HomeMy WebLinkAboutItem 7a. Consideration of the 2023-25 Water Rates Item 7a
Department: Utilities
Cost Center: 6001
For Agenda of: 6/6/2023
Placement: Public Hearing
Estimated Time: 20 minutes
FROM: Aaron Floyd, Utilities Director
Prepared By: Shane Whittington, Utilities Business Manager
SUBJECT: CONSIDERATION OF THE 2023-25 WATER RATES
RECOMMENDATION
1. Receive and file the Comprehensive Water Rate Study, April 2023; and
2. Adopt a Draft Resolution entitled “A Resolution of the City Council of the City of San
Luis Obispo, California, establishing the Water Service Rates for Financial Plan 2023-
25” provided there is no majority protest against the proposed water rates; and
3. Find the action statutorily exempt from the California Environmental Quality Act
(CEQA) under Public Resources Code 21083 and 21080(b)(8) and State CEQA
Guidelines Section 15273 (Rates, Tolls, Fares, and Charges).
REPORT-IN-BRIEF
The City is proposing a water rate increase consistent with the process requirements of
Proposition 218, the City’s Charter and Municipal Code, and City Financial Plan fiscal
policies. The goal of the rate-setting process is to provide funding to the City’s Water Fund
for operation, maintenance, and capital project needs commensurate with the costs to
provide adequate services. The water rates are proposed to increase revenues by 8.5
percent in 2023-24 and 7.5 percent in 2024-25. If approved, the proposed water rates
would become effective on July 1 of each fiscal year.
This report provides the constitutional, regulatory, and policy basis for the proposed water
rates, identifies the rate setting methodology and protest procedures, summarizes the
public outreach conducted to ensure our customers are provided information re garding
the process and opportunities to engage with Staff and submit comments, questions, and
written protests, and identifies the proposed rates for Council’s consideration.
POLICY CONTEXT
The City’s Water Fund is an Enterprise Fund. Enterprise Funds utilize rates and fees paid
for services rendered to fund operating, capital, and debt service expenditures. Water
rates pay for all costs associated with bringing water from surface water reservoirs to the
City’s water treatment plant and distributing 1.9 billion gallons of drinking water to
approximately 16,561 service connections. General funds (such as property tax or sales
tax) do not support these essential services.
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Item 7a
Rates must be developed in compliance with California Constitution Article XIII C and D,
commonly referred to as Proposition 218 (Prop 218). When proposing increased rates,
some Prop 218 requirements include:
1. Hold a noticed public hearing on proposed utility rate increases, to be held not less
than 45 days after notice of the hearing is mailed to each recorded owner of each
identified parcel upon which the proposed rates will be imposed.
2. The cost of the service shall not exceed the proportional cost of services provided
to the corresponding customer parcel.
3. Revenues derived from the fees must be used for the service that is provided.
4. Rates shall not be increased if a majority of affected parcels protest the proposed
increased rates in writing.
In addition to Prop 218 requirements, the City aims for rates that promote the stability and
predictability of water services. No changes to the current rate structure are
recommended or proposed, and the proposed rates are consistent with rate structure
prioritized goals previously established by the City Council (Water and Wastewater Rate
Structure Review, August 15, 2017 and January 9, 2018). These prioritized goals include:
revenue stability and predictability; discourage wasteful use; stability and predictability of
the rates; fair allocation of total cost of service among customer classes; and reflect all
present and future costs.
The proposed rates are consistent with policies identified under Financial Plan Enterprise
Fund Fees and Rates, which states that:
“City will set fees and rates at levels which fully cover the total direct and indirect
costs including operations, capital overlay, and debt service” and consistent with
this policy the rate setting process has been conducted in “accordance with
Proposition 218 and its notification requirements.”
In addition, the fiscal evaluation includes identification of community needs for essential
services (provision of drinking water and treatment of wastewater) and integration of
climate risk, climate action, and Diversity, Equity, and Inclusion (DEI) considerations
throughout all financial decisions including identification and implementation of resilient
capital projects that equitably provide water and sewer service to the community,1
consistent with Financial Plan Objectives.
1 Financial Plan Purpose and Organization, Financial Plan Objectives and Long -term Financial Planning,
C. Consideration of Climate Risk and Climate Action and D. Consideration of Diversity, Equity, and Inclusion
(DEI).
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Item 7a
DISCUSSION
Rate Setting Methodology
The goal of the rate-setting
process is to provide sustainable
funding to the City’s Water Fund
for operation, maintenance, and
capital project needs. Rates
must be developed that are
stable, equitable, and cost-
based in compliance with
California Constitution Article XIII
C and D, commonly referred to
as Proposition 218 (Prop. 218).
In October 2022, the City hired
HDR Engineering, Inc. (HDR) to assist with this process and prepare the Comprehensive
Water Rate Study (Attachment A). For the Comprehensive Water Rate Study, HDR
utilized industry-standard methods consistent with the M1 Manual, Principles of Water
Rates, Fees, and Charges published by the American Water Works Association (AWWA).
The Comprehensive Water Rate Study provides the necessary documentation and an
administrative record of the cost basis for the City’s proposed water rates in compliance
with Prop. 218 Section 6, which regulates property-related fees and charges to which
water is bound [California Supreme Court in Bighorn-Desert View Water Agency v. Verjil
(2006)]. In accordance with the provisions of Prop. 218, water rates are designed based
on a cost-of-service methodology that fairly apportions costs to all customers.
The methodology used for wate r rate setting includes a revenue requirement analysis, a
cost-of-service analysis, and rate design analysis, as outlined in the graphic below,
consistent with Financial Plan Enterprise Fund Fees and Rates policies for ongoing rate
review and cost of service fee assessment.2
2 Financial Plan Fiscal Policies Section 3 Enterprise Funds Fees and Rates. C. Ongoing Rate Review.
The City will review and adjust enterprise fees and rate structures as required to ensure that they remain
appropriate and equitable.
D. Cost of Service Fees. The City will treat the water and sewer funds in the same manner as if they were
privately owned and operated. This means assessing reasonable cost of service fees in fully recovering
service costs.
Revenue Requirements to
Operate WaterSystems
Proposition 218
City Policy/
Rate Structure
Cost of Services/
Proportionality
Rates
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Item 7a
This rate setting methodology is consistent with rate structure goals established by
Council, the City Charter, and the City Municipal Code, including:
1. The requirement of Council resolution to establish rates for service (Section
13.04.090)
2. Restriction of rate revenues for funding operations, construction, and debt service
related to wastewater services (Section 13.08.410 and City Charter Section 806)
Proposed Water Rates
Based on the results of the Comprehensive Water Rate Study, the City’s proposed water
rates for 2023-25 are provided in Table 1, below. The Resolution for adoption of the water
rates is provided in Attachment B.
Table 1: 2023-25 Proposed Water Rates
Usage (per unit cost) Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family Residential
Tier 1: 0 to 5 units
$7.94 $8.54
Single Family Residential
Tier 2: 6 to 12 units
$9.16 $9.84
Single Family Residential
Tier 3: 13+ units
$15.79 $16.97
Multi-Family $8.91 $9.58
Non-Residential $9.43 $10.14
Landscape Irrigation $9.63 $10.35
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Item 7a
Table 1: 2023-25 Proposed Water Rates (continued)
Base Fees Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family Residential
Monthly Base Fee
$28.15 $30.25
Multi-Family, Non-Residential, and Landscape Irrigation by Water Meter Size
0.75-inch or less meter $28.15 $30.25
1-inch meter $47.00 $50.50
1.5-inch meter $93.75 $100.80
2-inch meter $150.05 $161.30
3-inch meter $281.50 $302.60
4-inch meter $469.25 $504.45
6-inch meter $938.25 $1,008.60
8-inch meter $1,501.25 $1,613.85
Water System Access
Charge
$100.93 $108.50
Protest Procedures
The City sent out 27,175 notices (see Attachment C, Water and Sewer Rate Notice) in
April 2023 in compliance with Prop. 218. Under Prop. 218, property owners and/or
customers directly responsible for the payment of the fee subject to the proposed rate
increase may submit a written protest against the proposed rate increases. The protest
must be submitted on the form provided by the City, received by the City Clerk at or before
the June 6, 2023 public hearing, identify what is being protested, and contain the service
address. The party signing the protest must be listed on the account as the person
responsible for payment of the water bill or the property owner. In the event that a protest
is submitted by the owner and by the tenant responsible for payment of the water bill,
then one valid protest is counted for the account.
If written protests are filed by a majority (50% + 1), the proposed water rate structure and
rates may not be imposed. A majority of the City’s 16,561 water customers is 8,280 plus
one. As of May 25, 2023 at 12:00 PM, a total of 1,181 written protests were received by
the Office of the City Clerk. All protests will be validated regarding property ownership
and duplicate addresses. The City Clerk will provide an updated summary of the protests
received at the conclusion of the public hearing on June 6, 2023.
Previous Council or Advisory Body Action
The City Council received the Strategic Budget Direction from Staff on April 18, 2023,
highlighting the proposed rate increases and a presentation from Staff on the proposed
Water Rates and Sewer rates during the City Council meeting on May 16, 2023.
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Item 7a
Public Engagement
The City is committed to helping the public understand the recommended water rates.
Information is provided on the City Utilities Department’s website, and online calculators
were made available at the Utilities Department’s website to assist customers’
understanding of the proposed rate structure and rate changes. The Water and Sewer
Rate Notice was mailed to all property owners and customers; a copy of the notice is
provided as Attachment C.
Staff has responded to questions by phone and email on how c ustomers’ bills would be
affected. A Water and Sewer Rate Community Forum was held on May 18, 2023 at the
San Luis Obispo Library, where Staff provided a presentation and responded to questions
raised by the two attendees from the community. Information was provided to the public
via radio ads, digital advertisements were posted on social media and on the City’s web
page, and printed information was shared at the Utilities Department booth at the
Thursday night Farmers Market to get the word out to the public regarding the Forum,
public hearing, and opportunities for protest.
In addition, Miguel Barcenas, Utilities Deputy Director, Engineering and Planning,
participated in interviews and provided information in Spanish regarding the proposed
rates on two local Spanish radio stations, KLMM (94.1) and KIDI (105.1). The two
interviews were conducted in Spanish and the first aired on Friday May 25, 2023.
Significant outreach on Customer Assistance Programs has also occurred in both English
and Spanish. Outreach efforts will continue until the City Council’s final consideration of
the rates on June 6, 2023.
CONCURRENCE
The City Attorney has approved as to form, and the City Finance Department and City
Clerk concur with the proposed water rate increase and associated adherence to Prop.
218 required procedures.
ENVIRONMENTAL REVIEW
Modification of rates and charges by public agencies is statutorily exempt from the
California Environmental Quality Act (CEQA) under Public Resources Code 21083 and
21080(b)(8) and State CEQA Guidelines Section 15273 (Rates, Tolls, Fares, and
Charges) because the change in rates and charges is for the purpose of:
a) Meeting operating expenses;
b) Purchasing or leasing supplies, equipment, or materials;
c) Meeting financial reserve needs and requirements;
d) Obtaining funds for capital projects necessary to maintain se rvice within
existing service areas; and
e) Obtaining funds necessary to maintain such intra -city transfers as authorized
by City Charter.
The change in fees is not intended to fund expansion of capital projects not otherwise
evaluated under CEQA. Therefore, no environmental review is required for this item.
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Item 7a
FISCAL IMPACT
In order to meet the rate revenue requirement of the Water Fund detailed in the
Comprehensive Water Rate Study, the proposed water rates are projected to generate a
total of $24.8 million dollars during FY 2023-24. This is an increase in total rate revenues
of 8.5 percent over the FY 2022-23. The Water Fund’s projected total revenue
requirement for 2023-24 is $28.1 million when other revenue is included. This is further
summarized in Table 2.
Table 2: 2023-25 Rate Revenues and Revenue Requirements
Comprehensive Water Rate
Study (in thousands)
FY2023-24 Forecast FY2024-25 Forecast
Rate Revenues
Without Proposed Rate Increase
$22,861 $23,044
Rate Revenues
With Proposed Rate Increase
$24,804 $26,878
Total Revenue
Requirement
Includes Non-rate Revenues1
$28,100 $29,558
1Non-rate revenues included in Total Revenue Requirements consist of all other revenues obtained by the
Utilities Department. These revenues can include investments, capacity interest payments from Cal Poly,
and miscellaneous penalties assessed by the Utilities Department.
The proposed rate increases would be implemented on July 1 , of the corresponding fiscal
year.
ALTERNATIVES
1. Deny the Recommended Water Rates. The proposed water rates were prepared in
alignment with City Council rate structure goals established in January 2018 and
Financial Plan objectives and policies. The proposed water rates were identified
through the preparation of the Comprehensive Water Rate Study to meet the needs
of the City’s Water Fund in providing water service for the community.
The proposed water rates were also prepared in compliance with Prop. 218. Staff
believes that the services, operating programs, and Capital Improvement Plan
components of the Water Fund represented by the recommended rates are
necessary, consistent with Financial Plan objectives and policies, prior policy/program
direction of the City Council (Water and Wastewater Rate Structure Review, August
15, 2017 and January 9, 2018), the City Charter and Municipal Code, and required for
compliance with state and federal laws. If the City Council does not approve the
recommended rates, the City would not have enough funding to implement the
proposed Capital Improvement Plan and would not be able to construct essential
capital projects, and the City’s bond rating may decrease, which may hinder the City’s
ability to obtain low-interest loans for capital projects. Therefore, this alternative is not
recommended.
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Item 7a
2. Reduce the Recommended Rates. Council could reduce recommended rates and
the impact because so much of the system costs are fixed would be to reduce the
level of capital which would likely impact the system with potential failures and could
impact Water Fund rating due to less than market expectations in terms of
infrastructure replacement.
ATTACHMENTS
A - Comprehensive Water Rate Study (HDR; April 2023)
B - Draft Resolution establishing the Water Service Rates for Financial Plan 2023-25
C - Water and Sewer Rate Notice
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Draft Report
City of San Luis Obispo
Comprehensive Water Rate Study
April 2023
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hdrinc.com
April 21, 2023
Mr. Aaron Floyd
Director of Utilities
City of San Luis Obispo
879 Morro Street
San Luis Obispo, CA 93401-2710
Subject: Water Rate Study Draft Report
Dear Mr. Floyd:
HDR Engineering, Inc. (HDR) is pleased to present to the City of San Luis Obispo (City) the draft
report for the City’s water rate study (Study). The City’s water rate study was developed using
industry standard methodologies and approaches for water utilities. The technical analyses
conducted as part of the Study for the City includes a revenue requirement, cost of service, and
rate design analysis. The findings and conclusions from these analyses were used to develop
proposed water rates that are proportional to the City’s customers and intended to be sufficient
to fund the operating and capital needs of the water utility. This report outlines the overall
approach used to achieve these objectives, along with our findings, conclusions, and
recommendations.
The City owns and operates a water supply, treatment, transmission, and distribution system.
The costs associated with providing water service to the City’s customers has been developed
based on the information provided by the City and incorporated into and within the development
of the proposed water rates. The water rate study provides the basis for developing and
implementing water rates which are cost-based, proportional, and defensible for the City’s
customers.
We appreciate the assistance provided by the City’s management team in the development of
this water rate study. More importantly, HDR appreciates the opportunity to provide these
technical and professional services to the City.
Sincerely yours,
HDR Engineering, Inc.
Shawn Koorn
Associate Vice President
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Table of Contents i
City of San Luis Obispo – Water Rate Study
Executive Summary
Introduction ....................................................................................................................... 1
Overview of the Rate Study Process .................................................................................. 1
Key Water Rate Study Results ............................................................................................ 2
Summary of the Water Revenue Requirement Analysis ................................................... 2
Summary of the Water Cost of Service Analysis ................................................................ 5
Summary of the Water Rate Designs ................................................................................. 6
Water Rate Study Recommendations................................................................................ 9
Summary of the Water Rate Study .................................................................................... 9
1 Introduction and Overview
1.1 Goals and Objectives ............................................................................................. 10
1.2 Overview of the Rate Study Process ..................................................................... 11
1.3 Organization of the Study...................................................................................... 11
1.4 Summary ................................................................................................................ 11
2 Overview of the Water Rate Setting Principles
2.1 Generally Accepted Rate Setting Principles .......................................................... 12
2.2 Determining the Revenue Requirement ............................................................... 12
2.3 Analyzing Cost of Service ....................................................................................... 13
2.4 Designing Water Rates .......................................................................................... 14
2.5 Economic Theory and Rate Setting ....................................................................... 14
2.6 Summary ................................................................................................................ 14
3 Development of the Revenue Requirement Analysis
3.1 Determining the Revenue Requirement .............................................................. 15
3.2 Establishing a Time Frame and Approach ............................................................ 15
3.3 Projecting Rate and Other Miscellaneous Revenues ........................................... 16
3.4 Projecting Operation and Maintenance Expenses .............................................. 16
3.5 Projecting Capital Funding Needs ........................................................................ 17
3.6 Projection of Debt Service ................................................................................... 19
3.7 Reserve Funding ................................................................................................... 19
3.8 Summary of the Revenue Requirement .............................................................. 19
3.9 Reserve Levels ...................................................................................................... 21
3.10 Debt Service Coverage Ratios .............................................................................. 21
3.11 Consultant’s Conclusions ..................................................................................... 22
Table of Contents
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Table of Contents ii
City of San Luis Obispo – Water Rate Study
4 Development of the Cost of Service Analysis
4.1 Objectives of a Cost of Service Study .................................................................... 23
4.2 Determining the Customer Classes of Service ...................................................... 23
4.3 General Cost of Service Procedures ...................................................................... 24
4.4 Development of Distribution Factors .................................................................... 25
4.5 Functionalization and Allocation of Plant in Service ............................................. 27
4.6 Functionalization and Allocation of Operating Expenses ..................................... 29
4.7 Major Assumptions of the Cost of Service Study .................................................. 29
4.8 Development of Cost-Based Water Rates ............................................................. 29
4.9 Development of the Unit Costs for Rate Designs .................................................. 32
4.10 Summary Results of the Cost of Service Analysis .................................................. 37
4.11 Consult’s Conclusions and Recommendations...................................................... 37
4.12 Summary of the Cost of Service Analysis .............................................................. 38
5 Development of the Rate Designs
5.1 Rate Design Criteria and Considerations ............................................................... 38
5.2 Overview of the Proposed Rate Structures ........................................................... 39
5.3 Summary of the Present and Proposed Water Rates ........................................... 40
5.4 Water Rate Study Recommendations ................................................................... 43
5.5 Summary of the Water Rate Study ....................................................................... 43
6 Water Technical Appendix
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Executive Summary 1
City of San Luis Obispo – Water Rate Study
Introduction
HDR was retained by the City of San Luis Obispo (City) to conduct a water rate study (Study). The
objective of the Study was to review the City’s water utility operating and capital costs in order
to develop proposed water rates which are set in a proportional manner for the City’s water
customers. The Study determined the adequacy of the existing water rates and provides the
framework for cost-based and proportional proposed water rates.
