance of debt. By law, Council must approve the issuance of debt. Staff will return to Council for their consideration of any debt issuances related to the Water Program. Proposed Fixed/Variable Ratio Adjustment: Over the course of the workshops leading up to the March 3, 2020 Public Hearing (October 15, 2019 and November 19, 2019) for the current rates, staff discussed the importance of the fixed/variable ratio. The fixed/variable ratio reflects the amount of revenue collected between fixed charges which are not dependent on water usage and volumetric, or variable, charges which are dependent on water usage. This ratio is important for understanding the level of revenue stability. The more revenue is collected via a fixed charge, the less likely the water system will be impacted by changes in ratepayer usage. For example, the more INCREASING THE FIXED/VARIABLE RATIO SLOWLY BALANCES SUSTAINABILITY WITH RATEPAYER IMPACTS. revenue that is collected via fixed charges, the less likely a water system will be to increase rates in times of conservation as less of its revenue is affected by decreased demand, all else being equal. Under the prior rate structure, the fixed/variable ratio was 16/84%. At the Public Hearing on March 3, 2020 a fixed/variable ratio of 20/80% was approved to start increasing the amount of revenue 7 of 18
September 7, 2021, Item #6collected via fixed charges. A higher ratio was not selected at that time due to the potential impacts on lower volume users though discussions were had discussing the importance of slowly raising this ratio over time. As such, Council directed staff to slowly increase the fixed/variable ratio with each subsequent rate setting process. The proposed four-year water rate structure includes small adjustments to the ratio each year. The following table shows the changes to the fixed/variable ratio over the proposed four-year rates. Table 4: Estimated Fixed/Variable Ratio {Recommended) Existing Jan. 2022 Jan. 2023 Jan.2024 Jan.2025 Proposed Revenue Increase(%) N/A 10% 9% 8% 8% Fixed Charge (% of total revenue) 19.22%1 20.16% 21.21% 22.28% 23.39% Variable Rate(% of total revenue) 80.78% 79.84% 78.79% 77.72% 76.61% 1. The currently approved fixed/variable ratio is 20/80%. However, the actual ratio is impacted based on things like water sales. The actual ratio will always be slightly different than the projected ratio. As the table shows, the fixed charges are being increased each year to a level such that the fixed portion of the fixed/variable ratio increases by approximately 1 % each year. This means the fixed charges will increase at an amount greater than the proposed revenue increase each year while the variable rates will increase at an amount less than the proposed revenue increases. For example, the bimonthly fixed charge for a¾" meter is currently $58.13. In January 2022 it is proposed to increase to $67.15, or by $9.02 (15.5%) bimonthly. If the fixed charge were increased solely by the proposed revenue increase, it would increase to $63.95 in January 2022, or $5.82 (10%) bimonthly. The additional $3.02 bimonthly in this example for a¾" meter is what helps increase the revenue collected from fixed charges by approximately 1 % each year. To help ensure revenue is not over-collected, the variable rates are increased at a lower rate. For the variable rates, a 10% increase would increase the current Tier 1 residential rate from $4.80/unit to $5.28/unit. Instead, the Tier 1 residential rate is only increased to $5.22/unit, or 8.75%. At the end of the proposed four-year rate cycle, the fixed/variable ratio will be approximately 23%177%, or roughly 4% more than they are today. The following two tables provide more detailed information on the estimated residential impacts of adjusting the fixed/variable ratio. Table 4a: Estimated Impacts of Keeping the Existing Fixed/Variable Ratio Jan.2022 Increase from Increase from Existing (Same FN Ratio) Existing($) Existing(%) FixedNariable Ratio 19.22/80.78% 19.22/80.78% Fixed Charge $58.13 $63.95 $5.82 10% Variable Charges $191.20 210.32 $19.20 10% Total Estimated Bill1 $249.33 274.27 $24.94 10% 1. Assumes the average residential customer has a¾" meter and uses 37 units of water bimonthly. Table 4b: Estimated Impacts of Increasing the Existing Fixed/Variable Ratio Jan.2022 Increase from Increase from Existing (Increased FN Ratio) Existing($) Existing(%) FixedNariable Ratio 19.22/80.78% 20.16179.84% Fixed Charge $58.13 $67.15 $9.02 15.5% Variable Charges $191.20 $207.93 $16.73 8.75% Total Estimated Bill1 $249.33 $275.082 $25.75 10.3%3 2. Assumes the average residential customer has a¾" meter and uses 37 units of water bimonthly. 3. Matches Table 2a estimated residential impacts for January 2022. 4. Total percentage change slightly higher than 10% due to rounding. 8 of 18
