HomeMy WebLinkAboutItem 7b. Consideration of the 2023-25 Sewer Rates Item 7b
Department: Utilities
Cost Center: 6101
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 SEWER RATES
RECOMMENDATION
1. Receive and file the Comprehensive Sewer 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 Sewer Service Rates for Financial Plan 2023-
25” provided there is no majority protest against the proposed sewer 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 sewer 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 sustainable funding to the City’s
Sewer Fund for operation, maintenance, and capital project needs. The sewer rates are
proposed to increase revenues by 4 percent in both fiscal years 2023-24 and 2024-25. If
approved, the proposed sewer rates would become effective on July 1 of each fiscal year.
This report provides the constitutional, regulatory, and policy basis for the proposed sewer
rates, identifies the rate setting methodology and protest procedures, summarizes the
public outreach conducted to ensure our customers are provided information regarding
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 Sewer Fund is an Enterprise Fund. Enterprise Funds utilize rates and fees paid
for services rendered to fund operating, capital, and debt service expenditures. Sewer
rates pay for all costs associated with transporting 1.1 billion gallons of wastewater to the
City’s Water Resource Recovery Facility from 16,561 service connections. General funds
(such as property tax or sales tax) do not support these essential services.
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Item 7b
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 sewer services. No changes to the current rate structure are
recommended or proposed, and the proposed rates are con sistent 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 the “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 7b
DISCUSSION
Rate Setting Methodology
The goal of the rate-setting
process is to provide sustainable
funding to the City’s Sewer 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 Sewer Rate Study (Attachment
A). For the Comprehensive Sewer 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 Sewer Rate
Study provides the necessary documentation and an administrative record of the cost
basis for the City’s proposed sewer rates in compliance with Prop. 218 Section 6, which
regulates property-related fees and charges to which sewer is bound [California Supreme
Court in Bighorn-Desert View Water Agency v. Verjil (2006)]. In accordance with the
provisions of Prop. 218, sewer rates are designed based on a cost-of-service
methodology that fairly apportions costs to all customers.
The methodology used for sewer 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 the Wastewater Sytem
Proposition 218
City Policy/
Rate Structure
Cost of Services/
Proportionality
Rates
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Item 7b
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 Sewer Rates
Based on the results of the Comprehensive Sewer Rate Study, the City’s proposed sewer
rates for 2023-25 are provided in Table 1, below. The Resolution for adoption of the sewer
rates is provided in Attachment B.
Table 1: 2023-25 Proposed Sewer Rates
Usage (per unit
cost)
Current Rates Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective 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 Cost
(For all Water
Consumption)
$9.19 $9.88 $10.27
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Item 7b
Table 1: 2023-25 Proposed Sewer Rates (continued)
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
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 sewer 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 sewer bill,
then one valid protest is counted for the account.
If written protests are filed by a majority (50% + 1), the proposed sewer rates may not be
imposed. A majority of the City’s 16,561 sewer customers is 8,280 plus one. As of May
25, 2023 at 12:00 PM, a total of 1,184 written protests were received by the Office of the
City Clerk. All protests will need to 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 7b
Public Engagement
The City is committed to helping the public understand the recommended sewer 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 customers ’ 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 Pro grams 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 sewer 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 service 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 7b
FISCAL IMPACT
In order to meet the rate revenue requirement of the Sewer Fund detailed in the
Comprehensive Sewer Rate Study, the proposed sewer rates are projected to generate
a total of $19.3 million dollars during FY 2023-24. This is an increase in total rate revenues
of 4 percent over FY 2022-23. The Sewer Fund’s projected total revenue requirement for
2023-24 is $21.2 million when other revenue is included. This is further summarized in
Table 2.