The City owns and operates a water treatment, transmission, and distribution system. The costs
associated with providing water supply, plus the costs of distributing water to customers served
by the system has been developed based on City provided information and included within the
development of the proposed water rates.
Overview of the Rate Study Process
A comprehensive water rate study uses three interrelated analyses to address the adequacy and
proportionality of a utility’s rates. These three analyses are a revenue requirement analysis, a
cost of service analysis, and a rate design analysis. These three analyses are illustrated below in
Figure ES - 1.
Figure ES – 1
Overview of the Water Rate Analyses
The above framework for reviewing and evaluating the City’s water rates was utilized in the
development of the comprehensive water rate study.
Revenue Requirement Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses of
the utility to determine the overall level of
rate adjustment required.
Distributes the revenue requirement to the
customer classes of service in a proportional
manner.
Considers both the revenue requirement
and cost of service results to develop the
proposed water rates.
Executive Summary
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Executive Summary 2
City of San Luis Obispo – Water Rate Study
Key Water Rate Study Results
The technical analysis for the City’s water rate study was developed based on the operating and
capital infrastructure costs necessary to provide water service to the City’s customers. The City’s
comprehensive water rate study resulted in the following key findings, conclusions, and
recommendations:
The City’s FY 2022-23 budget was used as the starting point of the analysis
A revenue requirement analysis was developed for the projected period of FY 2023-24
through FY 2032-33
The rate setting period for the Study was FY 2023-24 and FY 2024-25
Operation and maintenance expenses are projected to increase at inflationary levels
Additional staffing was included in FY 2023-24 to support water operations
Projected customer consumption levels have been developed based on recent customer
consumption characteristics
The proposed annual water rate (revenue) adjustments are 7.5% in FY 2023-24 and 7.5%
in FY 2024-25
A cost of service analysis was developed to proportionally distribute the revenue
requirement between the City’s customer classes of service (i.e., rate schedules)
The results of the cost of service analysis provided average unit costs (i.e., cost-based
rates) which were used to establish the final proposed water rates
The Study has proposed proportional and cost-based water rates by customer class of
service (rate schedules)
Summary of the Water Revenue Requirement Analysis
A revenue requirement analysis is the first analytical step in the development of the water rate
study. This analysis determines the overall adequacy of the City’s current water rate revenues.
From this analysis, a determination can be made as to the overall level of water rate revenue
adjustments needed to provide adequate and prudent funding for both operating and capital
infrastructure needs.
For the City’s Study, the revenue requirement was developed for FY 2022-23 to FY 2032-33. For
purposes of establishing proposed water rates, and the Proposition 218 process, the rate setting
period was identified as FY 2023-24 and FY 2024-25. Reviewing a multi-year time frame is
recommended to better anticipate future financial requirements and allow the City to begin
planning for these impacts sooner, thereby minimizing short-term rate impacts and overall long-
term rates. The revenue requirement analysis was developed on a “cash basis” methodology (i.e.,
approach). The cash basis approach is the most commonly used methodology by municipal
utilities to set their revenue requirement and it includes the cost components of annual O&M
expenses, annual debt service payments, capital projects funded from rates (rate funded capital),
and reserve funding. The primary financial inputs in the development of the City’s water revenue
requirement analysis were the City’s FY 2022-23 budget, billed customer and consumption data,
and the current water capital improvement plan. The O&M budget was then projected using
assumed escalation (inflationary) factors from the City’s fund analysis. In addition to the O&M
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Executive Summary 3
City of San Luis Obispo – Water Rate Study
budget, changes and additions to budgetary levels were made to reflect known changes that will
occur in the future. Specifically, new (additional) staff is assumed in FY 2023-24 at an initial annual
cost of $137,000.
Once the operating and maintenance (O&M) expenses have been projected, the next step is to
develop the capital improvement funding plan. The proper and adequate funding of capital
projects is important to maintain the City’s existing water infrastructure and service levels. At the
same time, it is important to create a funding plan which maximizes the amount of funds available
while attempting to minimize rates impacts over time by using an appropriate blend of long-term
borrowing and rate funding. A general financial guideline states that, at a minimum, a utility
should fund from user rates an amount equal to or greater than the utility’s annual depreciation
expense. However, this level of funding is typically not sufficient to reflect replacement costs or
fund all planned capital projects, but rather, is intended to provide a consistent annual funding
source for the City’s existing infrastructure. Using annual depreciation expense as a financial
guideline, the City’s annual water utility depreciation expense was approximately $2.9 million in
FY 2022-23. Within the City’s proposed capital funding plan, the City is projected to annually fund
through rates $2.8 million in FY 2022-23 increasing to $8.7 million by FY 2032-33 and averages
$5.7 million per year over the period. It is assumed that, in addition to the rate funded capital
improvements, the City will also need to utilize other funding sources (i.e., long-term debt,
reserves), in order to fully fund the water utility’s planned capital projects over this time period.
Provided below in Table ES - 1 is a summary of the capital improvement funding plan over the
review period (FY 2022-23 through FY 2027-28).
Table ES – 1
Summary of the Capital Improvement Plan ($000)
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28
Total Capital Improvements $15,006 $7,182 $5,643 $13,090 $6,560 $6,922
Less: Outside Funding $12,176 $4,262 $2,418 $8,610 $1,410 $782
Rate Funded Capital $2,830 $2,920 $3,225 $4,480 $5,150 $6,140
As can be seen, the difference between annual capital improvement needs and rate funded
capital is being funded through other funding sources. The City’s capital plan reflects the capital
projects needed to maintain the existing system, repair or replace deteriorating infrastructure,
and projects related to growth or redundancy. A more detailed discussion of the development of
the capital improvement funding plan is provided in Section 3. The detailed capital improvement
plan can be found on Exhibit 4 of the Technical Appendix.
The revenue requirement analysis for the City’s water system was developed to determine the
rate projections based on the specific costs of the City’s water utility. Provided below, in Table ES
– 2, is a summary of the revenue requirement analysis developed for the water utility. A more
detailed analysis of the revenue requirements can be found in Section 3 of this report as well as
in the Technical Appendix in Exhibit 3.
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Executive Summary 4
City of San Luis Obispo – Water Rate Study
Table ES - 2
Summary of the Revenue Requirement Analysis ($000)
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28
Revenues
Rate Revenues $22,680 $22,861 $23,044 $23,229 $23,414 $23,602
Misc. Revenues 3,798 3,295 2,680 2,781 2,983 3,093
Total Revenues $26,478 $26,156 $25,724 $26,009 $26,397 $26,695
Expenses
O & M $21,319 $23,684 $24,854 $25,956 $26,671 $27,426
Net Debt Service 2,043 1,470 1,469 1,466 1,838 1,837
Rate Funded Capital 2,830 2,920 3,225 4,480 5,150 6,140
Reserve Funding 287 26 10 4 3 7
Total Expenses $26,478 $28,100 $29,558 $31,906 $33,662 $35,410
Bal./(Def.) of Funds $0 ($1,943) ($3,834) ($5,897) ($7,265) ($8,715)
Bal. as a % of Rate Rev. 0.0% 8.5% 16.6% 25.4% 31.0% 36.9%
Proposed Rate Adj. 0.0% 8.5% 7.5% 7.5% 4.5% 4.5%
Add’l Rev. from Rate Adj. $0 $1,943 $3,834 $5,897 $7,265 $8,715
Total Bal./(Def.) of Funds $0 $0 $0 $0 $0 $0
* Table may not foot due to rounding
As can be seen, the revenue requirement analysis has summed O&M, net debt service (debt
service less funding through development impact fees), rate funded capital, and reserve funding.
The total revenue requirement (i.e., expenses) are then compared to the total revenues of the
City’s water utility. Total revenues are comprised of rate revenues (at present rate levels), and
other miscellaneous revenues. From this comparison, a balance (+) or deficiency (-) of funds can
be determined in each year. This balance or deficiency of funds is then compared to the rate
revenues to determine the percentage level of rate revenue adjustment necessary to meet the
revenue requirement as developed in each year of the projected time period. It is important to
note, the “Bal. / (Def.) of Funds” row is cumulative. Any adjustments in the initial years will reduce
the deficiency in the later years. Over the period, and assuming no rate adjustments in the prior
years, the total deficiency of rates by FY 2027-28 is 36.9%. To meet the overall revenue needs of
the water utility, annual rate adjustments have been proposed (see blue band).
Based on the revenue requirement analysis developed, HDR has concluded that the City will need
to adjust the level of water rate revenues as noted above to fund their projected operating and
capital infrastructure needs and maintain cost-based water rates. HDR has reached this
conclusion and recommendations:
The revenue requirement analysis indicates an overall deficiency in rate revenues of
36.9% by FY 2027-28
Propose adjusting rates by 8.5% in FY 2023-24 and 7.5% in FY 2024-25 through the
rate setting process outlined in Prop 218
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Executive Summary 5
City of San Luis Obispo – Water Rate Study
Given the projected revenue deficiencies, rate adjustments are necessary to fully fund
the City’s projected operating costs and fund the proposed capital improvement plan
The proposed rate revenue adjustments maintain the City’s financial health and integrity
by providing consistent, long-term, and sustainable funding levels
Prior to the implementation of the second adjustment (FY 2024-25), the City should
complete a comprehensive review of the water rates
In reaching this conclusion, HDR would recommend that the City adopt the proposed rate
revenue adjustments in FY 2023-24 and FY 2024-25 to provide sufficient funding for the projected
operating and capital needs of the water utility. A detailed discussion of the development of the
revenue requirement analysis can be found in Section 3 of this report. Technical exhibits of the
revenue requirement analysis have been included within the Technical Appendix in Exhibits 1 -
5.
Summary of the Water Cost of Service Analysis
A cost of service analysis determines the proportional distribution of the revenue requirement
to the City’s water customer classes of service. The objective of the cost of service analysis is
different from determining the revenue requirement analysis. A revenue requirement analysis
determines the utility’s overall financial needs whereas the cost of service analysis determines
the proportional manner to collect the revenue requirement from each customer class of service.
The cost of service analysis developed as a part of the Study utilized generally accepted cost of
service principles and industry standard methodologies as defined by the American Water Works
Association (AWWA) to meet the requirements of Proposition 218.
In summary form, the cost of service analysis began by functionalizing the City’s revenue
requirement. The functionalized revenue requirement was then allocated to the appropriate cost
components (e.g., commodity-related, capacity-related, customer-related, fire protection-
related). The individual allocation totals were then proportionally distributed to the water
customer classes of service (e.g., rate schedules) based on distribution factors. The distributed
expenses for each customer class were then aggregated to determine each customer class’s
overall revenue responsibility. Table ES - 3 provides the summary of the cost of service analysis
for the FY 2023-24 test year.
Table ES - 3
Summary of the Cost of Service Analysis ($000)
Class of Service
Present
Revenues
Distributed
Costs
$
Difference
%
Difference
Residential $11,042 $12,602 ($1,560) 14.1%
Multi-Family 3,879 4,399 ($521) 13.4%
Non-Residential 5,450 5,702 ($252) 4.6%
Irrigation 2,491 2,102 $389 -15.6%
Total $22,861 $24,805 ($1,943) 8.5%
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City of San Luis Obispo – Water Rate Study
The cost of service analysis distributes a proportional share of the revenue requirement to each
customer class of service based on their respective usage characteristics (e.g., average day use,
peak day use, customer) on the water system and the facilities required to provide service. The
results of the analysis indicate that cost differences exist between the customer classes of
service. It is important to understand that a cost of service analysis is based on a review of a
specific point in time and that costs and customer usage characteristics changes over time, thus
impacting the results.
The City’s cost of service analysis and resulting proposed water rates have been developed to
meet the legal requirements of California constitution article XIII D, section 6 (Article XIII D), also
known as Proposition 218. A major component of Article XIII D is the development of rates which
reflect the cost of providing service and the proportional distribution of the costs between the
customer classes of service. A key outcome of the cost of service analysis are the cost-based
average unit costs (e.g., $/customer/month or $/hundred cubic feet [CCF]). Average unit costs
from the cost of service analysis provide the cost-basis for the development of the City’s
proposed water rates based on the cost of service results. Provided below in Table ES - 4 is a
summary of the average unit costs derived in the cost of service analysis that were used to
develop the City’s proposed water rate designs by customer class (e.g., rate schedule).
Table ES – 4
Summary of the Average Unit Costs
Residential Multi-Family Non-Residential Irrigation
Fixed - $ / mtr / mo $28.15 $28.15 $28.15 $28.15
Variable - $/CCF
Tier 1 $7.94 -- -- --
Tier 2 9.16 -- -- --
Tier 3 15.79 -- -- --
All Use -- $8.91 $9.43 $9.63
Section 4 of this report provides a detailed discussion of the cost of service analysis conducted
for the City’s water utility and the development of the average unit costs shown in Table ES – 4.
The Technical Appendix to this report contains additional details associated with the cost of
service analysis calculation and can be found on Exhibits 6 - 17.
Summary of the Water Rate Design
The final step of the comprehensive water rate study process is the design of the City’s proposed
water rates to collect the required level of revenue, based on the results of the revenue
requirement and cost of service analyses. The revenue requirement analysis provided a set of
recommendations related to the level of annual rate revenue adjustments, or the level of total
rate revenues necessary to provide sufficient funding. The cost of service analysis provided the
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Executive Summary 7
City of San Luis Obispo – Water Rate Study
basis for how those costs should be proportionally collected from each of the customer classes
of service (e.g., rate schedules).
As discussed above, the City’s proposed water rates have been developed with the intent of
meeting the legal requirements of California constitution article XIII D, section 6 (Article XIII D).
While Article XIII D requires the development of cost-based rates, it does not prescribe a specific
approach or methodology to assure meeting this legal requirement. At the same time, HDR would
point out that there is no single methodology for equitably assigning costs to the various
customer groups. Consequently, HDR has developed this report, along with the City’s proposed
water rates, based on the principles and methodologies contained in the AWWA M1 manual,
while tailoring the methodology to the City’s specific and unique system and customer
characteristics, and requirements of Article XIII D (Proposition 218). HDR is of the opinion this
approach meets the requirements of Article XIII D to provide an administrative record of the steps
taken to establish the City’s water rates. HDR reaches this conclusion based upon the following:
The revenue derived from water rates does not exceed the funds required to provide the
property related service (i.e., water service). The proposed water rates are designed to
collect the overall revenue requirement of the City’s water utility.
The revenues derived from water rates shall not be used for any purpose other than that
for which the fee or charge is imposed. The revenues derived from the City’s water rates are
used exclusively to operate and maintain the City’s water system.
The amount of a fee or charge imposed upon a parcel or person as an incident of property
ownership shall not exceed the proportional costs of the service attributable to the parcel.
Section 4 of the Study, the cost of service analysis, focuses exclusively on the issue of the
proportional assignment of costs to each customer class of service. The proposed rates have
appropriately grouped customers into customer classes of service (single family, multi-family,
non-residential, irrigation) that reflect the varying consumption patterns and system
requirements of each customer class of service. The grouping of customers and rates into
these classes of service creates the proportionality required under Article XIII D by having
differing rates by customer classes of service which reflect both the level of revenue to be
collected by the utility, but also the manner in which these costs are incurred and
proportionally distributed to the customer classes of service based upon their proportional
impacts and burdens on City’s the water system and water resources.
Given the requirements to develop water rates based on cost of service principles, the average
unit costs in Table ES – 4 were used to design the proposed water rates for the City’s customer
classes of service.
The City currently has four customer classes of service: Residential, Multi-Family, Non-
Residential, and Irrigation. The present residential rate structure includes a fixed monthly meter
charge and a three-tier increasing block consumption charge. The first tier is usage from 0 to 5
CCF 1 per month, the second tier is usage from 5 to 12 CCF, and All consumption over the second
1 A hundred cubic feet of water, or a CCF of water, is equal to 748 gallons of water
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City of San Luis Obispo – Water Rate Study
tier (i.e., > 12 CCF) is charged at a higher rate which reflects the increased costs associated with
providing the additional capacity needed during peak use periods. As part of the Study, the tier
sizes (e.g., amount of consumption in each tier) and residential consumption characteristics were
reviewed and incorporated into the cost of service analysis. Section 5 of this report provides a
more detailed discussion of the consumption analysis.
Currently, multi-family, non-residential, and irrigation customer groups utilize the same rate
structure with a fixed meter charge by meter size, which is the same for all classes, and a uniform
consumption charge that is unique rate for each customer class. The proposed rates for all
customer classes are based on the results of the average unit costs shown in Table ES – 4 for FY
2023-24. Given the cost of service adjustments proposed in FY 2023-24, the proposed rates for
FY 2024-25 were adjusted “across the board” based on the overall revenue adjustment as
outlined in the revenue requirement analysis. Provided below in Table ES - 5 is a summary of the
present and proposed water rates for the two-year rate setting period.
Table ES - 5
Summary of the Present and Proposed Water Rates
Present
Rate FY 2023-24 FY 2024-25
Fixed Charge $/Meter/Mo
3/4" & Less (Residential) $24.12 $28.15 $30.25
1" 40.28 47.00 50.50
1 1/2" 80.38 93.75 100.80
2" 128.61 150.05 161.30
3" 241.31 281.50 302.60
4" 402.24 469.25 504.45
6" 804.30 938.25 1,008.60
8" 1,286.92 1,501.25 1,613.85
Consumption Charge $ / CCF
Residential
0 – 5 CCF $6.90 $7.94 $8.54
5 – 12 CCF 8.04 9.16 9.84
12 CCF + 14.74 15.79 16.97
Multi-Family $7.88 $8.91 $9.58
Non-Residential $9.57 $9.43 $10.14
Irrigation $11.73 $9.63 $10.35
As can be seen, the proposed water rates contain minor changes to the rate levels for each
customer class. In addition, each customer class has a specific rate based on the results of the
cost of service analysis. As noted, the cost of service average unit costs is the basis for both the
fixed monthly meter charges and consumption charges. In this way, the proposed rates reflect
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Executive Summary 9
City of San Luis Obispo – Water Rate Study
the results of the revenue requirement analysis (overall system revenue needs) and cost of
service analysis (proportional distribution / average unit costs).