September 7, 2021, Item #6Proposed Wastewater Rates Four-year rate increases of 4.0% in January 2022, 2023, 2024, and 2025 are being proposed for wastewater to cover the increasing costs of providing safe, reliable wastewater services to ratepayers. The increases are necessary to fund the costs of wastewater treatment, capital expenses, and operational expenses. These proposed rate increases reflect the use of reserves to temper the impacts to ratepayers. Funds to cover Poway's estimated share of the San Diego Pure Water project were set aside as part of a strategic financial management decision to help mitigate the impacts to ratepayers and is more fully discussed below. Wastewater Treatment: The most significant rate driver for the proposed revenue increases is wastewater treatment costs. Wastewater treatment represents almost 43 percent of all operating expenses. When wastewater treatment costs increase, this impacts City of Poway wastewater rates. The largest factor increasing wastewater treatment costs is the San Diego Pure Water project. San Diego's Pure Water project is a THE LARGEST WASTEWATER RATE DRIVERS INCLUDE WATER TREATMENT COSTS AND CAPITAL PROJECTS. multi-year project that is projected to supply one-third of San Diego's water supply locally by 2035. Based on projections from May 2020, Poway's estimated share of the project is over $4 million annually for the next five years. However, several years ago staff began incorporating these costs into rates as part of a long-range financial management strategy to mitigate the impacts of this project to ratepayers. Funds collected have been set aside in reserves. As such, a combination of reserve drawdowns and rate increases will be used over the coming years to temper the impacts to ratepayers. Additionally, a wastewater treatment plant is designed to treat certain types of waste. As people dispose of pharmaceuticals, food waste, cooking oil, industrial chemicals, etc. down the wastewater system, the treatment process gets extended which increases costs. Wastewater Capital Improvement Program: The next largest factor driving the proposed revenue increases is rate-funded capital improvement projects. Rate-funded capital is paid for via rates or reserves; no debt is currently used to fund capital projects. The City of Poway's wastewater system includes over $36 million in infrastructure necessary to provide associated services. Rate funded capital is also being proactively invested in the rehabilitation and repair of the wastewater infrastructure to ensure Poway continues to provide safe, reliable, and affordable wastewater services. Wastewater infrastructure includes infrastructure to transport wastewater from the city to various treatment plants within the County of San Diego in a safe and reliable manner including over 186 miles of wastewater pipes, five lift stations (designed to raise wastewater material to a higher elevation), and over 4,000 maintenance covers. Rate-funded capital is currently proposed at approximately $5.7 million over the next five years, or slightly more than $1 million per year on average. Table 4 shows the estimated bimonthly impacts of the proposed four-year increases to the average residential customer by year. [Remainder of page intentionally left blank] 9 of 18
September 7, 2021, Item #6Table 4: Estimated Residential Impacts (Recommended) Proposed Increases Existing Jan. 2022 Jan. 2023 Jan.2024 Jan.2025 Rate Increase(%) N/A 4% 4% 4% 4% Estimated Water Bill1 $98.21 $102.20 $106.23 $110.60 $115.03 Impact($) N/A $3.99 $4.03 $4.37 $4.43 1. Assumes the average residential customer has 15 units of winter wastewater flow bimonthly. As the table shows, the average residential customer would be paying over $16 more per bimonthly billing period for wastewater in January 2025. Given the number of non-residential wastewater categories the impacts were not analyzed as an average grouping is less obvious on the wastewater side. Community Outreach To help the community understand the impacts of the proposed four-year rate increases, staff updated the residential bill estimator tool (https://poway.org/175/Rates-Fees). This will