Table 2: 2023-25 Rate Revenues and Revenue Requirements
Comprehensive Sewer Rate
Study (in thousands)
FY2023-24 Forecast FY2024-25 Forecast
Rate Revenues
Without Proposed Rate Increase
$18,589 $18,738
Rate Revenues
With Proposed Rate Increase
$19,333 $20,267
Total Revenue
Requirement
Includes Non-rate Revenues1
$21,207 $22,131
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 Sewer Rates. The proposed sewer rates were prepared
in alignment with City Council rate structure goals established in January 2018 and
Financial Plan objectives and policies. The proposed sewer rates were identified
through the preparation of the Comprehensive Sewer Rate Study to meet the needs
of the City’s Sewer Fund in providing sewer service for the community.
The proposed sewer rates were also prepared in compliance with Prop. 218. Staff
believes that the services, operating programs, and Capital Improvement Plan
components of the Sewer 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.
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Item 7b
2. Reduce the Recommended Rates. Council could reduce recommended rates and
the impact because the majority of system costs are fixed would be to reduce the level
of capital which would likely impact the system with potential failures and could impact
Sewer Fund rating due to less than market expectations in terms of infrastructure
replacement.
ATTACHMENTS
A - Comprehensive Sewer Rate Study (HDR; April 2023)
B - Draft Resolution establishing the Sewer Service Rates for Financial Plan 2023-25
C - Water and Sewer Rate Notice
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City of San Luis Obispo
Comprehensive Wastewater Rate Study
April 2023
Draft Report
Page 367 of 954
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: Wastewater 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 comprehensive wastewater rate study (Study). The City’s Study was
developed to provide cost‐based wastewater rates that generate sufficient revenue to
adequately fund the operation and maintenance costs and capital infrastructure needs of the
City’s wastewater utility. More specifically, the Study was designed to develop cost‐based and
proportional wastewater rates for the City’s customers. This report outlines the overall approach
used to achieve these objectives, along with our findings, conclusions, and recommendations.
The costs associated with providing wastewater service to the City’s customers has been
developed based on City specific information and customer chara cteristics and is included within
the development of the proposed wastewater rates. This update was developed using generally
accepted rate setting principles and industry standard methodologies as outlined in the Water
Environment Federation’s Manual of Practice No. 27, Financing and Charges for Wastewater
Systems to develop cost‐based and proportional rates. This report provides the basis for
developing and implementing wastewater rates which are cost‐based, proportional, and legally
defensible for the City’s customers.
We appreciate the assistance provided by the City’s project team in the development of this
study and this report. More importantly, HDR appreciates the opportunity to provide these
technical and professional services to the City of San Luis Obispo.
Sincerely yours,
HDR Engineering, Inc.
Shawn Koorn
Associate Vice President
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Table of Contents i
City of San Luis Obispo – Wastewater Rate Study
Table of Contents
Executive Summary
Introduction ........................................................................................................................... 1
Overview of the Rate Study Process ...................................................................................... 1
Key Wastewater Rate Study Results ...................................................................................... 2
Summary of the Wastewater Revenue Requirement Analysis ............................................... 2
Summary of the Wastewater Cost of Service Analysis ........................................................... 5
Summary of the Wastewater Rate Design ............................................................................. 6
Summary 7
Introduction and Overview 8
1.1 ..... Goals and Objectives ................................................................................................... 8
1.2 ..... Overview of the Rate Study Process ............................................................................ 8
1.3 ..... Organization of the Study ............................................................................................ 9
1.4 ..... Summary ..................................................................................................................... 9
Overview of Rate Setting Principles 10
2.1 ..... Generally Accepted Rate Setting Principles ............................................................... 10
2.2 ..... Determining the Revenue Requirement .................................................................... 10
2.3 ..... Analyzing Cost of Service ........................................................................................... 11
2.4 ..... Designing Utility Rates ............................................................................................... 12
2.5 ..... Economic Theory and Rate Setting ............................................................................ 12
2.6 ..... Summary ................................................................................................................... 12
Wastewater Revenue Requirement 13