Section 5 of this report provides a detailed discussion of the current and proposed water rates
along with a component by component summary of the proposed water rates for FY 2023-24 and
FY 2024-25.
Water Rate Study Recommendations
Based on the results of the water rate study, HDR recommends the following:
Rate revenue adjustments are necessary to prudently fund operating expenses and
necessary capital investment in renewal and replacement of the existing system
Water rate revenues should be adjusted 8.5% in FY 2023-24 and 7.5% in FY 2024-25
The City’s proposed water rates reflect the results of the cost of service analysis. The
average unit costs derived from the cost of service analysis, and the basis for the City’s
proposed water rates, reflect the proportional distribution of costs to the customer
classes of service
Prior to the implementation of the proposed set of rate adjustments the City should
complete an update to the water rate study
Summary of the Water Rate Study
This completes the summary discussion of the development of the comprehensive rate study
conducted for the City’s water utility. The focus of the Study has been the prudent and adequate
funding of the annual water utility operation and maintenance expenses and capital funding
needs. Furthermore, to meet the requirements of Proposition 218, the proposed water rates
were developed based on the proportional distribution of costs through the cost of service
analysis. A full and complete discussion of the development of the City’s comprehensive water
rate study can be found in following sections of this report.
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Introduction & Overview 10
City of San Luis Obispo – Water Rate Study
1 Introduction & Overview
HDR Engineering, Inc. (HDR) was retained by the City of San Luis Obispo (City) to conduct a
comprehensive water rate study. The objective of a comprehensive water rate study is to develop
proportional and cost-based water rates which are compliant with the requirements of
Proposition 218. This is accomplished by first reviewing and analyzing the City’s water operating
and capital costs and developing a projection of the overall revenue requirement of the water
utility. Next, the City’s revenue requirement is proportionally distributed to the City’s customer
classes of service (e.g., residential, multi-family, non-residential, irrigation). The findings and
conclusions from the cost of service analysis are then used to develop the City’s proposed water
rates which are reflective of how the City incurs costs to provide the water service to each class
of service. The result of the comprehensive water rate study process is proportional water rates
reflective of the water utility specific costs (i.e., cost-based rates).
The City owns and operates a water supply, treatment, transmission, and distribution system.
The determination of the total costs associated with providing water supply, treatment,
transmission, and distribution of water to the City’s customers has been developed based on the
City’s accounting, operating, and customer billing records along with other City specific
information.
1.1 Goals and Objectives
The City had several key objectives in developing the water rate study. These key goals and
objectives provide a framework for the technical analysis and policy decisions that are a part of
this study. The City’s key goals and objectives for this study were as follows:
Develop the study in a manner consistent with the principles and methodologies established
by the American Water Works Association (AWWA), M1 Manual, Principles of Water Rates,
Fees, and Charges to meet the requirement of Proposition 218
In financial planning and establishing the City’s proposed rates, review and utilize best
industry practices, while recognizing and acknowledging the specific and unique
characteristics of the City’s system and customers
Utilizing generally accepted rate making methodologies review the City’s costs to determine
the adequacy and equity of the water utility’s rates
Meet the City’s financial planning criteria as it relates to legally required debt service
coverage (DSC) ratios, adequate funding of capital infrastructure, and maintenance of
adequate and prudent reserve levels
Develop a final proposed rate transition plan which adequately supports the utility’s funding
requirements, while attempting to minimize overall impacts to rates
Provide proposed water rates designed to meet the intent and legal requirements of
California Constitution article XIII D, section 6 (commonly referred to as Proposition 218)
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Introduction & Overview 11
City of San Luis Obispo – Water Rate Study
1.2 Overview of the Rate Study Process
The City’s water rates must be set at a level where the operating and capital expenses are met
with the revenues received from customers. This is an important point, as failure to achieve this
objective may lead to insufficient funds to maintain system integrity. To evaluate the adequacy
of a utility’s existing rates, a comprehensive water rate study is often performed. A
comprehensive water rate study consists of three interrelated analyses. Figure 1 - 1 below
provides an overview of these analyses.
Figure 1 – 1
Overview of the Comprehensive Water Rate Analyses
The above framework was utilized for reviewing and evaluating the City’s water rates.
1.3 Organization of the Study
This report is organized in a sequential manner that first provides an overview of utility rate
setting principles, followed by sections that detail the specific technical and analytical steps used
to develop the City’s proposed water rates. The following sections comprise the City’s water rate
study report:
Section 2 – Overview of Water Rate Setting Principles
Section 3 – Revenue Requirement Analysis
Section 4 – Cost of Service Analysis
Section 5 – Rate Design Analysis
A Technical Appendix is attached at the end of this report, which details the technical analyses
that were undertaken in the preparation of the City’s water study.
1.4 Summary
This report will review and discuss the water rate analyses prepared for the City. This report has
been prepared utilizing generally accepted water rate setting methodologies and techniques to
meet the requirements of Proposition 218.
Revenue Requirement Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses of
the utility to determine the overall level of
rate adjustment required
Distributes the revenue requirement to the
customer classes of service in a proportional
manner
Considers both the revenue requirement
and cost of service results to develop the
proposed rates
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Overview of Water Rate Setting Principles 12
City of San Luis Obispo – Water Rate Study
2 Overview of Water Rate Setting Principles
This section of the report provides background information about the water rate setting process,
including descriptions of generally accepted principles, types of utilities, and the methodologies
used to develop the revenue requirement, cost of service, and rate design analyses. This
information is useful for gaining a better understanding of the details presented in Sections 3
through 5 of this report. The use of these principles and methodologies lead to cost-based and
equitable water rates for the City’s water customers.
2.1 Generally Accepted Rate Setting Principles
As a practical matter, all utilities should consider setting their rates around some generally
accepted or global principles and guidelines. That is, utility rates should be:
Cost-based, proportional, and set at a level that meets the utility’s full revenue
requirement
Easy to understand and administer
Designed to conform to generally accepted rate setting techniques and requirements of
Proposition 218
Stable in their ability to provide adequate revenues for meeting the utility’s financial,
operating, and regulatory requirements
Established at a level that is stable from year-to-year from a customer’s perspective
2.2 Determining the Revenue Requirement
Most public utilities use the “cash basis” 2 approach, or methodology, for establishing their
revenue requirement and setting rates. This approach conforms to most public utility budgetary
requirements and the calculation is easy to understand. A public utility totals its cash
expenditures for a period to determine required revenues. The revenue requirement for a public
utility is usually comprised of the following cost components or expenses:
• Total Operating Expenses: This includes a utility’s operation and maintenance (O&M)
expenses, plus any applicable taxes or transfer payments. Operation and maintenance
expenses include the materials, electricity, labor, supplies, etc., needed to keep the utility
functioning.
• Total Capital Expenses: Capital expenses are calculated by adding annual debt service
payments (principal and interest) to capital improvements financed with rate revenues.
In lieu of including capital improvements financed with rate revenues, a utility sometimes
includes annual depreciation expense to stabilize the annual revenue requirement.
Using the cash basis approach, the sum of the total operating expenses plus the total capital
expenses equals the utility’s revenue requirement during any selected time period (historical or
projected).
2 “Cash basis” as used in the context of rate setting is not the same as the terminology used for accounting
purposes and recognition of revenues and expenses. As used for rate setting, “cash basis” refers to the specific
cost components to be included within the revenue requirement analysis as outlined in the AWWA M1 Manual.
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Overview of Water Rate Setting Principles 13
City of San Luis Obispo – Water Rate Study
Note that the two portions of the capital expense component (debt service and capital
improvements funded from rate revenues) are necessary under the cash basis approach because
utilities generally cannot finance all their capital facilities with long-term debt. At the same time,
it is often difficult to pay for all capital expenditures on a “pay-as-you-go” basis given that some
major capital projects may have significant rate impacts upon the utility, even when financed
with long-term debt. Many utilities have found that a combination of “pay-as-you-go” funding
and long-term debt financing will often lead to minimization of rate increases over time.
As noted, public utilities typically use the cash basis methodology or approach to establish their
revenue requirement. An exception may occur if a public utility provides service to a wholesale
or large contract customer. In this situation, a public utility could use the “utility basis” approach
(see Table 2 - 1) to earn a “fair” rate of return on the investment needed to serve the wholesale
or large contract customer.
Table 2 – 1
Cash versus Utility Basis Comparison
Cash Basis Utility Basis (Accrual)
+ O&M Expenses + O&M Expenses
+ Taxes/Transfer Payments + Taxes/Transfer Payments
+ Capital Improv. Funded From Rates
(≥ Depreciation Expense) + Depreciation Expense
+ Debt Service (Principal + Interest) + Return on Investment
= Total Revenue Requirement = Total Revenue Requirement
2.3 Analyzing Cost of Service
After the total revenue requirement is determined, it is proportionally distributed to the users of
the service. The allocation and distribution process, as analyzed through a cost of service analysis,
reflects the cost relationships for producing and delivering water services. A cost of service
analysis requires three analytical steps:
1. Costs are functionalized, or grouped, into the cost categories related to providing service
(supply, treatment, distribution, pumping, etc.). This step is largely accomplished by the
utility’s accounting system.
2. The functionalized costs are then allocated to specific cost components. Allocation refers
to the arrangement of the functionalized data into cost components. For example, a
water utility’s costs – such as for the City - are typically allocated as commodity (average
day), capacity (peak day), customer, or fire-protection-related costs.
3. Once the total costs are allocated to the cost components, they are proportionally
distributed to each of the customer classes of service (e.g., residential, multi-family, non-
residential, irrigation) or rate schedule. The proportional distribution is based on each
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Overview of Water Rate Setting Principles 14
City of San Luis Obispo – Water Rate Study
customer class’s relative contribution to the cost component (i.e., benefits received from,
and burdens placed on the system and its resources). For example, customer-related
costs are proportionally distributed to each class of service based on the total number of
customers in that class of service, relative to all other customer classes of service. Once
the total costs (i.e., revenue requirement) are proportionally distributed, the level or
amount of revenues required from each customer class of service to achieve cost-based
rates can be determined.
The City’s cost of service analysis was developed based on generally accepted water cost of
service methodologies and approaches, while at the same time, tailoring the analysis to take into
consideration and reflect the City’s unique customer and system characteristics. The water cost
of service analysis developed for the City is discussed in more detail in Section 4 of this report.
2.4 Designing Water Rates
Water rates that meet the utility’s cost-based and proportional objectives are designed based
upon the findings and conclusions from the revenue requirement and cost of service analyses.
Using the cost information from these two analyses provides rates that are strictly cost-based
and proportional. The average unit costs (i.e., cost-based rates) from the cost of service analysis
does not consider, or take into account, other non-cost based goals and objectives (e.g.,
conservation, economic development, ability to pay, revenue stability). In designing water rates,
many utilities consider or incorporate other rate design objectives such as ability to pay,
continuity of past rate philosophy, economic development, ease of administration, and customer
understanding into their final water rate designs. However, the City’s proposed water rates must
comply with the requirements of Proposition 218. They must take into consideration each
customer class’s proportional share of costs distributed through the cost of service analysis to
meet the requirements of Proposition 218. The development of the City’s proposed water rate
designs is discussed in more detail in Section 5 of this report.
2.5 Economic Theory and Rate Setting
One of the major justifications for a comprehensive rate study is founded in economic theory.
Economic theory suggests that the price of a commodity must roughly equal its cost if equity
among customers is to be maintained. This statement’s implications on utility rate designs are
significant. For example, a water utility usually incurs capacity-related costs to meet summer
outdoor or non-domestic watering needs. It is presumed, then, that the customers who create
excessive peak demands on the system - and create the need for upsizing of the water system
infrastructure - should pay their proportional share of the costs related to the over-sizing of
facilities to meet peak use requirements. When costing and pricing techniques are refined,
consumers have a more accurate understanding of what the commodity costs to produce and
deliver. This price-equals-cost concept provides the basis for the subsequent analysis and
comments. This basic pricing technique has been incorporated and used within this study.
2.6 Summary
This section of the report has provided a brief introduction to the general principles, techniques,
and economic theory used to set water rates. These principles and techniques provide the
theoretical and technical basis for the analysis used to develop the City’s water rate study.
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Revenue Requirement Analysis 15
City of San Luis Obispo – Water Rate Study
3 Development of the Revenue Requirement
The development of the revenue requirement analysis is the first analytical step in the three-step
comprehensive water rate study process. This section of the report describes the development
of the revenue requirement analysis for the City’s water utility. The City provided HDR with
detailed revenue, expense, and customer data for the water system that allowed for the
development of the revenue requirement analysis.
The revenue requirement analysis, as developed for the City’s water utility, determines the
adequacy of water rates at current rate levels. From this analysis, a determination can be made
as to the overall level of rate revenue adjustment needed to provide adequate and prudent
funding for both operating and capital expenses. HDR has developed an independent analysis
based on the data and information provided by the City.
3.1 Determining the Revenue Requirement
In developing the City’s water revenue requirement, the water utility, as an enterprise fund, must
financially “stand on its own” and be properly funded. That is, no transfers from other City of San
Luis Obispo funds or enterprise funds occur to support the water utility. As a result, the revenue
requirement analysis assumes the full and proper funding needed to operate and maintain the
City’s water system on a financially sound and prudent basis.
3.2 Establishing a Time Frame and Approach
The first step in developing the revenue requirement for the City’s water utility was to establish
a time frame for the revenue requirement analysis. For the Study, the City’s revenue requirement
was developed for FY 2022-23 through FY 2032-33. This time frame was composed of the FY
2022-23 budget which was then projected using assumed escalation (inflationary) factors from
the City’s fund analysis through FY 2032-33. While the revenue requirement was developed for
a ten-year period, the focus for rate setting purposes was the immediate two-year period of FY
2023-24 and FY 2024-25. Reviewing a multi-year time period is always recommended in order to
aide in identifying any major financial impacts that may be on the horizon. By anticipating future
financial requirements sooner, the City can begin planning for these changes, thereby minimizing
short-term rate impacts and likely overall long-term rate levels.
The second step in determining the revenue requirement was to decide on a method to
accumulate water utility costs. In this case, a cash basis revenue requirement was utilized. As
noted in Section 2, the cash basis approach is the most common methodology used by municipal
utilities to establish their revenue requirement. Given a time period around which to develop the
revenue requirement and a method to accumulate the costs, the focus shifts to the development
and projection of the revenues and expenses of the City.
Presented below is a detailed discussion of the steps and key assumptions contained in the
development of the City’s water revenue requirement analysis.
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City of San Luis Obispo – Water Rate Study
3.3 Projecting Rate and Other Miscellaneous Revenues
Once the method and time period for developing the revenue requirement was established, the
next step is to develop a projection of the water rate revenues, at present rate levels. In general,
this process involved developing projected billing units (i.e., meter size, metered consumption)
for each customer group (e.g., residential, multi-family, commercial, irrigation) based on
historical billing records as provided by the City. The billing units for each customer group were
then multiplied by the current water rates for each customer group. This method of
independently calculating revenues links the projected revenues used within the Study to the
projected billing units. It also helps to confirm that the billing units used within the analyses are
reasonable for purposes of projecting future revenues, proportionally distributing costs (Section
4), and developing the proposed water rates (Section 5).
A key aspect of the projection of water
rate revenues was to develop a
projection of consumption levels. The
consumption data from July 2021
through June 2022 was reviewed to
develop a projection of customer
consumption characteristics. Most the
City’s water rate revenues are derived
from the residential customer class which
is approximately 48.3% of the total rate
revenues which is typical of a municipal
utility. Including the other customer
classes, and at current rate levels, the City
is projected to receive approximately $22.7 million in rate revenue in FY 2022-23. The Study has
assumed a conservative level of annual customer growth of 0.8%/year over the review period. In
FY 2027-28, the rate revenues, given assumed customer growth and at current rate levels, are
projected to be approximately $23.6 million.
In addition to water rate revenues, the water utility also receives miscellaneous revenues. There
are various miscellaneous revenue sources which are related to fines and penalties, interest
earnings, recycled water sales, and other miscellaneous revenues. In total, the City is projected
to receive approximately $3.8 million in miscellaneous revenues in FY 2022-23. This amount is
projected to decrease over the next five years due to grants falling off and reach approximately
$3.1 million by FY 2027-28.
On a combined basis, summing the water rate revenues at current rate levels and the
miscellaneous revenues, the City’s water utility has total projected revenues of approximately
$26.5 million in FY 2022-23, which is projected to increase to approximately $26.7 million by
2027-28, absent any proposed rate adjustments.
3.4 Projecting Operation and Maintenance Expenses
Operation and maintenance (O&M) expenses are incurred by the City to provide water service,
that is the supply, treatment, transmission, and distribution of water. This includes the daily
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Revenue Requirement Analysis 17
City of San Luis Obispo – Water Rate Study
operation and maintenance of the existing infrastructure, as well as purchasing water. For the
development of the revenue requirement, the City provided detailed budgeted O&M expenses
and capital improvement needs (discussed in Section 3.5) for the water utility for FY 2022-23. The
budgeted FY 2022-23 O&M expenses were then projected over the review period based on the
City’s estimated cost increases from the Fund Analysis. The total FY 2022-23 O&M expenses for
the City are budgeted at approximately $21.3 million. For FY 2023-24, addition staffing was added
starting based on the City’s current assumptions at $137,000. Over the planning horizon, the total
O&M expenses for the City is projected to increase to approximately $31.6 million by FY 2032-
33.
3.5 Capital Funding
A key component in the development of the water revenue requirement was properly and
adequately funding capital improvement needs related to the infrastructure of the City’s water
system. One of the major issues facing utilities across the U.S. is the amount of deferred capital
projects and the funding pressure from growth/expansion and regulatory-related improvements.
The proper and adequate funding of capital projects is an important issue for all water utilities
and is not just a local issue or concern of the City.