help evaluate how the proposed increases impact their specific usage patterns. This tool, as well as information specifically about the majority-protest public hearing, and proposed rates, was posted to the homepage of the City's website and the Water and Sewer Services section of the Finance Department webpage. This information was also actively communicated to the public via the City's Nextdoor public agency account, its City of Poway Facebook page, its City of Poway Twitter account, and the Poway Today e-newsletter. Utility Assistance Programs The COVID-19 pandemic has impacted people throughout the country. A variety of policies and programs have been put in place to aid those impacted by the pandemic. For example, the State of California declared through Executive Order No. N-42-20 issued on April 2, 2020 that residential customers and certain business customers could not have service discontinued or be shut-off for utility non-payment. Based on the City's normal policies, a total of 2,007 accounts could have been tagged due to non-payment. Tagging is the precursor to discontinuing service. The tags would have created additional fees for ratepayers. Since the City was not discontinuing service it would not be tagging ratepayers. The savings to ratepayers for these fees cannot be reasonably estimated due to several factors leading to the tag fee charged. The City went beyond the State's prescription and extended the shut off moratorium to all Poway ratepayers. Another example of the City going beyond the State's policy is the waiver of late fees. The City has been waiving late fees since the beginning of the pandemic even though it has not been required by the State. The City has waived 7,747 late fees totaling over $232k between March 18, 2020 and June 30, 2021. Late fees were resumed on July 1 consistent with the timing of the State's reopening plan. Given a full economic recovery will take time and there are still customers that are experiencing financial uncertainty, there are several programs to help provide assistance. The State of California is currently putting together a California Water and Wastewater Arrearage Payment Program based on the $985M received from federal funding. This funding will help cover water debt from residential and commercial customers accrued between March 4, 2020 and June 15, 2021. If the program still has funding available, it will extend to wastewater residential and commercial arrearages as well. While this program is not fully operational yet, it is anticipated to provide relief to Poway ratepayers. Once the program is operational, applicable Poway ratepayers will be notified about how it can benefit them. 10 of 18
September 7, 2021, Item #6The County of San Diego has a fully operational 2021 Emergency Rental Ass~stance Program (www.sdhcd.org). This program also helps eligible households who have been financially impacted by the COVID-19 pandemic by providing payment assistance on utilities (and rent) to qualifying individuals. To date, 20 Poway ratepayers have received a total of $25,663 in assistance to cover their water and wastewater bills. Timeline The following graphic shows the proposed four-year rate cycle as well as the current schedule for the potential three series of debt to fund the Water Program. Set Public Hearing: Sept. 7, 2021 Potential 2021 Debt Series: Nov. 10, 2021 Year 3 Rates Effective: Jan. 1, 2024 Environmental Review: Mail 218 Notice: By Sep. 18, 2021 Year 1 Rates Effective: Jan. 1, 2022 Potential 2024 Debt Series: Aug.2024 Consider Debt: Oct. 19, 2021 Year 2 Rates Effective: Jan. 1, 2023 Year 4 Rates Effective: Jan. 1,2025 Public Hearing: Nov. 2, 2021 Potential 2023 Debt Series: Mar. 2023 This action is not subject to review under the California Environmental Quality Act (CEQA). Fiscal Impact: There is no direct fiscal impact associated with this staff report because it only sets the public hearing. However, based on the information contained in this staff report, sufficient revenues to fund operations, investment in capital infrastructure, and appropriate reserve levels will be generated from the recommended water and wastewater revenue increases. Over the next four-year period, it is estimated approximately $23.3M in additional water revenues will be generated while approximately $3.3M in additional wastewater revenues will be generated if the proposed rates are adopted at the public hearing. Safe reliable water delivered on demand to an average residential ratepayer costs approximately one penny per gallon. Treating the average residential ratepayer's wastewater in a safe and reliable fashion costs approximately nine-tenths of one penny per gallon. [Remainder of page intentionally left blank] 11 of 18