3.1 ..... Determining the Revenue Requirement .................................................................... 13
3.2 ..... Establishing a Time Frame and Approach .................................................................. 13
3.3 ..... Projecting Rate and Other Miscellaneous Revenues ................................................. 14
3.4 ..... Projecting Operation and Maintenance Expenses ..................................................... 15
3.5 ..... Projecting Capital Funding Needs .............................................................................. 15
3.6 ..... Projection of Debt Service ......................................................................................... 17
3.7 ..... Reserve Funding ........................................................................................................ 17
3.8 ..... Summary of the Wastewater Revenue Requirement ................................................ 18
3.9 ..... Consultant’s Conclusions ........................................................................................... 20
3.10 ... Summary ................................................................................................................... 20
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Table of Contents ii
City of San Luis Obispo – Wastewater Rate Study
Wastewater Cost of Service 21
4.1 ..... Objectives of a Cost of Service .................................................................................. 21
4.2 ..... Determining the Customer Classes of Service ........................................................... 21
4.3 ..... General Cost of Service Procedures .......................................................................... 22
4.3.1 Functionalization of Costs ............................................................................ 22
4.3.2 Allocation of Costs........................................................................................ 22
4.3.3 Development of Distribution Factors ........................................................... 23
4.4 ..... Summary of the Wastewater Cost of Service Analysis .............................................. 24
4.5 ..... Consultant’s Conclusions ........................................................................................... 28
4.6 ..... Summary ................................................................................................................... 28
Wastewater Rate Design 29
5.1 ..... Introduction .............................................................................................................. 29
5.2 ..... Rate Design Criteria and Considerations ................................................................... 29
5.3 ..... Development of Cost‐Based Wastewater Rates ........................................................ 29
5.4 ..... Overview of the Current Wastewater Rate Structure ............................................... 30
5.5 ..... Development of the Proposed Wastewater Rates .................................................... 31
5.6 ..... Summary ................................................................................................................... 31
Technical Appendix 32
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Executive Summary 1
City of San Luis Obispo – Wastewater Rate Study
Executive Summary
Introduction
HDR Engineering, Inc. (HDR) was retained by the City of San Luis Obispo (City) to conduct a
comprehensive wastewater rate study (Study). The main objectives of the wastewater rate study
were:
Develop a projection of wastewater revenues to support the City’s operating and capital
costs
Provide a proportional distribution of the costs for providing wastewater service to those
customers receiving service
Propose cost‐based wastewater rates for a multi‐year time period that are in compliance
with State law
The City owns, operates, and maintains the wastewater system which provide service to the
customers within the City’s service area. The City’s wastewater system plays a leading role in the
protection of public health and the environment to the local community. Maintaining this system
requires a proactive commitment to investing in the capital infrastructure and resources
necessary to keep this vital system operating 24 hours a day, 365 days per year. The costs
associated with providing wastewater service to the City’s customers have been developed based
on the information provided by City staff and incorporated and included within the development
of the proposed wastewater rates.
Overview of the Rate Study Process
A comprehensive rate study is completed through three interrelated analyses to address the
adequacy and proportionality of the wastewater 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 Comprehensive Wastewater Rate Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses of the
utility to determine the overall revenue adjustment
required
Proportionally distributes the revenue requirement
to the customer classes of service
Considers both the revenue requirement and cost
of service results to develop cost‐based rates
Revenue Requirement Analysis
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Executive Summary 2
City of San Luis Obispo – Wastewater Rate Study
The above analytical framework was utilized in the development of the City’s Study for reviewing
and evaluating the City’s wastewater rates.
Key Wastewater Rate Study Results
The technical analysis was developed based on the operation and maintenance (O&M) and
capital infrastructure costs necessary to provide wastewater service to the City’s customers. The
Study resulted in the following findings, conclusions, and recommendations.