In general, there are three general types of capital projects that a utility may need to fund. These
include the following types:
Renewal and Replacement - A renewal and replacement project is essentially a project
required for maintaining the existing system that is in place today. As the existing
infrastructure becomes worn out, obsolete, etc., the utility should be making continuous
(annual) investments to maintain the integrity of the facilities.
Growth / Capacity Expansion - A utility may make capital investments to expand the capacity
of facilities to accommodate future capacity needs (customers).
Regulatory-Related - Another type of project may be a function of a regulatory (legal)
requirement in which the Federal or State government mandates the need for an
improvement to the system to meet a regulatory standard (e.g., water quality).
Understanding these different types of capital projects is important because it may aid in
explaining any needed rate adjustments. As the need for capital investment increases, it often
directly impacts needed rate revenue adjustments. In addition, and more importantly, the way
in which projects are funded may vary by the type of capital project. For example, annual and on-
going renewal and replacement projects may be paid for through rates and funded on a “pay-as-
you-go” basis. In contrast to this, growth or capacity expansion projects may be funded through
the collection of development impact fees (i.e., growth-related charges) in which new
development pays an equitable share of the cost of facilities necessary to serve their respective
development (impact). Finally, regulatory projects may be funded by a variety of different means,
which may include annual rate revenues, long-term borrowing, grants, etc.
While the above discussion appears to precisely divide capital projects into three clearly defined
categories, the reality of working with specific capital projects may be more complex. For
example, a water pipeline may be replaced, but while being replaced, it is up-sized to
accommodate greater capacity to serve increasing demands or new development. There are
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City of San Luis Obispo – Water Rate Study
many projects that share these “joint” characteristics. At the same time, projects may not be
“replacement” related, but rather “improvement” related.
For purposes of developing the capital funding plan for the revenue requirement analysis, the
City provided its long-term capital improvement plan (CIP) to HDR. The CIP provides a listing of
long-term capital projects that address deficiencies and improvements needed on the water
system.
Provided below in Table 3 - 1 is a summary of the capital funding plan based on the overall capital
plan as developed by the City based on current needs. As noted, the focus of the City’s water rate
study was on the next five-year period for rate setting purposes. The capital plan detail has been
simplified to the main categories for ease of reading. Exhibit 4 in the Technical Appendix provides
details of the individual capital projects and identified funding sources.
Table 3 – 1
Summary of the Capital Improvement Plan ($000)
FY 2022-
23
FY 2023-
24
FY 2024-
25
FY 2025-
26
FY 2026-
27
FY 2027-
28
Total Capital Projects $15,006 $7,182 $5,643 $13,090 $6,560 $6,922
Less: Outside Funding Sources
Operating Fund $0 $0 $0 $0 $0 $0
Capital Fund 12,176 4,262 2,418 610 1,410 782
New Long-Term Borrowing 0 0 0 8,000 0 0
Total Outside Funding Sources $12,176 $4,262 $2,418 $8,610 $1,410 $782
Rate Funded Capital $2,830 $2,920 $3,225 $4,480 $5,150 $6,140
As can be seen in Table 3 - 1, the total cost of the capital projects to be funded varies from year-
to-year. While the total amount required to fund projects may vary from year-to-year, the rate
study capital funding plan has attempted to provide a consistent funding source from rates for
capital improvements. In this case, rates will annually fund, on average, $4.1 million per year (as
highlighted in Table 3 - 1). As a point of reference, the City’s annual depreciation expense was
approximately $2.9 million for FY 2022-23. A desirable and recommended minimum funding
target for rate funded capital is an amount equal to or greater than annual depreciation expense.
It is important to understand that annual depreciation expense is not the same as replacement
cost, which can be 1.5 to 2.0 times the original cost of the project. Thus, funding an amount which
exceeds annual depreciation expense is both prudent and appropriate.
This capital funding plan has assumed the need for additional long-term borrowing (debt
financing) to fund a portion of the capital projects in FY 2025-26. This new long-term borrowing
allows the City to complete the projects, while minimizing the direct impact to rates. In
developing the capital plan, and reviewing the current and anticipated debt service, HDR is not
acting as a municipal advisor or providing municipal advice as it relates to bonds, terms, or
structures of debt issuances. Rather, this rate study is a financial planning document which has
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City of San Luis Obispo – Water Rate Study
identified projections of future funding needs and utilized general assumptions for long-term
debt terms for modeling and projection purposes.
In summary, the capital funding analysis has established a level of annual rate funding which is
greater than annual depreciation. Going forward, the City should continue to plan and monitor
their annual renewal and replacement needs and, as appropriate, increase the level of rate
funded capital over time to keep up with the cost escalation of these capital projects. In
developing this financial plan, HDR and the City have attempted to minimize rate impacts while
funding the planned capital improvement projects of the City’s water utility.
3.6 Projection of Debt Service
The City currently has four outstanding long-term debt issues for the water utility which totals
$2.4 million in FY 2022-23. In addition, there is an anticipated to be new long-term debt service
in FY 2025-26 in order to fund the planned capital projects. The impact of the assumed borrowing
is approximately $382,000 in FY 2026-27. Additional long-term borrowing is also projected in FY
2028-29 which will add an additional $460,000 to the annual debt service requirement at that
time.
3.7 Reserve Funding
The final component of the revenue requirement analysis is the reserve funding. It includes
transfers to, or from, reserve funds to maintain prudent ending fund balances or for future
funding of capital projects. The City has a target minimum fund balance for the Operating
(reserve) Fund of 20% of annual O&M expenses, or approximately $4.3 million. In addition, the
rate study has included a capital reserve that does not currently have a minimum target and a
rate stabilization reserve target of 10% of rate revenues which for FY 2022-23 is $2.3 million. Any
additional balance of funds after the transfers are made is transferred to the capital fund to
maintain prudent levels of reserves to help pay for future capital needs of the water utility.
Funding from reserves may also be used to meet operating and capital needs in a deficient year.
3.8 Summary of the Revenue Requirement
Given the above projections of revenue and expense components, a summary of the City’s water
revenue requirement analysis can be developed. In developing the revenue requirement
analysis, consideration was given to the financial planning considerations of the City. More
specifically, emphasis was placed on minimizing rates while adequately funding the operational
and capital improvement needs throughout the review period. Presented below in Table 3 - 2 is
a summary of the City’s water revenue requirement analysis based on projected expenses and
current rates. Detailed exhibits of this analysis can be found in the Technical Appendices in
Exhibits 1 - 5.
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City of San Luis Obispo – Water Rate Study
Table 3 - 2
Summary of the Revenue Requirement Analysis ($000)
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28
Revenues
Rate Revenues $22,680 $22,861 $23,044 $23,229 $23,414 $23,602
Misc. Revenues 3,798 3,295 2,680 2,781 2,983 3,093
Total Revenues $26,478 $26,156 $25,724 $26,009 $26,397 $26,695
Expenses
O & M $21,319 $23,684 $24,854 $25,956 $26,671 $27,426
Net Debt Service 2,043 1,470 1,469 1,466 1,838 1,837
Rate Funded Capital 2,830 2,920 3,225 4,480 5,150 6,140
Reserve Funding 287 26 10 4 3 7
Total Expenses $26,478 $28,100 $29,558 $31,906 $33,662 $35,410
Bal. / (Def.) of Funds $0 ($1,943) ($3,834) ($5,897) ($7,265) ($8,715)
Bal. as a % of Rate Rev. 0.0% 8.5% 16.6% 25.4% 31.0% 36.9%
Proposed Rate Adjustment 0.0% 8.5% 7.5% 7.5% 4.5% 4.5%
Add’l Rev. from Rate Adj. $0 $1,943 $3,834 $5,897 $7,265 $8,715
Total Bal. / (Def.) of Funds $0 $0 $0 $0 $0 $0
As can be seen, the revenue requirement has summed the O&M, rate funded capital, net debt
service, and change in working capital (i.e., net funding to and from reserves). The City’s total
revenue requirement is then compared to the total revenues which include the rate revenues -
at present rate levels - and other miscellaneous revenues. From this comparison, a balance or
deficiency of funds in each year can be determined. This balance or deficiency of funds is then
compared to the present rate revenues to determine the level of rate adjustment needed to
meet the revenue requirement. It is important to note the “Bal. / (Def.) of Funds” row is
cumulative. That is, any adjustments in the initial years will reduce the deficiency in the later
years. In FY 2023-24, an 8.5% rate adjustment is proposed - which would be implemented July of
2023 (the first month of the fiscal year) - and 7.5% rate increase in FY 2024-25. Over the five-year
period, the total deficiency in current water rates is 36.9%. It is important to note that only the
proposed rate adjustments for the next two years – FY 2023-24 and FY 2024-25 – are proposed
to be noticed through the Prop 218 process.
The deficiencies shown in Table 3 - 2 are primarily a function of three factors. First, the O&M
expenses assume inflation assumptions for the projected time period, and the projection of O&M
expenses has also assumed additional expenses beyond existing/budgeted levels. Next, the
capital funding analysis includes the annual rate funding of capital projects along with the need
for long-term borrowing, which translates in a new (additional) debt service payment. Taken
together, the water utility’s current rates are projected to be deficient over the five-year time
period.
Based on the revenue requirement analysis developed for the City’s water utility, HDR has
concluded that the rate revenues will need to be adjusted to maintain prudent funding of
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City of San Luis Obispo – Water Rate Study
expenses and establish cost-based rates. Based on the rate transition plan (blue shaded line in
Table 3 – 2), the proposed annual rate adjustments are designed and intended to meet the
operating and capital needs of the City’s water utility, as well as maintain strong financial metrics.
3.9 Reserve Levels
Another key element of determining the financial health and sustainability of the City’s water
utility is a review of the level of available reserve funds after the proposed rate adjustments.
Utilities can establish and maintain several different reserves. Each reserve has a specific and
different purpose. The typical types of reserves that utilities often maintain are generally
referenced as an operating reserve, a capital reserve, an impact fee reserve, and in some cases
an emergency or rate stabilization reserve. Certain funds may establish a minimum ending
balance that, if reached or falls below, is a signal that the City should review the revenue sources
associated with that fund and take appropriate action. The minimum ending balances will vary
depending on the purpose of the fund and the expected revenue sources.
For the City, there are three primary funds for the water utility rate study. These are the
Operating Fund, Capital Fund, and Rate Stabilization. Each of these is discussed further below.
Operating Fund – The operating reserve is in place to meet the City’s fluctuating cash flow
needs. The typical minimum ending balance for an operating reserve ranges from 90 –
365 days of annual O&M expenses. For the City, the minimum target was set at 20% of
O&M expenses, or 73 days of O&M. This target results in a minimum ending balance of
approximately $4.6 million in FY 2022-23. This minimum reserve level increases to $6.4
million by 2032-33.
Capital Fund – The capital fund is used to track the collection of development impact fee
revenues as well as provided funding for capital projects. There is currently no minimum
target for the reserve. When capital reserve funds are available, this fund is used to pay
for capital improvement projects and when there is a surplus of funds those funds are
moved to the capital fund in order to fund future capital projects.
Rate Stabilization Fund – A rate stabilization reserve is maintained at a level equal to
approximately 10% of the annual water rate revenue. These funds are unrestricted, but
their intended use shall be limited to mitigating large or unanticipated rate impacts, or
emergency/catastrophe situations.
3.10 Debt Service Coverage Ratios
When long-term debt is issued it may have certain rate covenants associated with the debt issue.
Currently, the City has 4 outstanding long-term debt issuances. Additionally, as mentioned
previously, it is assumed within the capital funding plan that the City will need to issue long-term
debt in order to fund capital improvement projects. The City will need to monitor the debt service
coverage (DSC) as the debt is incurred and for planning purposes a minimum debt service
coverage ratio of 1.30 is assumed. The City should strive for a coverage ratio which is greater
than the minimum. Provided in Table 3 - 3 is a summary of the projected debt service coverage
(DSC) ratio calculations for the City’s water utility before and after the proposed rate
adjustments.
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City of San Luis Obispo – Water Rate Study
Table 3 - 3
Summary of the Debt Service Coverage Ratio (All Debt, w/DIF)
FY 2022-23 FY 2023-24 FY 2024-25 FY 2025-26 FY 2026-27 FY 2027-28
Before Rate Adjustment 2.67 1.75 0.89 0.46 0.23 0.03
After Rate Adjustment 2.67 2.79 2.95 3.62 3.48 3.93
As can be seen in Table 3 - 3, with the proposed rate adjustments, the City is maintaining a strong
debt service coverage ratio. In contrast, should the City not implement the proposed rate
revenue adjustments, the DSC ratio would fall below 1.00 in FY 2024-25. It is prudent financial
practice to target at least 1.30 for the DSC ratio. The 1.30 DSC means that the utility, after meeting
its O&M expenses has sufficient funds available to pay the debt service payment. More
specifically, an amount of funding available which is 30% greater than the actual debt service
payment. With this minimum financial planning target set, Table 3 – 3 demonstrates that the City
is above this minimum threshold after the proposed rate adjustments. The City is advised to
continue to monitor revenues and expenses to maintain sufficient debt service coverage ratios.
3.11 Consultant’s Conclusions
The revenue requirement developed above for the City’s water utility has indicated the need for
annual revenue (rate) increases to adequately fund the City’s operating and capital needs for the
water utility. The proposed rate revenue adjustments are 8.5% in FY 2023-24 and 7.5% in FY
2024-25. HDR has reached the following conclusion and recommendations:
Rate adjustments are necessary to adequately fund the water utility’s operating and
capital expenses
The proposed rate adjustments maintain the City’s financial health and provide long-term
sustainable funding levels
The rate adjustments are needed to maintain, and exceed, the minimum debt service
coverage ratio requirements
Prior to the implementation of the final proposed rate adjustment the City should
complete a review of the water rates
In reaching the above conclusions, HDR would recommend that the City adopt the proposed
annual rate adjustments to provide sufficient funding for the City’s projected operating expenses
and capital improvement program.
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Cost of Service Analysis 23
City of San Luis Obispo –Water Rate Study
4 Development of the Cost of Service Analysis
In the previous section, the revenue requirement analysis focused on the total revenues required
to adequately fund the City’s water utility. This section will provide an overview of the second
step in a comprehensive water rate study; the cost of service analysis developed for the City’s
water utility.
A water cost of service analysis determines the proportional distribution or assignment of the
total revenue requirement to the customer classes of service (e.g., residential, multi-family, non-
residential, irrigation). The previously developed revenue requirement for FY 2023-24 was
utilized in the development of the following cost of service analysis.
4.1 Objectives of a Cost of Service Study
There are two primary objectives in conducting a cost of service analysis:
• Proportionally distribute the City’s water revenue requirement among the customer
classes of service, and
• Derive average unit costs (i.e., cost-based rates) for subsequent rate designs
The objectives of the cost of service analysis are different from determining a revenue
requirement. As noted in the previous section, a revenue requirement analysis determines the
utility’s overall financial needs, while the cost of service analysis determines the proportional
manner to collect the total revenue requirement from the customer classes of service.
The results of the cost of service analysis determine the average unit costs (cost-based rates)
which are used in the development of the final step of the rate study process, the rate design
analysis. The cost of service analysis provides a per unit cost of water consumption based on each
customer class’s proportional share of costs. For example, a water utility incurs costs related to
average day and peak day demands, fire protection, and customer-related cost components. A
water utility must build sufficient capacity 3 to meet summer peak capacity needs. Therefore,
those customers contributing to those peak demands on the system should pay their
proportionate (i.e., fair) share of the costs to provide the capacity in the system. The average unit
costs derived from the cost of service analysis provides the relationship between these
components which are then used to set cost-based rates. Similarly, the customer-related costs
are totaled and distributed proportionately on an equivalent meter basis.
3 System capacity is the system’s ability to supply water to all delivery points at the time when demanded. Coincident
peaking factors are calculated for each customer class at the time of greatest system demand. The time of greatest
demand is known as a peak demand. Both the operating costs and capital asset related costs incurred to
accommodate the peak demands are generally allocated to each customer class based upon the class’s contribution
to the specific peak month, peak day, or peak hour event.
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Cost of Service Analysis 24
City of San Luis Obispo –Water Rate Study
4.2 Determining the Customer Classes of Service
The first step in a cost of service analysis is to determine the customer classes of service. Based
on a review of the customer and billing information, the current rate schedules, and discussion
with City staff, the classes of service used within the cost of service analysis were:
Residential
Multi-Family
Non-Residential
Irrigation
In determining classes of service for cost of service purposes, the objective is to group customers
together into similar or homogeneous groups based upon similar facility requirements and/or
demand characteristics. HDR reviewed the current customer characteristics and facility
requirements of each of the customer classes of service. In reviewing the customer classes of
service, the City has appropriately grouped customers into customer classes of service. The
grouping of customers and rates into these classes of service creates the proportionality
expected under Proposition 218. This is accomplished by having differing rates, by customer
classes of service, which reflect both the level of revenue to be collected by the utility, but also
the manner in which these costs are incurred, and then assigning those costs to customer classes
of service based upon their proportional impacts.
4.3 General Cost of Service Procedures
To determine the cost to serve each customer class of service on the City’s water system, a cost
of service analysis is conducted. A cost of service analysis utilizes a three-step approach to review
costs. These steps take the form of functionalization, allocation, and distribution. Provided
below is a detailed discussion of the water cost of service study conducted for the City, and the
specific steps taken within the analysis. The approach used for the City’s Study conforms to
generally accepted and industry standard cost of service methodologies that are outlined in the
AWWA M1 Manual to meet the proportionality requirements of Proposition 218.
4.3.1 Functionalization of Costs
The first analytical step in the cost of service process is called “functionalization”.
Functionalization is the arrangement of expenses and asset (i.e., infrastructure or plant) data by
major operating functions (e.g., supply, treatment, transmission, distribution). Within the City’s
Study there was a limited amount of functionalization of the cost data required since it was
already largely accomplished within the City’s system of accounts.
4.3.2 Allocation of Costs
The second analytical task performed in a water cost of service study is the allocation of costs.
The allocation of costs examines why each expense identified in the revenue requirement was
incurred or what type of need is being met. The following cost allocators were used to develop
the City’s water cost of service analysis:
Commodity-Related Costs: Commodity costs are those costs which tend to vary with the
total quantity of water consumed by a customer. Commodity costs are those incurred
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Cost of Service Analysis 25
City of San Luis Obispo –Water Rate Study
under average load (demand) conditions and are generally specified for a period such as
a month or year. Chemicals or utilities (electricity) are general examples of commodity-
related cost as these costs tend to vary based upon the total volumes of water consumed.