September 7, 2021, Item #6Public Notification: The California Constitution, Article XIIID, Section 6, states that local governments must hold a Majority-Protest Public Hearing and notify property owners at least 45 days in advance of the public hearing related to proposed water, recycled water, and wastewater rates. The notice (Attachment A) will be mailed at least 45 days prior to the public hearing, or on or before September 18, 2021. The public hearing will take place as follows: Tuesday, November 2, 2021 at 7:00 p.m. Attachments: A. Notice of Public Hearing Reviewed/ Approved By: Wenl<aserman Assistant City Manager 12 of 18 City of Poway City Hall 13325 Civic Center Drive Poway, CA 92064 Reviewed By: Alan Fenstermacher City Attorney Approved By: Chris Hazeltine City Manager
September 7, 2021, Item #6The City is committed to providing the highest quality water and wastewater services at the lowest possible rates. To keep this commitment, the City regularly evaluates infrastructure needs, and operations and maintenance costs for the upcoming years. In compliance with Proposition 218, enclosed in this notice are the proposed rate adjustments for 2022 through 2025. The rate adjustments being considered will become effective January 1 of each year and reflected on bimonthly bill statements in March or April. NOTICE OF PUBLIC HEARING & PROPOSED WATER AND WASTEWATER RATES ~~~ Tuesday, November 2, 2021 at 7 p.m. City Council Chambers I 13325 Civic Center Drive, Poway Your are invited to participate in person, by phone or online poway.org/councilmeetings On Tuesday, November 2, 2021 at 7 p.m. the Poway City Council will consider adopting proposed changes to water and wastewater charges. If adopted, the rate adjustments will become effective January 1 of each year and reflected on bimonthly bill statements in March or April. The City bills for water and wastewater service bimonthly (every two months) based on consumption during the two months prior to the billing date. All interested persons are invited to appear at the meeting to give oral or written testimony on the proposed rate adjustments. Rate protests must be submitted in writing ahead of the council meeting. Details on the written protest process is located on the back page of this notice. Why are you receiving this notice? The City of Poway is mailing this notice to you because you are a water and/or wastewater customer responsible for payment of water and/ or wastewater fees, or you are the owner of record for a property that receives water and/ or wastewater service. This notice describes proposed adjustments to water and wastewater rates, rate structure changes, and provides notice of the upcoming public hearing at which these proposed changes will be considered by the Poway City Council. For rates information and links to resources quoted in this notice, scan this QR code or visit: poway.org/rates-fees. 13 of 18 ATTACHMENT A
September 7, 2021, Item #6Proposed Changes to Water and Wastewater Rates The City of Poway provides safe, reliable water on demand to its customers and purchases nearly 100 percent of its water from the San Diego County Water Authority (SDCWA). The cost to purchase and treat imported water continues to increase. The City proactively plans for increases in these costs, along with costs associated with operations, maintenance, and replacement of infrastructure along with maintaining appropriate reserves. To accommodate these increases, the City is proposing adjustments in potable water rates over the next four years. The City of Poway maintains a wastewater system that provides customers with wastewater collection and conveyance services to the San Diego Metropolitan Wastewater System (Metro) where the wastewater is treated at the Point Loma Wastewater Treatment Plant and then discharged into the ocean. The City proactively plans for increases in costs associated with operations, maintenance, and replacement of infrastructure along with maintaining appropriate reserves. The City also pays a percentage share of the operation, maintenance, and capital replacement costs of the Metro system. To accommodate these increases in costs, adjustments in wastewater rates over the next four years are being proposed. A