A revenue requirement analysis was developed for the time period of FY 2022‐23 through
FY 2032‐33
The City’s adopted FY 2022‐23 wastewater utility budget was used as the starting point of
the analysis
Operation and maintenance (O&M) expenses are projected to increase at inflationary levels
A cost of service analysis was developed, for test year FY 2023‐24, to review the cost‐basis
of the existing wastewater rates and to distribute the revenue requirement proportionally
among the customer classes of service
The results of the cost of service analysis provided average un it costs (i.e., cost‐based rates)
which were used to establish the proposed wastewater rates
The Study has developed proposed rates for a two year period of FY 2023‐24 through FY
2024‐25, by customer class of service
Based upon the findings and conclusions from the revenue requirement analysis, the
proposed wastewater rate revenue adjustments (not customer bill impacts) are 4.0%
annually in FY 2023‐24 and 2024‐25. The rate adjustments are proposed to be effective July
1 of each year
Summary of the Wastewater Revenue Requirement Analysis
The City’s wastewater utility revenue requirement analysis is the first analytical step in the rate
study process. The revenue requirement analysis determines the adequacy of the City’s current
wastewater rates to fund budgeted and projected costs related to both O&M and capital
infrastructure expenses. From this analysis, a determination can be made as to the overall level
of wastewater revenue adjustments needed to provide adequate and prudent funding for the
wastewater utility.
The revenue requirement was developed from the City’s adopted FY 2022‐23 budget and then
projected forward for a ten‐year review period of FY 2023‐24 through FY 2032‐33. As a practical
matter, reviewing a multi‐year time frame is recommended in an attempt to identify major
expenses that may be on the horizon. By anticipating future financial requirements, the City may
begin planning for these changes sooner, thereby minimizing short‐term rate shock and
smoothing long‐term rate adjustments. The focus of this Study was on the next two‐year rate
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Executive Summary 3
City of San Luis Obispo – Wastewater Rate Study
setting period of FY 2023‐24 through FY 2024‐25 while considering the long‐term rate needs of
the wastewater utility.
For the City’s wastewater revenue requirement analysis, a “cash basis” methodology or approach
was utilized, which is the approach historically used by the City. The cash basis approach is the
most commonly used methodology by municipal utilities to set their revenue requirement. Under
this approach, the revenues of the utility must be at a sufficient level to pay for O&M expenses,
annual debt service payments, rate funded capital, and reserve funding. The primary financial
inputs in the development of the revenue requirement were the City’s adopted FY 2022‐23
budget documents, historical billed customer and consumption data, and the City’s wastewater
capital improvement plan. The budgeted O&M expenses were projected from FY 2023‐24
through FY 2032‐33 using assumed escalation (inflationary) factors from the City’s fund analysis.
In addition to the budged O&M, the Study assumed additional staff totaling $113,000 in FY 2023‐
24. In total, the City’s O&M expenses are $11.6 million in FY 2022‐23 and increase to $15.3 million
by FY 2027‐28 due to additions in O&M as well as inflationary projections.
The proper and adequate funding of capital projects is important to help minimize rate increases
over time. General financial guidelines state that, at a minimum, a utility should annually fund
from rates an amount equal to, or greater than, annual depreciation expense. The annual
depreciation expense reflects the City’s current investment in plant in service
(infrastructure/facilities) being depreciated or “losing” their useful life. Over time, and as facilities
become worn out or depleted, plant investment needs to be replaced to maintain the existing
level of infrastructure (and service levels). However, it must be kept in mind that simply funding
an amount equal to annual depreciation expense will not be sufficient to fund the replacement
of an existing or depreciated facility. Therefore, consideration should be given to funding within
rates at some amount greater than, typically 1.5 to 2.0 times, the annual depreciation expense
for renewal and replacement capital projects.