Capacity-Related Costs: Capacity costs are those which vary with peak demand, or the
maximum rates of flow to customers. System capacity is required when there are large
demands for water placed upon the system (e.g., summer lawn watering). For water
utilities, capacity-related costs are generally related to the sizing of facilities needed to
meet a customer’s maximum water demand at any point in time. For example, portions
of distribution storage reservoirs and mains (pipes) must be adequately sized to meet this
type of requirement.
Customer-Related Costs: Customer costs are those costs which vary with the number of
customers on the water system. They do not vary with system output or consumption
levels. These costs are also sometimes referred to as “readiness to serve” or availability
costs. Customer costs may also sometimes be further allocated as either “actual” or
“weighted”. Actual customer costs vary proportionally on a per customer basis, from
customer to customer, with the addition or deletion of a customer regardless of the size
of the customer. An example of an actual customer cost is postage for mailing bills. This
cost does not vary from customer to customer, regardless of the size or consumption
characteristics of the customer. In contrast, a weighted customer cost reflects a
disproportionate cost, from customer to customer, with the addition or deletion of a
customer. Examples of weighted customer costs are items such as meter maintenance
expenses, where a large commercial customer requires a significantly more expensive
meter than a typical residential customer or the greater capacity requirements of the
larger meters.
Fire Protection-Related Costs: Fire protection costs are those costs related to the public
fire protection functions. Usually, such costs are those related to public fire hydrants and
the over-sizing of mains and distribution storage reservoirs for fire protection purposes.
Even with the largest peak demands on the system, there still must be sufficient capacity
available to meet fire protection-related needs. These costs are related to water service
on property because public fire hydrants are designed to deliver water to property served
by the water utility in sufficient quantities and pressures to fight a fire on the property.
Revenue-Related Costs: Some costs associated with the utility may vary with the amount
of revenue received by the utility. An example of a revenue related cost would be a utility
tax which is based on the gross utility revenue.
4.4 Development of Distribution Factors
Once the allocation process is complete, and the customer groups have been defined, the
allocated costs are proportionally distributed to each customer group. The City’s allocated costs
for the water utility were distributed to the identified customer groups using the following
distribution factors.
Commodity Distribution Factor: As noted previously, commodity-related costs vary with
the total water consumption. Therefore, the commodity distribution factor was based on
the projected total metered water consumption plus water losses for each class of service
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Cost of Service Analysis 26
City of San Luis Obispo –Water Rate Study
for the projected test period FY 2023-24. For the
City’s Study the consumption for each customer
class of service was developed based on historical
metered consumption records.
Capacity Distribution Factor: Capacity is related to
peak usage. The capacity distribution factor was
developed based on the estimated contribution to
the water system peak day use of each customer
class. Peak day use by customer class of service was
estimated using peaking factors for each customer
group. In this case, the peaking factor was defined as
the relationship between peak day contribution and
average day use and determined for each customer
group based on a review of the metered average
month to peak month usage. Given an estimated
peaking factor, the estimated peak day contribution
for each class of service was developed.
Customer Distribution Factor: Customer costs vary
with the number of customers on the system. The
City’s customer costs were distributed on the
weighted customer distribution factor which is for
meters and services. This factor reflects the capacity
requirements of each customer class based on the
sum of the equivalent meters. For example, a 2-inch
meter has eight times the capacity of a 5/8” meter.
Therefore, a larger proportion of the capacity costs
of providing service is distributed to the larger meter
sizes.
Fire Protection Distribution Factor: The
development of the distribution factor for fire
protection expenses involved an analysis of each
class of service and their corresponding fire flow
requirements. The analysis considered the gallon
per minute (gpm) fire flow requirements in the
event of a fire, along with the duration of the
required flow. The fire flow rates used within the
distribution factor were based on industry standards
and similar experiences with other water cost of
service studies. The minimum fire flow requirements
are then multiplied by the number of customers in
each class of service, and the assumed duration of
Water Cost of Service Analysis
Terminology
Functionalization – The
arrangement of the cost data by
functional category (e.g., source of
supply, treatment, etc.).
Allocation – The assignment of
functionalized costs to cost
components (e.g., commodity,
capacity, customer and fire
protection related).
Distribution – Equitably
distributing the allocated costs to
each class of service based upon
each class’s proportional
contribution to that specific cost
component.
Commodity Costs – Costs that are
allocated as commodity-related
vary with the total volume of water
consumed (e.g., chemical use at a
treatment plant).
Capacity Costs – Costs allocated as
capacity-related are related to
meeting peak day or peak hour
usage. Facilities are often designed
and sized around meeting peak
demands.
Fire Protection Costs – Costs that
are related to fire protection
services (e.g., hydrants, oversizing
of storage and distribution mains).
Customer Costs – Costs allocated
as customer-related vary with the
number of customers on the
system (e.g., metering costs).
Revenue Related Costs – Costs
which vary with the amount of
revenue received by the utility
(e.g., income tax).
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Cost of Service Analysis 27
City of San Luis Obispo –Water Rate Study
the fire, to determine each class’s prorated fire flow requirements.
Revenue Related Distribution Factor: The revenue related distribution factor was
developed from the projected rate revenues for FY 2023-24 for each customer class of
service. These same revenues were used within the revenue requirement analysis
discussed previously.
The distribution factors are developed for each customer class of service. At the same time, the
distribution factors for commodity and capacity-related costs must be developed to also calculate
the average unit cost pricing. For example, the residential commodity and capacity distribution
factor is broken down for each of the rate structure tiers; multi-family, non-residential, and
irrigation is a single factor for each class. This level of distribution was provided within the analysis
in order to demonstrate (i.e., calculate) the cost basis for the City’s tiered rates, and meet the
requirements of Proposition 218. Further discussion related to the distribution of costs to a
greater cost level is discussed in more detail in the rate design analysis provided in Section 5 of
this report.
4.5 Functionalization and Allocation of Plant in Service
As noted above, the first steps of the cost of service analysis are the functionalization and
allocation of plant (infrastructure) in service. In performing the functionalization of plant in
service, HDR utilized the City’s historical plant (asset) records. Once the plant assets were
functionalized, the analysis shifted to the allocation of the asset. The allocation process included
reviewing each group of assets and determining which cost allocators the assets were related to.
For example, the City’s assets were allocated as: commodity-related, capacity-related, customer-
related, revenue-related, fire protection-related, or a direct assignment. Provided below is a
summary overview of the allocation process used for the City’s plant assets. The following
approach is based on the methodology as described in the AWWA M1 Manual.
4.5.1 Source of Supply
Source of supply was allocated as both average day and peak day related. The City’s water system
statistics from July 2021 through June 2022 were utilized to develop the average day and peak
day calculation. The City’s source of supply assets was allocated on the basis of the relationship
of system average day to peak day demands. This resulted in 60.0% of the source of supply plant
assets allocated to commodity-related costs (average day) and 40.0% to capacity-related costs
(peak day). These allocation percentages reflect the City’s specific system peak demand (capacity
needs) in relation to the system average day use (base needs).
4.5.2 Treatment
Treatment plant assets were allocated in the same manner as the source of supply assets; 60.0%
to commodity-related and 40.0% to capacity-related. Treatment plant is often considered to be
an extension of the source of supply and this allocation also reflects the operation of the
treatment facilities either as meeting average day and peak day needs on the system.
4.5.3 Pumping
Pumping was allocated as 100% capacity. Pumps must be sized to meet peak use requirements
and this allocation assumes pumping plant is sized to meet peak use needs.
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City of San Luis Obispo –Water Rate Study
4.5.4 Storage
Distribution storage reservoirs are typically designed to meet at least two types of needs –peak
use demands and fire protection. The total storage capacity of the City’s storage facilities was
examined, while consideration is also given to the additional capacity required for fire protection
under a fire event scenario. This additional amount of capacity, in relation to the total storage
capacity, is considered fire protection-related. The balance of storage capacity is in place to meet
average and peak use demands. Finally, the City has a component of the storage assets that are
related to reservoirs that act more as a source of supply and were allocated as average day and
peak day as the source of supply assets. This resulted in storage plant assets allocated 32.1% to
commodity, 56.6% to capacity, and the remaining 11.3% assigned to the fire protection
component.
4.5.5 Transmission and Distribution
Transmission and distribution lines (mains) are typically assumed to provide three types of costs.
First, a distribution system must be in place to meet a customer’s minimum use requirements for
water. This portion of the distribution main plant investment is a function of the number of
customers on the system and, thus, a customer-related cost. Next, a portion of the distribution
system mains is considered a function of meeting peak flow (use) requirements on the system.
Distribution mains must be sized to adequately meet the maximum peak flows demanded by
customers. This incremental portion of the distribution main plant investment is considered
capacity related. Finally, even with sufficient capacity for meeting peak use demands, distribution
mains must also be over-sized for fire flow demands. This final portion of over-sizing for
distribution mains plant investment is classified as fire protection related. Based upon an analysis
of the City’s distribution mains, the assignment of the distribution mains was allocated as 18.0%
customer-related, 70.6% to capacity(i.e., peak use)-related, and 11.4% fire protection-related.
Table 4 - 1 provides a summary of the basic functionalization and allocation of the major water
plant items. A more detailed exhibit of the City’s functionalization and allocation of plant
investment can be found in the Technical Appendix Exhibit 11.1.
Table 4 - 1
Summary of the Allocation of Water Plant in Service
Category
Commodity
Related
Capacity
Related
Customer
Related
Equivalent
Meters
Fire
Protection
Source of Supply 60.0% 40.0% 0.0% 0.0% 0.0%
Pump Stations 0.0% 100.0% 0.0% 0.0% 0.0%
Storage 32.1% 56.6% 0.0% 0.0% 11.3%
Transmission & Distribution 0.0% 70.2% 0.0% 17.9% 11.8%
General Plant 28.7% 55.9% 0.0% 8.9% 6.5%
Total Net Plant in Service 28.7% 55.9% 0.0% 8.9% 6.5%
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Cost of Service Analysis 29
City of San Luis Obispo –Water Rate Study
4.6 Functionalization and Allocation of Operating Expenses
As noted in the AWWA M1 Manual, operating expenses are generally functionalized and
allocated in a manner similar to the corresponding plant account. For example, maintenance of
distribution mains is typically allocated in the same manner (allocation percentages) as the plant
account for distribution mains. This approach to allocation of the City’s water utility operating
expenses was used for this analysis.
For the City’s water rate study, the revenue requirement for FY 2023-24 was functionalized,
allocated, and distributed. As noted in Section 3, the City utilized a cash basis revenue
requirement, which was comprised of operation and maintenance expenses, rate funded capital,
net debt service, and reserve funding. A more detailed review of the functionalization and
allocation of the revenue requirement can be found in the Technical Appendix in Exhibit 13.1.
4.7 Major Assumptions of the Cost of Service Study
Several key assumptions were used within the City’s water cost of service analysis. Below is a
brief discussion of the major assumptions used.
The test period used for the water cost of service analysis was FY 2023-24. The revenue
and expense data were previously developed within the revenue requirement analysis
A cash basis methodology was utilized which conforms to generally accepted water cost
of service approaches and methodologies and is consistent with the City’s previous cost
of service analyses
The allocation of plant in service was developed based upon generally accepted cost
allocation techniques and the City’s specific system characteristics
Consumption by cost or class of service used within this study were developed for each
class of service from historical usage information provided by the City
Peak day capacity distribution factors were estimated based upon each customer group’s
average month to peak month relationship
For residential customers, costs were distributed to consumption tiers to specifically
address the requirements of Proposition 218
4.8 Development of Cost-Based Water Rates
While there are various rate study goals and objectives, a key consideration in developing water
rates, meeting the legal requirements - and documenting the steps taken to meet the
requirements - has been in the forefront with the recent legal challenges in the State of California
on water rates. Given this, the City’s proposed water rates have been developed to meet the
legal requirements of Article XIII D. A key component of Article XIII D is the development of rates
which reflect the cost of providing service and which proportionally distributed such costs among
the various customer classes of service. There is no single prescribed methodology for
proportionally distributing costs to the customer classes of service. The AWWA M1 Manual
clearly delineates various methodologies which may be used to establish cost-based rates. Article
XIII D does not prescribe a particular methodology for establishing cost-based rates,
consequently, HDR developed the City’s proposed water rates based on the methodologies
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Cost of Service Analysis 30
City of San Luis Obispo –Water Rate Study
provided in the AWWA M1 Manual to meet the requirements of Article XIII D to provide an
administrative record of the steps taken to establish the City’s water rates.
HDR is of the opinion that the proposed rates comply with legal requirements of Article XIII D.
HDR reaches this conclusion based upon the following:
The revenue derived from water rates does not exceed the funds required to provide the
property related service (i.e., water service). The proposed rates are designed to collect the
overall revenue requirement of the City’s water utility.
The revenues derived from water rates shall not be used for any purpose other than that
for which the fee or charge is imposed. The revenues derived from the City’s water rates are
used exclusively to operate and maintain the City’s water system.
The amount of a fee or charge imposed upon a parcel or person as an incident of property
ownership shall not exceed the proportional costs of the service attributable to the parcel.
The cost of service analysis section of this study has focused exclusively on the issue of
proportional assignment of costs to the customer classes of service. The proposed rates have
appropriately grouped customers into customer classes of service (residential, multi-family,
etc.) that reflect the varying consumption patterns and system requirements of each
customer class of service. The grouping of customers and rates into these classes of service
creates the proportionality expected under Article XIII D by having differing rates by customer
classes of service which reflect both the level of revenue to be collected by the utility, but
also the manner in which these costs are incurred and distributed to customer classes of
service based upon their proportional impacts and burdens placed on the City’s the water
system.
The above discussion provides an overview of the California legal requirements of setting rates.
The cost of service developed herein has developed a set of average unit costs which provide the
cost-basis for the development of the proposed water rates for the City.
As a part of the Study, HDR has developed a water rate design discussion to demonstrate and
support the proposed water rates. The following discussion provides a more detailed analysis of
the costing techniques and methodologies used to support the City’s proposed rate design.
4.8.1 Determination of Sizing and Number of Tiers
As a part of the City’s water rate study, the residential customer class rate structure which is a 3-
tiered structure. The City’s recent water consumption data was evaluated to aide in the
evaluation of the current tiers and used as justification if any adjustments to tier sizes are
appropriate. After reviewing the residential consumption profile, it was determined three rate
tiers appeared to be appropriate given the level of consumption in each tier. The goal of the tiers
was to target typical monthly customer average annual consumption levels in the first block and
the City’s residential average annual water use is approximately 5.74 CCF per month. This means
that almost all of the average annual usage for the residential class is captured in the first tier.
The first tier represents 63.0% of the total consumption. Tier 2 is designed to capture above
average day use and the majority of outdoor use and in the City’s case the tier 2 usage captures
27.6% of the total annual water use for the residential customer class. The remaining 9.4% of
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City of San Luis Obispo –Water Rate Study
water consumption is then
be captured in tier 3. The
graph shows the residential
consumption, by month,
based on the current rate
structure.
The current consumption
rate structure for the multi-
family, non-residential, and
irrigation customers is a
uniform rate structure (i.e.,
all usage charged the same
per unit rate). The customer
characteristics of each of
these customer groups are
unique between customer classes as well as between the customers among each class of service.
The total consumptive use can vary significantly for these customers and it is difficult, if not
impossible, to develop an equitable tier size that reflects the various types of customer
consumption characteristics and needs.
After the number and size of tiers and rate structures have been identified, the pricing of the rate
components is the next analytical step.
4.8.2 Establishing the Cost-Basis for Pricing Tiers
Given the requirements of Proposition 218, HDR has concluded that utilities have available to
them at least three technical approaches to be able to justify tiered pricing of the rates. These
technical approaches encompass the following areas:
1. Cost differences in water supply (i.e., stacking of water supply resources to tiers/seasons).
2. Cost differences from high peak use consumers (relationship of average use to peak use).
3. Direct assignment of costs to specific tiers/seasons (e.g., conservation program costs, etc.)
In certain cases, the cost differences may be related to the cost of water supply when a utility
has more than one source of water supply. Additionally, this water supply approach may also
include the cost of alternative water supplies (i.e., recycled or reuse water). For example, reuse
water may be assigned to higher tiers to reflect outdoor use or the need for
additional/alternative water supply to meet the demands of the high use customers.
The second possible source of cost differences for the pricing of tiers is related to high-peak use
(peak demand) customers. Customers that use more water in peak periods create greater
demands and costs on the system. A water supply and distribution system must be sized to meet
these peak use requirements. In other words, on the hottest day of the year when everyone is
watering their lawn, the supply and distribution system must be sized to meet those peak use
demands. Economic theory clearly states that equity is achieved when those that create the peak
demand event, pay for the peak demand event. In this case, this has implications upon the
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City of San Luis Obispo –Water Rate Study
proportional distribution of capacity-related costs to the different usage tiers (low peak use vs.
high peak use).
Finally, certain costs may be directly assigned to specific tiers. For example, a conservation
program which focuses on outdoor water use may be directly assigned to the upper water tier,
or summer season, which are most directly related to outdoor use. The direct assignment to a
specific price tier will create a price differential for that tier.
For the City’s water rate study, the focus of the analysis was on the second method of
determining the cost impacts and cost differences associated with high peak and seasonal use
customers. The pricing of the consumption rate components was developed to provide the cost-
basis and meet the proportionality requirements of Proposition 218.
4.9 Development of the Unit Costs for Rate Designs
To begin the assignment of costs related to rate components, the results of the cost of service
analysis are utilized. The cost of service analysis allocated the revenue requirement between the
cost components of average use (commodity, peak use capacity), and customer (actual and
weighted). Provided in Table 4 – 2 is a summary of the allocation of the FY 2023-24 revenue
requirement from the cost of service analysis.
Table 4 - 2
Summary of the Allocation of the FY 2023-24 Revenue Requirement ($000)
Total
Commodity
Related
Capacity
Related
Customer
Related
Fire
Prot.
Revenue
Related
Direct
Assign.
Revenue
Requirement $24,805 $6,562 $11,124 $5,936 $1,183 $0 $0
The total allocation of the FY 2023-24 revenue requirement, approximately $24.8 million, is then
distributed to the various customer classes of service. Given the legal requirement to provide the
cost-basis the rate structure components, the allocated costs are further distributed between
the rate structure components based on the appropriate distribution factors. The costs in Table
4 – 2 are taken from Exhibit 13 in the Water Technical Appendix.