four-year rate setting process strikes a balance between investor preferences and flexibility. A four-year period is long enough to increase investor confidence ( see "Debt Financing" for more details) while still short enough to allow rate changes if future projections are different than anticipated. How were rates determined? Changes to how Poway's water and wastewater rates are structured involve a deliberate series of steps to ensure rates remain affordable, fair, and equitable. First, future demands on our wa-ter and wastewater systems are projected, as well as water quality impacts, potential risks to system reliability, and anticipated chang-ing conditions to sustainability. Next, specific water and wastewa-ter infrastructure improvements are prioritized and incorporated into the framework. These proj-ects support near-and long-term needs, from regular system operations and maintenance to proactive investments to improve system quality, reliability, and sustainability. 17 26 Wastewater Water projects projects Finally, a third-party rate consul-tant leads a cost of service study in partnership with City Council and staff. The study designs a legally compliant rate frame-work that recovers water and wastewater costs across different customer classes. These studies are typically updated every four to six years to ensure the rate design is still affordable, fair, and equitable. The most recent study was performed in December 2019 for rates effective during calendar year 2020. 0 For additional information on how your rates have been calculated, please refer to the staff report on September 7, 2021 titled "Set Public Hearing for Proposed Four-Year Water, Recycled Water, and Wastewater Rates." 14 of 18
September 7, 2021, Item #6CURRENT AND PROPOSED WATER RATES 5/8" 43.00 49.67 56.79 64.28 72.69 3/4" and 1" fire 58.13 67.15 76.78 86.90 98.27 1" 88.39 102.10 116.74 132.13 149.41 1 1/2" 164.03 189.47 216.64 245.20 277.27 2" 254.80 294.30 336.51 380.87 430.67 3" 542.25 626.31 716.13 810.54 916.53 4" 965.85 1,115.57 1,275.55 1,443.72 1,632.50 6" 1,979.46 2,286.29 2,614.17 2,958.82 3,345.71 8" 3,643.63 4,208.40 4,811.93 5,446.33 6,158.49 --CUSTOMER CLASS CURRENT 1/1/2022 1/1/2023 1/1/2024 1/1/2025 Single Family Residential Tier 1: 1-20 Units 4.80 5.22 5.62 6.00 6.40 Tier 2: 21-56 Units 5.60 6.09 6.56 7.00 7.46 Tier 3: 57+ Units 7.79 8.47 9.12 9.73 10.37 Multi-family Residential 4.91 5.35 5.76 6.15 6.56 Landscape Irrigation 6.82 7.43 8.00 8.53 9.09 Non-residential 5.22 5.69 6.13 6.54 6.97 Recycled Water 4.25 4.63 4.99 5.33 5.68 City Potable Usage 5.22 5.69 6.13 6.54 6.97 Water Rate Notes: 1 unit= 748 gallons Consistent with Council direction during the prior rate-setting cycle, the fixed/variable ratio for water is being increased by approximately 1 % each year. This means the fixed charges will increase at an amount greater than the proposed revenue increase each year while the variable rates will increase at an amount less than the proposed revenue increases. Slowly increasing the fixed/variable ratio increases financial sustainability while helping minimize impacts to lower volume users. Any water rates or fees associated with water service, including raw water, not addressed within this notice shall remain in full force and effect as previously adopted by the Poway City Council. 15 of 18
September 7, 2021, Item #6CURRENT AND PROPOSED WASTEWATER RATES --CUSTOMER CLASS CURRENT 1/1/2022 1/1/2023 1/1/2024 1/1/2025 Single Family Residential (Residential wastewater flow based on 85% of lowest winter water use averaged over the past three years.) All Customer Classes (Except Schools) 28.31 29.45 30.63 31.85 33.13 ----CUSTOMER CLASS CURRENT 1/1/2022 1/1/2023 1/1/2024 1/1/2025 Residential Single Family 4.66 4.85 5.04 5.25 5.46 Residential Multi-family & Mobile 5.85 6.09 6.33 6.59 6.85 Home Non-Residential General Commercial 5.04 5.25 5.46 5.68 5.91 Medium-low 5.65 5.88 6.12 6.36 6.61 Medium 6.34 6.60 6.86 7.14 7.42 Medium-high 6.48 6.74 7.01 7.29 7.58 High 8.92 9.28 9.65 10.04 10.44 Light Industry 5.49 5.71 5.94 6.18 6.42 Industrial Special User 5.53 5.76 5.99 6.23 6.48 Government & Membership 4.14 4.31 4.48 4.66 4.85 Organizations Churches 5.04 5.25 5.46 5.68 5.91 Elementary School 5.11 5.32 5.53 5.75 5.98 (ADA) Secondary & High 5.06 5.27 5.48 5.70 5.93 School (ADA) Wastewater Rate Notes: Multi-family and mobile home customers' wastewater flow is calculated based on 75% of bimonthly water use for accounts without a landscape meter and 85% of bimonthly water use for accounts with a landscape meter. Non-residential customers' wastewater flow is calculated based on 75%, 85% or 90% of bimonthly water use depending on customer class. Wastewater flow for schools is estimated based on the average flow per student per day using 75% or 85% of the water use from the March/April billing period. 16 of 18