A key element of the Study was the establishment of prudent levels of renewal and replacement
funding to meet future capital improvement needs. The City has a number of significant capital
improvement projects at the wastewater treatment plant, as well as annual capital needs
throughout the collection system, over the next ten‐year period. Over the rate setting period,
the City anticipates rate funding of capital of $7.2 million from FY 2022‐23 to $4.8 million in 2032‐
33. This decrease is due to the debt service from the Water Resource Recovery Facility (WRRF)
upgrade that begins in FY 2024‐25 which hinders the ability of the City to invest in wastewater
capital until it future rate adjustments can restore this capacity. As a point of reference, the City’s
annual depreciation expense is approximately $3.6 million (FY 2021‐22). In developing this
financial plan, HDR and the City have attempted to minimize rate impacts while funding the City’s
capital improvement plan projects. HDR has worked closely with City staff to develop the
proposed capital funding plan.
Provided below in Table ES ‐ 1 is a summary of the capital funding plan over the next five years.
A more detailed discussion of the capital funding plan is included in Section 3 of this report.
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Executive Summary 4
City of San Luis Obispo – Wastewater Rate Study
Table ES – 1
Summary of the Capital Improvement Plan (000’s)
FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26 FY 2026‐27 FY 2027‐28
Total Capital Projects $76,343 $10,212 $3,852 $8,621 $2,390 $9,102
Less: Non‐Rate Funding 69,148 2,787 2,002 6,746 0 6,302
Rate Funded Capital $7,195 $7,425 $1,850 $1,875 $2,390 $2,800
Given a projection of O&M and capital expenses, a summary of the wastewater revenue
requirement analysis was developed. Provided below in Table ES – 2 is a summary of the revenue
requirement analysis for the City’s wastewater utility.
Table ES ‐ 2
Summary of the Wastewater Revenue Requirements (000’s)
FY 2022‐
23
FY 2023‐
24
FY 2024‐
25
FY 2025‐
26
FY 2026‐
27
FY 2027‐
28
Revenues
Rate Revenues $18,441 $18,589 $18,738 $18,887 $19,039 $19,191
Miscellaneous Revenues 1,609 1,874 1,864 1,840 1,827 1,802
Total Revenues $20,050 $20,463 $20,602 $20,728 $20,865 $20,993
Expenses
Total O&M $11,620 $12,547 $13,417 $14,259 $14,766 $15,291
Rate Funded Capital 7,195 7,425 1,850 1,875 2,390 2,800
Debt Service 1,231 1,232 6,856 6,949 6,940 6,938
Reserve Funding 4 2 8 3 4 9
Total Revenue Requirement $20,050 $21,207 $22,131 $23,086 $24,099 $25,038
Bal./(Def.) of Funds $0 ($744) ($1,529) ($2,358) ($3,234) ($4,046)
Bal. as a % of Rate Rev. 0.0% 4.0% 8.2% 12.5% 17.0% 21.1%
Proposed Revenue Adjustment 0.0% 4.0% 4.0% 4.0% 4.0% 3.5%
Add’l Rev. from Rev Adj $0 $744 $1,529 $2,358 $3,234 $4,046
Bal. / (Def.) After Rate Adj. $0 $0 $0 $0 $0 $0
As can be seen, the revenue requirement has summed the annual O&M expense, rate funded
capital, debt service, and reserve funding. The total revenue requirement is then compared to
the total sources of funds 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 current level of rate
revenues to determine the level of adjustment needed to meet the revenue requirement. It is
important to note the “Bal. / (Def.) of Funds” row is cumulative. That is to say that any rate
revenue adjustments in the initial years will reduce the deficiency in the later years.
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Executive Summary 5
City of San Luis Obispo – Wastewater Rate Study
Based on the revenue requirement analysis developed herein, HDR has concluded that the City
will need to adjust the level of wastewater revenues received over the next two fiscal years (FY
2023‐24 through FY 2024‐25). HDR has reached this conclusion for the following reasons:
Adjustments are necessary to fund the City’s capital needs, of which a substantial portion
is driven by the planned issuance of long‐term debt to fund the wastewater capital
improvement projects
Adjustments are necessary to maintain prudent funding of annual renewal and
replacement of the wastewater utility
The proposed adjustments will positively position the City’s financial health (e.g., debt
service coverage ratios) and provide long‐term, sustainable funding levels for the City
In reaching this conclusion, HDR would recommend that the City adopt the proposed wastewater
rate revenue adjustments for FY 2023‐24 through FY 2024‐25 to provide sufficient funding for all
the O&M and capital improvement needs over the next five fiscal years. A detailed discussion of
the development of the revenue requirement is provided in Section 3 of this report.