Provided below is a discussion of the approach used to proportionally distribute the revenue
requirement between the various customer classes of service to the various rate components for
each customer class of service.
4.9.1 Commodity Distribution Factor
The commodity distribution factor is based on the average annual use for each of the customer
classes of service, and more importantly by tier for the residential customer class. For the
development of the pricing of the proposed rates the following customer class distribution
factors were used:
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City of San Luis Obispo –Water Rate Study
Residential – Tier 1
Residential – Tier 2
Residential – Tier 3
Multi-Family
Non-Residential
Irrigation
To develop the commodity distribution factor for each customer class, the usage for each class
was divided by the total usage of the system. This produces the percent (proportion) of the
system that each class is responsible for and, therefore, their contribution to commodity-related
costs. After the responsibility of commodity-related costs have been identified, the total
commodity-related costs can be distributed to each customer class tier based on the commodity
distribution factor. The final step in developing the average unit commodity costs is to divide the
distributed commodity costs for each customer class tier by the total amount of consumption
used in determining their fair share of commodity-related costs. This produces an average unit
commodity cost on a $/CCF basis.
Provided in Table 4 – 3 is a summary of the commodity distribution factor and average unit cost
development and is taken from Exhibit 6 in the Water Technical Analysis.
Table 4 - 3
Summary of the Commodity Distribution Factor
Reference A B C D
Calculation D = C / A
Consumption
(CCF)
% of
Total
Distributed
Commodity
Costs
Unit Cost
($ / CCF)
Residential
0 – 5 CCF 573,827 29.7% $1,947,645 $3.39
5 – 12 CCF 251,684 13.0% 854,248 3.39
12 + CCF 85,716 4.4% 290,931 3.39
Residential Total 911,227 $3,092,823
Multi-Family 395,029 20.4% $1,340,781 $3.39
Non-Residential 448,770 23.2% 1,523,183 3.39
Irrigation 178,222 9.2% 604,909 3.39
Total 1,933,248 $6,561,696
As can be seen, the development of the commodity distribution factor is straightforward and
based on metered consumption. As an example, consumption in tier 1 of the residential class of
service represents 29.7% of the total consumption on the system. As a result, 29.7% of the total
commodity related costs ($3.1 million in total) is distributed to tier 1 of the residential customers
which is approximately $1.9 million. The total commodity-related costs in Column C are taken
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City of San Luis Obispo –Water Rate Study
from Table 4 – 2. This approach then is used for each of the customer classes of service for each
rate component and pricing tier. Finally, to develop the average unit cost for each component,
the distributed costs in column C are divided by the consumption volumes shown in column A.
The average unit costs are stated in $ / CCF.
4.9.2 Capacity Distribution Factor
The capacity distribution factor utilizes the same customer classes of service as the commodity
distribution factor. Whereas commodity costs are related to the volume of water consumed by
each class of service by consumption tier, capacity is related to how the class uses that water in
each tier. Customers use water in different ways and at different times, thus creating different
usage patterns and resulting in different peaking factors. These usage patterns drive how the City
must size the system to meet the peak demands of customers, regardless of when they occur. To
determine the distribution by rate component, peaking factors needed to be developed for each
customer class and tier. The peaking factors for each class of service and tier must be reasonably
estimated due to a lack of specific metered data related to peak day usage by individual customer
or class of service. The method used to estimate a class’s peaking factor is to review the average
monthly volume of water consumed and compare it to the maximum monthly usage of water.
By dividing the maximum month by the average month, a reasonable surrogate for a peak day
peaking factor is calculated. This factor also provides a seasonal surrogate for the difference
between the average use and peak day use in each rate component. For example, if a customer
used 10 CCF per month on average and in the peak month 15 CCF was used, the peaking factor
would be 1.50 (15.0 / 10.0 = 1.50). In this example, the peaking factor is stating that the maximum
usage in a month is 1.50 times higher than the average usage per month. Using this same
calculation for each customer class rate and tier, the distribution factor for capacity can be
developed. Table 4 – 4 provides a summary of the capacity distribution factor for each customer
class and is taken from Exhibit 7 in the Water Technical Analysis.
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Cost of Service Analysis 35
City of San Luis Obispo –Water Rate Study
Table 4 - 4
Summary of the Capacity Distribution Factor
Reference A B C D E F G
Calculation C = A × B G = E / F
Average
Use
(MGD)
Peaking
Factors
Peak Day
Use
(MGD)
% of
Total
Distributed
Capacity Costs
2022-23
Consumption
(CCF)
Unit
Cost
(CCF)
Residential
0 – 5 CCF 1.35 1.31 1.77 23.5% $2,609,349 573,827 $4.55
5 – 12 CCF 0.59 1.66 0.98 13.0% 1,450,250 251,684 5.76
12 + CCF 0.20 3.57 0.72 9.5% 1,062,207 85,716 12.39
Res Total 2.15 3.48 $5,121,806 911,227
Multi-Family 0.93 1.59 1.48 19.6% $2,180,249 395,029 $5.52
Non-Residential 1.06 1.74 1.84 24.4% 2,710,519 448,770 6.04
Irrigation 0.42 1.80 0.75 10.0% 1,111,777 178,222 6.24
Total 4.56 7.55 $11,124,350 1,933,248
Table 4 – 4 provides the development of the capacity distribution factor. Like that of the
commodity cost distribution to the tiers or seasons, the capacity-related costs are distributed in
the same manner. For example, 23.5% of the total capacity costs are distributed to tier 1 of the
residential customers based on column D in Table 4 - 4. That translates to a cost distribution to
tier 1 residential of approximately $2.6 million. This cost, when divided by the corresponding first
tier consumption results in an average unit cost for capacity of $4.55 / CCF. As can be seen in
Table 4 - 4, the average unit costs for capacity vary by customer class of service and tier based
upon the respective demands placed on the system by each class and/or tier.
Combining the calculated average unit costs from the commodity and capacity distribution
factors provides the cost-basis of the consumption rate component. Table 4 – 5 below, shows
the summation of the costs for each class and tier. This table sums the costs from Table 4 – 3
column D and Table 4 – 4 column G, along with the other additional costs.
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Cost of Service Analysis 36
City of San Luis Obispo –Water Rate Study
Table 4 - 5
Summary of the Rate Component Cost Basis
Reference A B C D E
Commodity
Costs
($ / CCF)
Capacity
Costs
($ / CCF)
Other Costs
($ / CCF) [2]
Total Average
Unit Cost
($ / CCF)
Differential
($ / CCF)
Residential
0 – 5 CCF $3.39 $4.55 $0.00 $7.94
5 – 12 CCF 3.39 5.76 0.00 9.16 $1.21
12 + CCF 3.39 12.39 0.00 15.79 $6.63
Multi-Family $3.39 $5.52 $0.00 $8.91
Non-Residential $3.39 $6.04 $0.00 $9.43
Irrigation $3.39 $6.24 $0.00 $9.63
The results shown in Table 4 – 5 above provide the cost-basis for the City’s consumption charges
for the proposed rates. The analysis and average unit costs shown above have been developed
to comply with the proportionality requirements of Proposition 218 when developing cost-based
water rates.
The final average unit cost development is the customer-related costs which are used to establish
the monthly fixed meter charge which varies by meter size. A similar exercise as conducted above
for the consumption components was completed for the customer costs. The total customer
costs were divided by the number of equivalent meters on the system. An equivalent meter uses
the capacity ratio of a 5/8-inch meter to the capacity of larger meter sizes to determine the
pricing for each meter size. In this way the meter charge reflects the equitable proportion of fixed
costs on the system based on the capacity demands the customer can place on the system based
on the size of the meter. Shown below in Table 4 – 6 is a summary of the fixed meter charge unit
cost development which is taken from Exhibits 15 and 17 from the Water Technical Analysis.
Table 4 - 6
Summary of the Fixed Meter Charge Cost Basis
Cost Component Rate Calculation
Total Customer Costs $7,118,504
# of Equivalent Meters 21,070
Average Unit Cost ($ / equivalent meter / month) – ¾” & Less $28.15
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City of San Luis Obispo –Water Rate Study
4.10 Summary Results of the Cost of Service Analysis
In summary form, the cost of service analysis began by functionalizing the City’s revenue
requirement for FY 2023-24, which is the first year of the rate setting period. The functionalized
revenue requirement was then allocated into the appropriate cost components based on
industry standard cost of service methodologies. The individual allocated totals were then
proportionally distributed to the customer classes of service based on the appropriate
distribution factors. The distributed expenses for each customer class were then aggregated to
determine each customer class’s overall revenue responsibility (i.e., cost to provide service).
Provided below in Table 4 - 7 is the summary results of the City’s water cost of service analysis
and is found in Exhibit 16 in the Water Technical Appendix.
Table 4 - 7
Summary of the Water Cost of Service Analysis ($000)
Class of Service
Present Rate
Revenues
Distributed
Costs
$
Difference
%
Difference
Residential $11,042 $12,602 ($1,560) 14.1%
Multi-Family 3,879 4,399 (521) 13.4%
Non-Residential 5,450 5,702 (252) 4.6%
Irrigation 2,491 2,102 389 -15.6%
Total $22,861 $24,805 ($1,943) 8.5%
The cost of service study proportionally distributed the operating and capital costs for FY 2023-
24 to each customer class with their respective benefit received from and burdens placed on the
water system (proportional distribution) based on the service requirements. The results of the
analysis show that cost differences exist between the customer classes of service. Specifically,
the rates for residential and multi-family can be increased greater than the system average (i.e.,
8.5%), the non-residential rates can increase slightly lower than the system average, and
irrigation rates can be decreased. These results, and change in rate required, is primarily the
result of changing consumption characteristics since the prior cost of service study.
It is important to understand that a cost of service analysis is based on one year’s O&M expense
data and projected customer usage information, which can change from study to study. The
analysis can be impacted by several variables such as budget structure changes or a change in
consumption characteristics. Given this, the results of the cost of service analysis may change
from year to year. As the City continues to monitor water rates and cost of service results through
future studies, future cost of service adjustments may be necessary to reflect changes in costs
and consumption patterns at that time.
4.11 Consultant’s Conclusions and Recommendations
While cost differences exist, the overall allocation of costs between customers appears to be
reasonable and reflect the impacts each customer class of service places on the system. However,
given the requirements of Article XIII D, section 6, the results of the cost of service are used to
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City of San Luis Obispo –Water Rate Study
establish the proposed rate designs for each of the City’s water customer classes of service. More
specifically, it is recommended that the unit costs derived from the cost of service results be
utilized as the basis for the rate design for each water customer class in Section 5.
4.12 Summary of the Cost of Service Analysis
This section of the report has provided the recommendations resulting from the cost of service
analysis developed for the City’s water utility. This analysis was prepared using generally
accepted cost of service techniques as provided in the AWWA M1 Manual to meet the
proportionality requirements of Proposition 218. The Technical Appendix shows the detail of the
cost of service analysis in Exhibits 6 – 17. The following section of the report will provide a
summary of the present and proposed rates for the City’s water utility.
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City of San Luis Obispo – Water Rate Study
5 Development of the Rate Designs
The final step of the City’s comprehensive water rate study is the design of proposed rates to
collect the appropriate levels of revenues, based on the results of both the revenue requirement
and the cost of service analyses. In developing the City’s proposed water rates, consideration is
given to the level of the rates as well as the structure of the rates. The level of rates reflects the
amount of revenues that should be collected while the structure of the rates is how it is collected
(i.e., component charges) from the customers.
The overall revenue level for the City’s has been established in the revenue requirement analysis
(Section 3) while the proportional distribution of costs between the customer classes has been
developed in the cost of service analysis (Section 4) which provides the revenue levels to be
collected from each class of service based on cost causation and the average unit costs for each
rate component.
5.1 Rate Design Criteria and Considerations
Prudent rate administration dictates that several criteria must be considered when setting utility
rates. Some of these rate design criteria are listed below:
Rates which are easy to understand from the customer’s perspective
Rates which are easy for the City to administer
Consideration of the customer’s ability to pay
Cost-based and proportional
Continuity, over time, of the rate making philosophy
Policy considerations (encourage efficient use, economic development, etc.)
Provide revenue stability from month to month and year to year
Promote efficient allocation of the resource
Equitable and non-discriminatory (cost-based)
Legally Defensible (Proposition 218 compliant)
It is important that the City provide its water customers with the proper and accurate price signal
as to what their consumption and peaking (demand) requirements are costing. This goal may be
approached through both rate level and structure. When developing the proposed rate designs,
all the above listed criteria were taken into consideration. However, it should be noted that it is
difficult - if not impossible - to design a rate that meets all the goals and objectives listed above.
A good example of this is that it may be difficult to design a rate that takes into consideration the
customer’s ability to pay while also being cost-based. In designing rates, there are always trade-
offs between these various goals and objectives.
5.2 Overview of the Proposed Rate Structures
In discussion with City staff several of the above goals and objectives were highlighted as key
elements to be included within the proposed rate structure. These were:
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City of San Luis Obispo – Water Rate Study
Proportional, and cost-based
Revenue stability
The first goal was to provide the cost-basis, or justification, for the proposed rates to reflect the
legal rate setting requirements in California. This was accomplished through the development of
the cost of service analysis using industry standard approaches (AWWA M1 Manual). The cost of
service analysis provided the proportional distribution of costs to the classes of service and tiers,
and then provided the average unit costs for purposes of final proposed rates.
The second goal was to maintain the revenue stability of the current rate structure. This was
incorporated into the proposed rates by reviewing the level of revenues collected through the
monthly fixed meter charge and the consumption charge. In other words, the ratio of fixed
revenue collected through the proposed rates would be based the results of the cost of service
analysis and maintain a level of revenue stability as similar as possible to the current rate
structure.
5.3 Summary of the Present and Proposed Water Rates
The proposed rates for the City’s water utility were designed to meet the total system revenue
needs discussed in Section 3 and reflect the cost of service results, including the average unit cost
development, shown in Section 4. The proposed water rates have been developed for each
customer class of service based on the development of the pricing through the cost of service
analysis and specifically the average unit costs.
5.3.1 Review of the Present and Proposed Residential Water Rates
The City’s proposed residential customers’ rate structure maintains the current structure. The
consumption tiers were reviewed as part of the Study and discussed in Section 4.8.1. The
proposed rate structure consists of a monthly fixed charge and a consumption charge which is a
three-tiered increasing block rate structure. Provided below in Table 5 - 1 is a summary of the
present and proposed water rates for the City’s residential customers.
Table 5 - 1
Summary of the Monthly Single-Family Water Rates
Present
Rate FY 2023-24 FY 2024-25
$ / Acct / Month
Fixed Charge $24.12 $28.15 $30.25
Consumption Charge $ / CCF
0 – 5 CCF $6.90 $7.94 $8.54
5 – 12 CCF 8.04 9.16 9.84
12 + CCF 14.74 15.79 16.97
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City of San Luis Obispo – Water Rate Study
The proposed rates in Table 5 – 1 for FY 2023-24 show the fixed charge for all customers based
on the results of the average unit costs developed in the cost of service and previously
summarized in Table 4 - 6. Also shown in the table are the proposed tiered rates for FY 2023-24
which is taken directly from column D in Table 4 – 5, or the calculated average unit costs from
the cost of service analysis.
5.3.2 Review of the Present and Proposed Multi-Family Water Rates
For multi-family customers, the existing rate structure is also maintained. Multi-family has the
same fixed charge for as residential customers for a ¾” and Less but then it is ratioed by meter
size based on the AWWA meter ratios for the larger meters. For multi-family, the proposed
consumption charge is a uniform rate structure. The consumption charge was determined
through the cost of service process whereby costs were distributed to the consumption charge
based on the consumption characteristics for the multi-family customers (See Table 4 – 5). Table
5 – 2 provides a summary of the present and proposed multi-family rates.
Table 5 - 2
Summary of the Monthly Multi-Family Water Rates
Rate Component
Present
Rate FY 2023-24 FY 2024-25
Fixed Charge $ / Acct / Mth
3/4" & Less $24.12 $28.15 $30.25
1" 40.28 47.00 50.50
1 1/2" 80.38 93.75 100.80
2" 128.61 150.05 161.30
3" 241.31 281.50 302.60
4" 402.24 469.25 504.45
6" 804.30 938.25 1,008.60
8" 1,286.92 1,501.25 1,613.85
Consumption Charge $ / CCF
All Use $7.88 $8.91 $9.58
Just as in the residential rates, the multi-family fixed and consumption rates are based on the
average unit costs as calculated and developed in the cost of service analysis. The average unit
costs for multi-family the fixed charge and consumption charge can be referenced in Table 4 – 6
and Table 4 – 5, respectively.
5.3.3 Review of the Present and Proposed Non-Residential Water Rates
Similar to the multi-family rates, the proposed non-residential rates were adjusted to reflect the
overall revenue needs from the revenue requirement analysis and the calculated average unit
costs from the cost of service analysis. The current rate structure is the same as multi-family with
a fixed meter charge based on the size of meter and a uniform consumption charge on a per CCF
basis. However, the current and proposed rates for the commercial customers are based on the
specific costs distributed in the cost of service analysis for the commercial customer class of
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City of San Luis Obispo – Water Rate Study
service. Presented below in Table 5 - 3 is a summary of the present and proposed non-residential
water rates.
Table 5 - 3
Summary of the Monthly Non-Residential Water Rates
Rate Component
Present
Rate FY 2023-24 FY 2024-25
Fixed Charge $ / Acct / Mth
3/4" & Less $24.12 $28.15 $30.25
1" 40.28 47.00 50.50
1 1/2" 80.38 93.75 100.80
2" 128.61 150.05 161.30
3" 241.31 281.50 302.60
4" 402.24 469.25 504.45
6" 804.30 938.25 1,008.60
8" 1,286.92 1,501.25 1,613.85
Consumption Charge $ / CCF
All Use $9.57 $9.43 $10.14
As can be seen in Table 5 - 3, the commercial consumption charge is a uniform consumption
charge. It should also be noted that the proposed fixed charge by meter size is identical as multi-
family customers and the consumption charges for FY 2023-24 are based on the average unit
costs as developed in the cost of service analysis and previously shown in Table 4-6 and Table 4 -
5 respectively.