September 7, 2021, Item #6WATER INFRASTRUCTURE IMPROVEMENTS With the goal of increasing the reliability of drinking water for water customers now and generations to come, the City of Poway is undertaking the largest capital improvement program (CIP) in the city's 40-year history. The CIP will include replacing the clearwell (water storage reservoir) at the water treatment plant and a new (SDCWA) treated water connection and re-dundant pipeline. In order to replace the clearwell, a temporary bypass project will include two 1.4 mil-lion-gallon tanks for storing treated water. These infrastructure improvement projects have been in the planning stage for a long time and are moving ahead as part of a mutually beneficial agreement between Poway and the State Division of Drinking Water. Construction on the clearwell bypass project will begin by early October. For more information: poway.org/water-projects. sdcou nty .ca.gov /sd hcd 17 of 18 DEBT FINANCING The capital projects along with those described above are currently estimated to cost $63.2 million over the next five years, or slightly over $12.6 million per year (not including $13.7 million already included in the 2020-21 fiscal year). Based on the potential cost of these projects and the impact to current ratepayers, the City is exploring financing al-ternatives. Debt financing is a reasonable solution in that it provides the cash upfront to construct the projects while spreading the repayments out over a longer time horizon. This helps create intergenerational equity by aligning the water CIP costs to the people who benefit from the project. When debit is issued, current ratepayers would not be responsi-ble for fully funding projects today that will have a useful life beyond 30 years. The City is planning for a series of water bond issuances to fund the Water Infrastructure Improvement Program commencing in Fall 2021. The proposed four-year rate increases give investors assurances the City will have a sufficient revenue stream to pay the annual debt service which helps to lower the cost of debt and the impacts to ratepay-ers. While this debt financing plan helps ensure the City has a solution in place to fund the program, City staff is also committed to pursuing every available grant opportunity these projects may be eligible for.
September 7, 2021, Item #6PO Box 789 Poway, California 9207 4-0789 www.poway.org DATED MATERIAL -DO NOT DELAY DELIVERY Important information about your WATER and WASTEWATER account! Proposed Rate Change Protests As part of the rate setting process, on November 2, 2021, the City of Poway will conduct a public hearing on the proposed changes to water and wastewater rates and will consider all oral and written protests to the proposed changes. Oral comments at the public hearing will not qualify as formal protests unless accompanied by a written protest. Only one written protest will be counted per identified parcel. While email is not an official rate protest mechanism under California law, the City Council values resident input and will read all email correspondence regarding rates. Written protests must include: • A description of the property, such as the address or assessor's parcel number; and • The name and signature of the customer submitting the protest. The City Council will receive a final tabulation of all written protests received by the City Clerk. Written protests must be received by the City Clerk's office no later than 12 p.m. November 2, 2021 or can be submitted in writing in the Council Chambers before the public hearing is closed. If a majority of the affected customers do not file written protests of the proposed rate changes, the Council will then consider and may adopt the rate changes described in this notice. If a majority of affected customers file written protests, the City Council will not adopt the proposed rate adjustments and the City will reconsider the rate structure and rates. Please send written protests to: City Clerk of the City of Poway PO Box 789 Poway, CA 92074-0789 If you have any questions regarding this notice, please call (858) 668-4409. 18 of 18