Summary of the Wastewater Cost of Service Analysis
A cost of service analysis determines the proportional distribution of the revenue requirement
to the various customer classes of service. The objective of th e cost of service analysis is different
from determining the revenue requirement. Whereas the revenue requirement analysis
determines the utility’s overall revenue needs, the cost of service analysis determines the
proportional manner in which to distribute costs and collect the revenue requirement for the
proposed time period. In this case, the revenue requirement developed for FY 2023‐24 was used
for establishing the cost of service analysis.
In summary form, the cost of service analysis began by functionalizing the revenue requirement
for the wastewater system. As explained in more detail in this report (Section 4), the
functionalized revenue requirement was then equitably allocated to the appropriate cost
component(s). The individual functional allocation totals were then proportionally distributed to
the various customer class of service based on each customer cl ass’s use of or demand placed on
the system. 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 completed for the City’s wastewater utility customers.
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Executive Summary 6
City of San Luis Obispo – Wastewater Rate Study
Table ES ‐ 3
Summary of the Wastewater FY 2023‐24 Cost of Service Analysis ($000)
Class of Service
Current
Rate Revenues
Distribution
of Costs
$
Difference
%
Difference
Residential $9,868 $10,229 ($361) 3.7%
Multi‐Family 3,644 3,812 (168) 4.6%
Non‐Residential 5,077 5,291 (214) 4.2%
Total $18,589 $19,332 ($744) 4.0%
The results of the cost of service analysis indicate minor cost differences between the customer
classes of service. These customer classes reflect the various types of wastewater customers
served by the City as well as the current rate schedules. Given the requirements of California
Constitution Article XIII D, Section 6 (commonly referred to as Proposition 218), the results –
specifically the unit costs ‐ of the wastewater cost of service analysis are used to establish the
proposed wastewater rates. As noted in the cost of service section (Section 4) of this report, the
implementation of cost of service adjustments will impact the overall customer bill and revenue
generation for the wastewater utility. A detailed discussion of the development of the cost of
service analysis is provided in Section 4 of this report.
Summary of the Wastewater Rate Design
The final step of the comprehensive wastewater rate study process is the design of the
wastewater rates to collect the appropriate levels 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 revenue adjustments whereas the cost of service
results are related to implementing interclass adjustments to reflect the proportional distribution
of costs.
It is important to understand that each customer class has a separate rate given the different
characteristics as outlined in the cost of service analysis. The City currently has a rate structure
for each of the customer classes of service. The single family customers are charged a monthly
flat fixed charge per account and a uniform volumetric charge based on the water use up to the
winter water average. Multi‐family are charged a fixed charge based on the meter size and a
uniform volumetric charge on water use up to the winter water average. For commercial
customers, they are charged a fixed charge based on the meter size and a uniform volumetric
charge on all metered water use. After discussion with City staff, and a review of the current rate
structure and customer characteristics, no rate structure changes are recommended at this time.
Given the result of the prior analyses, the revenue requirement and cost of service, the proposed
wastewater rates can be developed that reflect the cost‐based a llocation of the costs of providing
service. Provided below in Table ES – 4 is a summary of the current and proposed wastewater
rates.