5.3.4 Review of the Present and Proposed Irrigation Water Rates
A similar approach was developed for the proposed irrigation rates as was used for multi-family
and non-residential customer classes. The current irrigation rate structure was maintained with
a monthly meter charge on a ¾-inch equivalency and the consumption charge is a uniform rate
structure charged per CCF. It is important to note that the cost differences between the irrigation
and all the other customers are due to the differing peak demands that are specific to irrigation
customers and based on the best available and current data. Irrigation customers have higher
peak demands with intermittent water requirements. Given these peak demands, the system
must still be sized to provide that level of water availability at all times. Again, the proposed rates
for this customer class of service are the direct output of the calculated average unit costs within
the cost of service analysis as shown in Table 4 – 5 in column D and Table 4 - 6. Provided below
in Table 5 - 4 is a summary of the present and proposed rates for the irrigation customers.
Page 350 of 954
Rate Design Analysis 43
City of San Luis Obispo – Water Rate Study
Table 5 - 4
Summary of the Monthly Irrigation Water Rates
Rate Component
Present
Rate FY 2023-24 FY 2024-25
Fixed Charge $ / Acct / Mth
3/4" & Less $24.12 $28.15 $30.25
1" 40.28 47.00 50.50
1 1/2" 80.38 93.75 100.80
2" 128.61 150.05 161.30
3" 241.31 281.50 302.60
4" 402.24 469.25 504.45
6" 804.30 938.25 1,008.60
8" 1,286.92 1,501.25 1,613.85
Consumption Charge $ / CCF
All Use $11.73 $9.63 $10.35
5.4 Water Rate Study Recommendations
Based on the results of the City’s water rate study, HDR recommends the following:
Rate revenues for the City’s water utility should be increased by 8.5% in FY 2023-24 and
7.5% in FY 2024-25
The proposed rates should be implemented to reflect each customer class’s proportional
distribution of costs as developed in this Study
The rates are proposed to be implemented and effective each year on July 1
Prior to the implementation of the final proposed rate adjustment the City should
complete another comprehensive review of the water rates
5.5 Summary of the Water Rate Study
This completes the comprehensive water rate study for the City of San Luis Obispo’s water utility.
The Study has provided a comprehensive review and development of proposed water rates for
the City. The adoption of the proposed water rates will allow the City to meet their current and
projected water system financial obligations for the time period reviewed based on the assumed
customer growth, capital plan, and projected increases in operating costs. Should these
assumptions change, the proposed rate adjustments may also need to be revised to reflect the
changed conditions.
Page 351 of 954
Water Technical Appendix
Page 352 of 954
R ______
RESOLUTION NO. _____ (2023 SERIES)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN LUIS
OBISPO, CALIFORNIA, ESTABLISHING THE WATER SERVICE RATES
FOR FINANCIAL PLAN 2023-25
WHEREAS, it is the policy of the City of San Luis Obispo to review enterprise fund
rates on an ongoing basis and to adjust them as required to ensure that they remain
equitable and adequate to fully cover the cost of providing services; and
WHEREAS, a comprehensive water rate study was completed in April 2023 by
HDR Engineering, Inc. including analysis of Water Fund operating, capital, and debt
service needs for fiscal years 2023-24 and 2024-25; and
WHEREAS, on May 16, 2023, the City Council reviewed preliminary water rates
based on updated revenue and expenditure information necessary to meet system
operating, capital, and debt service requirements; and
WHEREAS, 27,175 notices regarding the proposed rates were sent out in April
2023 in compliance with Proposition 218 requirements; and
WHEREAS, a public hearing was properly noticed and held on June 6, 2023; and
WHEREAS, a majority protest, as contemplated by Article XIII D of the California
Constitution, was not received by the conclusion of the public hearing.
NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis
Obispo as follows:
SECTION 1. Water Rates and Water System Access Charges. The water rates
and water system access charges set forth in Exhibit A are hereby adopted, establishing
water rates and water system access charges effective July 1, 2023 and July 1, 2024.
The cost of service does not exceed the proportional cost of services provided to the
correspondence customer parcel and the revenues derived from the fees will be used for
the provision of water services.
SECTION 2. California Environmental Quality Act. Modification of rates and
charges by public agencies is statutorily exempt from the California Environmental Quality
Act (CEQA) under Public Resources Code 21083 and 21080(b)(8) and State CEQA
Guidelines Section 15273 (Rates, Tolls, Fares, and Charges) because the change in
rates and charges is for the purpose of:
a) Meeting operating expenses;
b) Purchasing or leasing supplies, equipment, or materials;
c) Meeting financial reserve needs and requirements;
d) Obtaining funds for capital projects necessary to maintain se rvice within
existing service areas; and
Page 353 of 954
Resolution No. _____ (2023 Series) Page 2
R ______
e) Obtaining funds necessary to maintain such intra -city transfers as authorized
by City Charter.
The change in fees is not intended to fund expansion of capital projects not otherwise
evaluated under CEQA. Therefore, no environmental review is required for this item.
SECTION 3. Resolution No. 11257 (2021 Series) is hereby rescinded effective
11:59 p.m. June 30, 2023.
Upon motion of Council Member ___________, seconded by Council Member
___________, and on the following roll call vote:
AYES:
NOES:
ABSENT:
The foregoing resolution was adopted this _____ day of _______________ 20 23.
___________________________
Mayor Erica A. Stewart
ATTEST:
______________________
Teresa Purrington
City Clerk
APPROVED AS TO FORM:
______________________
J. Christine Dietrick
City Attorney
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of the
City of San Luis Obispo, California, on ______________________.
___________________________
Teresa Purrington
City Clerk
Page 354 of 954
Resolution No. _____ (2023 Series) Page 3
R ______
EXHIBIT A: 2023-25 WATER RATES
Usage (per unit cost) Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family Residential
Tier 1: 0 to 5 units
$7.94 $8.54
Single Family Residential
Tier 2: 6 to 12 units
$9.16 $9.84
Single Family Residential
Tier 3: 13+ units
$15.79 $16.97
Multi-Family $8.91 $9.58
Non-Residential $9.43 $10.14
Landscape Irrigation $9.63 $10.35
Base Fees Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family Residential
Monthly Base Fee
$28.15 $30.25
Multi-Family, Non-Residential, and Landscape Irrigation by Water Meter Size
0.75-inch or less meter $28.15 $30.25
1-inch meter $47.00 $50.50
1.5-inch meter $93.75 $100.80
2-inch meter $150.05 $161.30
3-inch meter $281.50 $302.60
4-inch meter $469.25 $504.45
6-inch meter $938.25 $1,008.60
8-inch meter $1,501.25 $1,613.85
Water System Access Charge $100.93 $108.50
Page 355 of 954
Page 356 of 954
879 Morro Street, San Luis Obispo, CA 93401 The protest form provided below is your official protest form. This form can be mailed or personally delivered to the City of San Luis Obispo, City Clerk Office, 990 Palm Street, San Luis Obispo, CA 93401, or personally delivered to the City Clerk at the noticed hearing prior to close of the hearing. For owners of multiple properties, additional protest forms are available at the City Clerk Office. If the City timely receives (prior to close of the noticed public hearing) written protests to the proposed rates or rate in excess of 50 percent of the parcels receiving water and/or sewer services from the City, City Council will not adopt the proposed rates or rate. Only one protest per parcel will be counted. Mailed or delivered protests received after the close of the noticed public hearing are not valid and won’t be counted, even if postmarked prior to the date of the noticed hearing. 1. Only the property owner on record of a parcel subject to the proposed rate increase or any tenant directly liable for payment of water and sewer service fees (i.e. customer of record) may protest the proposed rate increases. 2. The protest must be in writing. 3. The protest must be submitted to and received by the City Clerk prior to the close of the public hearing that is the subject of this Notice that will begin at 5:30 p.m. on Tuesday, June 6, 2023. Written protests must be mailed or personally delivered to the City of San Luis Obispo, City Clerk Office, 990 Palm Street, San Luis Obispo, CA 93401, or personally delivered to the City Clerk at the noticed hearing prior to close of the hearing. Protests submitted orally or by email, fax, or text will not be valid and will not be counted. 4. The written protest must state that the signer opposes the proposed increase in water rates, sewer rates, or both. If a written protest form is used, the box(es) identifying that you are protesting the water and/or sewer rates must be checked. 5. The written protest must contain the service address. 6. The protest must be signed by either the account holder or the property owner of the service address. Para acceder este aviso en español, por favor visite www.slocity.org/waterandsewerrates. FOR PROPOSED RATE INCREASES FOR WATER AND SEWER SERVICES This notice is provided to all property owners and customers who currently receive water and sewer services from the City of San Luis Obispo. The San Luis Obispo City Council will be holding public hearings to consider proposed increases to water and sewer rates as further described in this notice. The hearings will be held on: DATE: June 6, 2023 TIME: 5:30 PM PLACE: City of San Luis Obispo, Council Chambers 990 Palm Street, San Luis Obispo, CA 93401 The public hearings will cover proposed rate increases over two years (one increase to take effect from July 1, 2023 to June 30, 2024, and one increase to take effect from July 1, 2024 to June 30, 2025) for water and sewer services provided to users by the City of San Luis Obispo. If adopted, the proposed rate increases will become effective on July 1, 2023 and on July 1, 2024, respectively. In November 1996, California voters approved Proposition 218, which added Article XIII D to the California Constitution to regulate the imposition of assessments, fees, and charges imposed by local governments. As a result, California agencies must comply with the requirements of California Constitution Article XIII D when setting utility rates. One provision requires an agency to hold a noticed public hearing on proposed utility rate increases, to be held not less than 45 days after notice of the hearing is mailed to each recorded owner of each identified parcel upon which the proposed rates will be imposed, and that rates not be increased if a majority of affected parcels protest the proposed increased rates in writing. Please see the last page of this notice regarding the protest process. The City’s records indicate that you are an account holder and/or owner of a parcel receiving water and sewer services from the City of San Luis Obispo. As an account holder and/or owner of an identified parcel, you have the right to participate in the City’s rate setting process and, if you choose, to submit a written protest to the proposed increase(s) in rates. The City’s water and sewer operations rely on rate revenue to pay for operation, maintenance, and replacement of public water and sewer infrastructure, and debt service. General funds (such as property tax or sales tax) do not support these essential services. Rates for both water and sewer service support maintaining and replacing critical infrastructure, meeting public health regulations, and purchasing and maintaining necessary equipment. Water rates pay for all costs associated with bringing water from surface water reservoirs to the City’s water treatment plant and distributing drinking water to approximately 16,400 service connections. Sewer rates pay for all costs associated with the conveyance of wastewater from each connection to the Water Resource Recovery Facility where the wastewater is treated and valuable resources, such as energy, recycled water, and compost are recovered. Pursuant to California Constitution Article XIII D, the City may not collect more revenue from water and sewer charges than is necessary to recover the costs of providing water and sewer services, and may not use collected revenues for any purpose other than that for which the fee or charge was imposed. Proposed Water and/or Sewer Rate Protest Form Name (please print): _______________________ Date: ____________ Service Address (please print): ______________________________________________ □ I am protesting the proposed Sewer Rate (check the box) □ I am protesting the proposed Water Rate (check the box) ______________________________ □ Property Owner □ Account Holder Signature This Notice of Public Hearing provides information about proposed increases to the City’s water and sewer rates pursuant to the requirements of California Constitution Article XIII (commonly referred to as Proposition 218). This Notice provides information on (1) the amount of the proposed rates to be imposed, (2) the reasons for the rate adjustments, (3) how water and sewer rates are calculated, (4) how customers can receive more information on the effect of the proposed changes to their water and sewer bills, and (5) how to file a protest against the proposed rate increases. Para acceder este aviso en español, por favor visite www.slocity.org/waterandsewerrates. Page 357 of 954
1. One Unit = 748 gallons 2. Current rates effective July 1, 2022 1. One Unit = 748 gallons 2. Current rates effective July 1, 2022 3. Water System Access Charge applies where the city provides fire protection only to businesses that utilize a private well for domestic purposes The proposed water and sewer rate structures recognize different customer classes and their proportionate costs associated with the system. To derive the proportionality, the City completed a comprehensive Cost of Services Study in 2023. Based on the analysis, the water rates are proposed to increase revenues by 8.5 percent in 2023-24 and 7.5 percent in 2024-25. The sewer rates are proposed to increase revenues by 4 percent in both 2023-24 and 2024-25. If approved, the proposed water and sewer rates would become effective on July 1 of each fiscal year. Proposed increases for specific customer classes are shown in the tables below. While most operations have not changed substantially, cost of commodities and support services related to water and sewer services have increased significantly over the past two years. Some of the primary drivers of increased costs of operations are: xIncrease in construction costs for replacement of utility assets like aging water and wastewater pipelines and treatment plants xIncrease in electricity costs related to the treatment and conveyance of water and wastewater xCost of salaries and benefits to remain competitive in the recruitment and retention of qualified and licensed personnel xIncrease in chemical costs for the treatment of water and wastewater These costs are essential for high quality water and wastewater services that are compliant with State and Federal regulations. Usage (per unit cost) Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single Family Residential Tier 1: 0 to 5 units $6.90 $7.94 $8.54 Tier 2: 6 to 12 units $8.04 $9.16 $9.84 Tier 3: 13+ units $14.74 $15.79 $16.97 Multi-Family, Non-Residential, and Landscape Irrigation Multi-Family $7.88 $8.91 $9.58 Non-Residential $9.57 $9.43 $10.14 Landscape Irrigation $11.73 $9.63 $10.35 Base Fees Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single-Family Residential Monthly Base Fee $24.12 $28.15 $30.25 Multi-Family, Non-Residential, and Landscape Irrigation by Water Meter Size 0.75-inch or less meter $24.12 $28.15 $30.25 1-inch meter $40.28 $47.00 $50.50 1.5-inch meter $80.38 $93.75 $100.80 2-inch meter $128.61 $150.05 $161.30 3-inch meter $241.31 $281.50 $302.60 4-inch meter $402.24 $469.25 $504.45 6-inch meter $804.30 $938.25 $1,008.60 8-inch meter $1,286.92 $1,501.25 $1,613.85 Water System Access Charge $93.02 $100.93 $108.50 For single-family and multi-family residential customers, a winter water use average is the three-month average of water used during the December, January, and February billing periods. This is also referred to as a “sewer cap” and is the basis of the usage portion of the customer’s monthly sewer charges. For non-residential customers, all “usage” is based on monthly water consumption. For more on how sewer cap is calculated, visit www.slocity.org/ub and click on “Sewer Cap Info”. Usage (per unit cost) Current Rates Proposed Rates Effective July 1, 2023 Proposed RatesEffective July 1, 2024 Single-Family and Multi-Family Residential Per Unit Cost (Up to Sewer Cap) $9.19 $9.44 $9.82 Non-Residential Per Unit Costs (for All Water Consumption) $9.19 $9.88 $10.27 Base Fees Current Rates Proposed Rates Effective July 1, 2023 Proposed Rates Effective July 1, 2024 Single-Family Residential Monthly Base Fee $21.89 $23.58 $24.52 Multi-Family and Non-Residential by Water Meter Size 0.75-inch or less meter $21.89 $23.58 $24.52 1-inch meter $36.55 $39.37 $40.95 1.5-inch meter $72.86 $78.51 $81.65 2-inch meter $116.63 $125.67 $130.70 3-inch meter $218.83 $235.78 $245.21 4-inch meter $364.78 $393.04 $408.76 6-inch meter $729.34 $785.85 $817.28 8-inch meter $1,166.99 $1,257.40 $1,307.70 10-inch meter $1,677.72 $1,807.71 $1,880.02 Under the proposed rate changes, a typical single-family home using six units of water per month can expect the water portion of their monthly bill to increase from $66.66 to $77.01 in July 2023, and to $82.79 in July 2024. A typical single family home with a sewer cap of five units can expect the sewer portion of their monthly bill to increase from $67.84 to $70.78 in July 2023, and to $73.62 in July 2024. For information on financial assistance programs, please visit https://www.slocity.org/cap. To calculate how the proposed water and sewer rates affect your bill, visit www.slocity.org/waterservice and click on “Calculate My Bill”. If you keep your monthly water and sewer bill, you can look back at the units of water used and your residential sewer cap to determine how the proposed rate will impact your bill. Look up your bill online by logging into your online payment portal at www.slocity.org/paywaterbill. Please call the City of San Luis Obispo Utilities Department at 805-781-7133 for assistance.Average Monthly Residential Bill Current Rates Proposed Rates Effective July 1, 2023 Proposed RatesEffective July 1, 2024 Water (base fee + six units) $66.66 $77.01 $82.79 Sewer (base fee + five units) $67.84 $70.78 $73.62 Total Monthly Bill $134.50 $147.79 $156.41 2 1 1 2 3 Page 358 of 954
1010 Marsh St., San Luis C
(805) 546-8208 . FAX (£
PROOF OF PUBLICATION
(2015.5 C.C.P.)
STATE OF CALIFORNIA,
County of San Luis Obispo,
I am a citizen of the United States and a resident
of the county aforesaid; I am over the age of
eighteen years, and not a party interested in the
above entitled matter. I am the principal clerk
of the printer of the New Times, a newspaper
of general circulation, printed and published
weekly in the City of San Luis Obispo, County
of San Luis Obispo, and which has been
adjudged a newspaper of general circulation by
the Superior Court of the County of San Luis
Obispo, State of California, under the date of
February 5,1993, Case number CV72789: that
notice of which the annexed is a printed copy
(set in type not smaller than nonpareil), has been
published in each regular and entire issue of said
newspaper and not in any supplement thereof on
the following dates, to -wit:
(t
in the year 2023.
I certify (or declare) under the the penalty of
perjury that the foregoing is true and correct.
Dated at San Luis Obispo ,�Calif _oK�ia, this day
Zj of , 2023.
n u
Patricia Horton, New Times Legals
Prool
SAN LUIS OBISPO CITY COUNCIL
NOTICE OF PUBLIC HEARING
The San Luis Obispo City Council invites all interested
persons to participate in a public meeting on Tuesday,
June 6, 2023, at 530 p.m. in the Council Chambers at
City Hall, 990 Palm Street San Luis Obispo. Meetings
can be viewed on Government Access Channel 20
or streamed live from the City's YouTube Channel at
httoJiyoutube.slu.ciri. Public comment prior to the
start of the meeting, may be submitted in writing via
U.S. Mail delivered to the City Clerk's office at 990
Palm Street San Luis Obispo, CA 93401 or by email to
emailcouncil®slocity ore
PUBLIC HEARING ITEM:
• 2023-24 AND 2024-25 WATER RATE ADOPTION
A public hearing to consider adopting a Resolution
armed, "A Resolution of the Council of the City of
Son Luis Obispo, California, establishing Water
Rates for Fiscal Years 2023-24 and 2024-25."