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Executive Summary 7
City of San Luis Obispo – Wastewater Rate Study
Table ES – 4
Summary of the Present and Proposed Wastewater Rates
Present
Rates FY 2023‐24 FY 2024‐25
Base Charge
Residential $21.89 $23.58 $24.52
Multi‐Family / Non‐Residential
3/4" or Less $21.89 $23.58 $24.52
1" 36.55 39.37 40.95
1.5" 72.86 78.51 81.65
2" 116.63 125.67 130.70
3" 218.83 235.78 245.21
4" 364.78 393.04 408.76
6" 729.34 785.85 817.28
8" 1,166.99 1,257.40 1,307.70
10” 1,677.72 1,807.71 1,880.02
Consumption Charge
Residential $9.19 $9.44 $9.82
Multi‐Family 9.19 9.44 9.82
Non‐Residential 9.19 9.88 10.27
The proposed wastewater rates are based on the calculated average unit costs within the cost of
service analysis. Average unit costs were calculated for both the base charges and the
consumption charges for each customer class. The development of the City’s proposed rate
designs is outlined in detail in Section 5 of this report.
Summary
This wastewater rate study is the culmination of the technical analyses undertaken for the City’s
wastewater utility. The recommendations contained within this study are intended to adequately
fund and maintain the City’s wastewater utility with cost‐based and proportional rates.
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Introduction and Overview 8
City of San Luis Obispo – Wastewater Rate Study
Introduction and Overview
HDR was retained by the City of San Luis Obispo (City) to conduct a comprehensive wastewater
cost of service study (Study). The objective of the City’s comprehensive wastewater rate study
was to review the City’s wastewater operating and capital costs and develop proportional rates
that are in compliance with Proposition 218. The City’s Study reviewed the adequacy of the
existing wastewater rates and provides the framework and cost‐basis for the proposed rates.
The City owns and operates the wastewater utility system in San Luis Obispo, California. This
system includes and provided for the collection, conveyance, treatment, and disposal of the
wastewater flows generated by its customers. The costs associated with providing wastewater
service to the City’s customers has been developed based on the financial and operating data
and information provided by the City and included/incorporated within the development of the
Study.
1.1 Goals and Objectives
The City had a number of key objectives in developing their comprehensive wastewater rate
study. These key objectives provided a framework for the policy decisions in the analyses that
followed. These key objectives were:
Develop the City’s Study in a manner that is consistent with the principles and
methodologies established by the Water Environment Federation (WEF), Manual of
Practice No. 27, Financing and Charges for Sewer Systems (WEF MOP #27) and applicable
law, including the requirements of California Constitution Article XIII D, Section 6
(commonly referred to as Proposition 218)
In financial planning ‐ and when establishing the City’s rates ‐ review and utilize industry
standard practices, while recognizing and acknowledging the specific and unique
characteristics of the City’s wastewater system
Meet the City’s financial planning criteria and goals such as debt service coverage ratios,
adequate funding of capital infrastructure replacement, and maintenance of prudent
reserve levels
Develop a financial plan which adequately supports the wastewater utility’s funding
requirements, while attempting to minimize overall impacts to rates
1.2 Overview of the Rate Study Process
User rates must be set at a level where a utility’s O&M and capital expenses are met with the
revenues received from customers. This is a crucial point, as failure to achieve this objective may
lead to insufficient funds to maintain system integrity. To evaluate the adequacy and
proportionality of the existing wastewater rates, a comprehensive wastewater rate study is
performed. A comprehensive rate study consists of three interrelated analyses. Figure 1 ‐ 1
provides an overview of these analyses.
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Introduction and Overview 9
City of San Luis Obispo – Wastewater Rate Study
Figure 1 – 1
Overview of the Comprehensive Wastewater Rate Analyses
The above analytical framework for reviewing and evaluating rates was utilized for the
development of the City’s wastewater rate study. It is important to understand that the City’s
wastewater utility was reviewed on a financially stand‐alone basis. That is, no funding from other
City departments or the City’s general fund was assumed or utilized in determining the level of
adequate funding needed by the City from its wastewater utility rate revenues.