On April 17, 2023, all property owners and
customers of record will be mailed a notice of the
proposed rate, including the amount, the basis for
calculation, the reason for the rate, and a form
to protest the proposed water rates, as required
under Proposition 218. Signed protests must be
received by the City Clerk, 990 Palm Street San
Luis Obispo CA 93401, at or before the done of the
protest hearing (June 6, 2023 at 5.30 p.m.l.
For more information, please contact the Cdy's
Utilities Department at f805) 781-7133 or by email
atub@slocity.org.
• 202344 AND M4-25 SEWER RATE ADOPTION
A public hearing to consider adopting a Resolution
entitled, "A Resolution of the Council of the City of
San Luis Obispo, California, establishing Sewer
Rates for Fiscal Years 2023-24 and 2024-25."
On April 17, 2023, all property owners and
customers of record will be mailed a notice of the
proposed rate, including the amount the basis for
calculation, the reason for the rate, and a form
to protest the proposed sewer rates, as required
under Proposition 218. Signed protests must be
received by the City Clerk, 990 Palm Street San
Luis Obispo CA 93401, at or before the time of the
protest hearing (June 6, 2023 at 5:30 p.m.l.
For more information, please contact the Cify's
Utilities Department at (8051781-7133 or by email
atub®slocityorg.
The City Council may also discuss other hearings or
business items before or after the items listed above.
If you challenge the proposed action in court, you may
be limited to raising only those issues you or someone
else raised at the public hearing described in this
notice, or in written correspondence delivered to the
CityCouncil at or priorto, the public hearing.
Council Agenda Reports for this meeting will be
available for review one week in advance of the
meeting date on the Citys website, under the Public
Meeting Agendas web page: httos'llvaww slocily ore/
government/mavor-and-city-counciUaeendas-and-
minutes. Please call the City Clerk's Office at(805)781-
7114 for more information. The City Council meeting
will be televised live on Charter Cable Channel 20 and
live streaming on the City's YouTube channel hW
youtube slc city.
Teresa Purrington
City Clerk
Cfry of San Luis Obispo
April 13, 2023
1010 Marsh St., San Luis Ok
(805) 546-8208 . FAX (8l
PROOF OF PUBLICATION
(2015.5 C.C.P.)
STATE OF CALIFORNIA,
County of San Luis Obispo,
I am a citizen of the United States and a resident
of the county aforesaid; I am over the age of
eighteen years, and not a party interested in the
above entitled matter. I am the principal clerk
of the printer of the New Times, a newspaper
of general circulation, printed and published
weekly in the City of San Luis Obispo, County
of San Luis Obispo, and which has been
adjudged a newspaper of general circulation by
the Superior Court of the County of San Luis
Obispo, State of California, under the date of
February 5, 1993, Case number CV72789: that
notice of which the annexed is a printed copy
(set in type not smaller than nonpareil), has been
published in each regular and entire issue of said
newspaper and not in any supplement thereof on
the following dates, to -wit:
in the year 2023,
I certify (or declare) under the the penalty of
perjury that the foregoing is true and correct.
Dated at San Luis Obispo, CAmdor ia, this day
1%14
222 �_of/ 1 2023.
Patricia Horton, New Times Legals
Proof
SAN LUIS OBISPO CITY COUNCIL
NOTICE Of PUBLIC HEARING
The San Luis Obispo City Council invites all interested
persons to participate in a public meeting on Tuesday,
June 6, 2023, at 5:30 p.m. in the Council Chambers at
City Hall, 990 Palm Street San Luis Obispo. Meetings
can be viewed on Government Access Channel 20
or streamed live from the City's YouTube Channel at
hhap:llvoutuhe.slo.ciw. Public comment prior to the
start of the meeting, may be submitted in writing. via
U.S. Mail delivered to the City Clerk's office at 990
Palm Street San Luis Obispo, CA 93401 or by email to
emailcouncil®slocitvorg.
• 2OM-24 AND 2024.25 WATER RATE ADOPTION
A public hearing to consider adopting a Resolution
entitled, "A Resolution of the Council of the City of
San Luis Obispo, California, establishing Water
Rates for Fiscal Years 2023-24 and 2024-25."
On April 17, 2023, all property owners and
customers of record will be mailed a notice of the
proposed rate, including the amount the basis for
calculation, the reason for the rate, and a form
to protest the proposed water rates, as required
under Proposition 218. Signed protests must be
received by the City Clerk, 990 Palm Street San
Luis Obispo CA 93401, at or before the time of the
protest hearing (June 6, 2023 at 5:30 p.m.).
For more information, please contact the City's
Utilities Department at (805) 781-7133 or by email
at ub®slocityarg.
• 2023.24 AND 2024.25 SEWER RATE ADOPTION
A public hearing to consider adopting a Resolution
emitted, "A Resolution of the Council of the City of
San Luis Obispo, California, establishing Sewer
Rates for Fiscal Years 2023-24 and 2024-25."
On April 17, 2023, all property owners and
customers of record will be mailed a notice of the
proposed ram, including the amount the basis for
calculation, the reason for the rate, and a form
to protest the proposed sewer rates, as required
under Proposition 218. Signed protests must be
received by the City Clerk, 990 Palm Street San
Luis Obispo CA 93401, at or before the time of the
protest hearing (June 6, 2023 at 5:30 p.m.).
For more information, please contact the Cdys
UVIntes Department at (805) 781-7133 or by email
atub@slocity.org.
The City Council may also discuss other hearings or
business items before or after the items listed above.
If you challenge the proposed action in court you may
be limited to raising only those issues you or someone
else raised at the public hearing described in this
notice, or in written correspondence delivered to the
City Council at or prior to, the public hearing.
Council Agenda Reports for this meeting will be
available for review one week in advance of the
meeting date on the City's website, under the Public
Meeting Agendas web page: httur/hwwv.sloc' org(
oovernme ntimavor-and-city-c o u n c illa ge ndas-and-
minutes. Please call the CityClerk's Office at(805) 781-
7114 for more information. The City Council meeting
will be televised live on Charter Cable Channel 20 and
live streaming on the City's YouTube channel Ifs
voutube.slo.city.
Teresa Purrington
City Clerk
City of San Luis Obispo
May 25, 2023
Public Hearing for Proposed Water and Sewer Rates
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
City Council Presentation –June 6, 2023
Public Hearing for Proposed Water and Sewer Rates
Proposition 218 Other Requirements
Main Point:Proposed rates were developed
to be compliant with Prop 218, the City
Municipal Code, the City Charter, and the
City’s Financial Plan.
Legal
notification 45
days prior to
public hearing
27,175 notices
mailed
Rates shall not be
increased if a
majority of affected
parcels protest the
increase
50%
+1
16,528 active
water accounts
(8,265 for a
successful protest)
15,987 active
sewer accounts
(7,994 for a
successful protest)
Rates must be
established based
on proportional cost
of providing
services
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Public Hearing for Proposed Water and Sewer Rates
Proposition 218 Other Requirements
Main Point:Proposed rates were developed to be compliant
with Prop 218, the City Municipal Code, the City Charter, and the
City’s Financial Plan.
City Council Rate Structure Goal Prioritization
City Council Water and Wastewater Rate Structure Study Session
August 15, 2017
1 Revenue Stability and Predictability
2 Discourage Wasteful Use
3 Stability and Predictability of Rates
4 Fair Allocation of Total Costs of Service Among Customer Classes
5 Reflect all Present and Future Costs
Questions
Timeline
Protest Count
Rate Setting
Legal Requirements
Public Hearing for Proposed Water and Sewer Rates
Revenue Requirements Cost of Service Rate Design
Main Point:The Rate Revenue Requirement Study
determines how much additional rate revenues are
needed to support operating and capital expenses.
Fiscal Year Water Revenue
Requirement
Sewer Revenue
Requirement
2023-24 Proposed +8.5%+4.0%
2024-25 Proposed +7.5%+4.0%
2025-26 Forecasted +7.5%+4.0%
2026-27 Forecasted +4.5%+4.0%
2027-28 Forecasted +4.5%+3.5%
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Public Hearing for Proposed Water and Sewer Rates
Revenue Requirements Cost of Service Rate Design
Main Point:The cost of service study takes water and sewer use
characteristics of different customer classes to establish the cost of
delivering services to those customers.
+14.13%
+13.41%
+4.62%
-15.62%
$(2,000)
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
Residential Multi-Family Non-Residential Irrigation
Water Cost of Service (in thousands)
Revenues vs Distributed Costs (FY23-24 forecast)
Revenues Distributed Costs
+3.66%
+4.61%
+4.22%
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Residential Multi-Family Non-Residential
Sewer Cost of Service (in thousands)
Revenues vs Distributed Costs (FY23-24 forecast)
Revenues Distributed Costs
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Public Hearing for Proposed Water and Sewer Rates
Revenue Requirements Cost of Service Rate Design
Main Point:The rate design considers legal requirements, findings
from revenue requirement and cost of service analyses, and
organizational goals to determine a rate structure. Based on the
results of the rate analysis, the rate structure is proposed to
remain the same, but be adjusted to meet revenue needs and
proportionality requirements.
Average Monthly
Residential Bill
Current Rate Proposed Rate
Effective July 1, 2023
Proposed Rate
Effective July 1, 2024
Water
(base fee + 6 units)
$66.66 $77.01 $82.79
Sewer
(base fee + 5 units)
$67.84 $70.78 $73.62
Total Monthly Bill $134.50 $147.79 $156.41
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Public Hearing for Proposed Water and Sewer Rates
October
2022
April
2023
May
2023
June
2023
1.Comprehensive
Water and Sewer
Rate Studies begin
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Public Hearing for Proposed Water and Sewer Rates
October
2022
April
2023
May
2023
June
2023
1.Finalize Comprehensive
Water and Sewer Rate
Studies
2.Proposition 218 Notices are
mailed
3.Strategic Budget Direction
Legal Requirements
Questions
Protest Count
Rate Setting
Timeline
Public Hearing for Proposed Water and Sewer Rates
October
2022
April
2023
May
2023
June
2023
1.Social media advertisements
2.Water Supply and Rate
Updates presented to
Council
3.Community forum on water
and sewer rates is conducted
4.Staff is interviewed on local
radio stations
Legal Requirements
Questions
Protest Count
Rate Setting
Timeline
Public Hearing for Proposed Water and Sewer Rates
October
2022
April
2023
May
2023
June
2023
1.Public Hearing for Proposed
Water and Sewer Rates
2.Continued advertisement of
the customer assistance
programs
www.slocity.org/cap
Legal Requirements
Questions
Protest Count
Rate Setting
Timeline
Public Hearing for Proposed Water and Sewer Rates
If reservoirs are full, why are rate increases
being proposed?
Main Point:Unfortunately, increased rainfall does not equate to reduced costs.
More than 85% of the costs to provide water and sewer services are fixed. And
macroeconomic supply chain issues and inflation have had significant impacts on
the cost of delivering water and sewer services.
83%89%
17%11%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
601-Water Fund 602-Sewer Fund
FY23-24 Fixed vs Variable Operating Costs
Fixed Variable
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Public Hearing for Proposed Water and Sewer Rates
Why aren’t rates structured to more
aggressively penalize excessive water use?
Main Point: Proposition 218
requires that rates must not
exceed the proportional
cost of delivering services.
Legal Requirements
Timeline
Protest Count
Rate Setting
$36.09
$95.33
$179.34
$-
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
$180.00
$200.00
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Bill amount$/unitUnits Used
FY23-24 Cost Per Unit vs Bill Amount
Single Family Residential
Cost per unit Total Bill
Questions
Public Hearing for Proposed Water and Sewer Rates
What are driving proposed rate increases?
Chemicals Electricity Construction Inflation
The Utilities Department estimates that it will spend $300,000
more on chemicals in FY23-24 than FY21-22.
Chemical FY21-22
Contract
FY22-23
Contract
FY23-24
Contract
% increase
from FY21-22
to FY23-24
Alum $336/ton $450/ton $491/ton 46%
Fluoride $1,760/ton $3,211/ton $3,016/ton 71%
Sodium
Hydroxide
$0.76/gallon $1.28/gallon $1.34/gallon 76%
Polymer $0.60/lb $0.95/lb $1.06/lb 77%
Chlorine $1.19/gallon $1.43/gallon $2.46/gallon 107%
Legal Requirements
Timeline
Protest Count
Rate Setting
Questions
Public Hearing for Proposed Water and Sewer Rates
Chemicals Electricity Construction Inflation
It is anticipated that electricity will cost Utilities $1.5 million
more in FY23-24 than FY21-22.
53%54%56%57%
18%16%
19%20%
27%
28%
23%
22%
$2,922,000
$3,353,000
$4,462,000 $4,816,000
FY21-22 FY22-23 FY23-24 FY24-25
Electricity Costs
Raw Water Delivery Water Treatment Wastewater Treatment Other
What are driving proposed rate increases?Legal Requirements
Timeline
Protest Count
Rate Setting
Questions
Public Hearing for Proposed Water and Sewer Rates
Chemicals Electricity Construction Inflation
California
Construction Cost
Index
7102
CCCI February 2021
9166
CCCI February 2023
29%
CCCI % increase from Feb-2021
to Feb-2023
0
50
100
150
200
250
300
2018 2019 2020 2021 2022
December YoY PPI Index
Commodity:Plastics sewer, stormdrain, and water main pipe
Source:U.S. Bureau of Labor Statistics PPI Detailed report
5-year increase: 149%
What are driving proposed rate increases?Legal Requirements
Timeline
Protest Count
Rate Setting
Questions
Public Hearing for Proposed Water and Sewer Rates
Chemicals Electricity Construction Inflation
Municipal Cost Index
261.08
MCI January 2021
308.41
MCI January 2023
18%
% increase from Jan-2021 to Jan-2023
While it is hard to quantify the effect of
general inflation, the MCI is a reasonably
good placeholder to estimate the impact of
inflation on municipal operations. MCI has
increased 18% over two years.
What are driving proposed rate increases?Legal Requirements
Timeline
Protest Count
Rate Setting
Questions
Public Hearing for Proposed Water and Sewer Rates
What has the city done to try to reduce rates?
Cost Savings Cost Control Financial Assistance
Fund Grant Purpose Project Awarded Amounts
Sewer SRF Loan Forgiveness WRRF Upgrade $4,000,000
Sewer Flood Protection WRRF Upgrade $2,077,103
Sewer Wastewater Discharge
Compliance
WRRF Upgrade $1,314,530
Water Energy Resiliency WTP Generator $1,395,000
Water Groundwater
Sustainability Plan
Sustainable Groundwater
Management Act
$256,395
Water Groundwater Expansion Groundwater Plume
Characterization Study
$1,996,575
Water Groundwater Expansion Groundwater
Plume Cleanup
$5,877,765
Water Self-Generation
Incentive Program
Tesla Battery Pack $3,202,536
Total $20,119,904
Legal Requirements
Timeline
Protest Count
Rate Setting
Questions
Public Hearing for Proposed Water and Sewer Rates
What has the city done to try to reduce rates?
Cost Savings Cost Control Financial Assistance
Legal Requirements
Timeline
Protest Count
Rate Setting Cost Control for Rate Payers
Energy efficiency efforts to reduce electricity costs.
Pursuit of additional grant opportunities.
Reduction in the sewer cap default from 8 CCF to 5.
Administration of the State COVID-19 Arrearage Program
resulting in $373,512 in water and sewer bill relief.
Questions
Public Hearing for Proposed Water and Sewer Rates
What has the city done to try to reduce rates?
Cost Savings Cost Control Financial Assistance
Customer Assistance Program (CAP)
Eligible customers can receive a 15% discount on
monthly water and sewer bills.
Please visit www.slocity.org/cap
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Low Income Household Water Assistance
Program (LIHWAP through CAPSLO)
Eligible customers can receive one-time
assistance when facing imminent disconnection,
have been disconnected, or have past due water
or wastewater bills.
Please visit www.capslo.org/water-assistance/
Public Hearing for Proposed Water and Sewer Rates
Questions?
Legal Requirements
Timeline
Protest Count
Rate Setting
Questions
Public Hearing for Proposed Water and Sewer Rates
Proposition 218 Official Protest Count
Water Rates
Mayor
1.Open the Public Hearing
2.Call for any written
protests from the public
3.Receive public comments
4.Close the Public Hearing
City Clerk
5.Confirm the number of
written protests received
6.Confirm the total
number of valid protests
Council may not adopt the proposed rates if 8,265 valid
protests (50% plus 1) are filed.
Council
7.Adopt or deny a resolution entitled “A Resolution of the
City Council of the City of San Luis Obispo, California,
establishing the Water Service Rates for Financial Plan
2023-25”
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Public Hearing for Proposed Water and Sewer Rates
Proposition 218 Official Protest Count
Sewer Rates
Mayor
1.Open the Public Hearing
2.Call for any written
protests from the public
3.Receive public comments
4.Close the Public Hearing
City Clerk
5.Confirm the number of
written protests received
6.Confirm the total
number of valid protests
Council may not adopt the proposed rates if 7,994 valid
protests (50% plus 1) are filed.
Council
7.Adopt or deny a resolution entitled “A Resolution of the
City Council of the City of San Luis Obispo, California,
establishing the Sewer Service Rates for Financial Plan
2023-25”
Legal Requirements
Questions
Timeline
Rate Setting
Protest Count
Public Hearing for Proposed Water and Sewer Rates
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
City Council Presentation –June 6, 2023
Public Hearing for Proposed Water and Sewer Rates
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Public Hearing for Proposed Water and Sewer Rates
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting
Public Hearing for Proposed Water and Sewer Rates
Opportunities for Future Rate Structure Modifications
Staff’s earliest recommendation for reviewing the City’s water and sewer rate
structures is FP2025-27. This is because the Utilities Department is
anticipating operational changes, which may affect what rate structures make
sense. These operational changes include:
•Strategic Plan
•WRRF completion
•Groundwater expansion
•Infrastructure renewal strategies
•Short-term non-potable water sales
•Energy management
Legal Requirements
Questions
Timeline
Protest Count
Rate Setting