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 steps used to review and develop
the City’s proposed wastewater rates. The following sections comprise the City’s wastewater cost
of service study report:
Section 2 – Overview of Rate Setting Principles
Section 3 – Revenue Requirement Analysis
Section 4 – Cost of Service Analysis
Section 5 – Rate Design Analysis
Technical Appendices are attached at the end of this report, which detail the technical analyses
that were undertaken in the preparation of the Study.
1.4 Summary
This report will review the comprehensive wastewater cost of service study prepared for the City.
This report has been prepared utilizing generally accepted and industry standard rate setting
techniques and methodologies, while also taking into consideration meeting the requirements
for establishing rates pursuant to the California Constitution.
Revenue Requirement Analysis
Cost of Service Analysis
Rate Design Analysis
Compares the revenues to the expenses
of the utility to determine the overall
revenue adjustment required
Distributes the revenue requirement to the
customer classes of service in a
proportional manner
Considers both the level and structure of
the rate design to collect the target level of
revenues through cost based rates.
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Overview of Rate Setting Principles 10
City of San Luis Obispo – Wastewater Rate Study
Overview of Rate Setting Principles
This section of the report provides background information about the wastewater rate setting
process, including descriptions of generally accepted principles, types of utilities, methods of
determining a revenue requirement, cost of service, and rate design. This information is useful
for gaining a better understanding of the details presented in Sections 3 through 5 of this report.
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. 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
Stable in their ability to provide adequate revenues for meeting the utility’s financial,
O&M, 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” methodology or approach 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 of time to determine its required revenues. The revenue requirement
for a public (i.e., municipal) utility is usually comprised of the following costs or expenses:
Total Operating Expenses: This includes a utility’s operation and maintenance (O&M)
expenses, plus any applicable taxes or transfer payments. O&M expenses include the
materials, electricity, labor, supplies, etc., needed to keep the utility functioning.
Total Capital Expenses: Capital infrastructure expenses are calculated by adding debt
service payments (principal and interest) to capital improvement projects financed from
rate revenues. In lieu of including capital improvement projects financed from rate
revenues, a utility sometimes includes annual depreciation expense to stabilize the
annual revenue requirement. In addition, a utility may fund future capital improvements
through transfers to capital reserves that are used in future years for capital
improvements.
Under the cash basis approach, the sum of the total operating expenses plus the total capital
expenses equals the utility’s total revenue requirement during any selected period of time
(historical or projected).
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Overview of Rate Setting Principles 11
City of San Luis Obispo – Wastewater Rate Study
Note that the two portions of the capital expense component (debt service and rate funded
capital projects) are necessary under the cash basis approach because utilities generally cannot
finance all of their capital facilities with long‐term debt. At the same time, it is often difficult to
pay for capital expenditures on a “pay‐as‐you‐go” basis given that some major capital projects
may have significant rate impacts on a utility, even when financed with long‐term debt. Many
utilities have found that some combination of “pay‐as‐you‐go” (rate) funding and long‐term
financing will often lead to minimization of rate increases over time.
As noted, public utilities typically use the cash basis
1 approach to establish their revenue
requirements. An exception occurs if a public utility provides service to a major wholesale or
contract customer. In this situation, a public utility could use the “utility basis” approach (see
Table 2 ‐ 1) regarding earning a fair return on its investment. As a point of reference, the City’s
Study is based on the cash basis approach.
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
+ Rate Funded Capital Proj. (≥ Depr. 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, proportionally distributed to the customers
benefitting from the service. The distribution, analyzed through a cost of service analysis, reflects
the cost relationships for providing wastewater services. A cost of service analysis requires three
analytical steps:
1. Costs are functionalized or grouped into the various cost categories related to providing
service. For the wastewater utility, this typically includes collection, pumping, and
treatment. 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,
1 “Cash basis” as used in the context of rate setting is not the same as the terminology used for accounting purposes
and the recognition of revenues and expenses. As used for rate setting, “cash basis” simply refers to the specific cost
components to be included within the revenue requirement analysis.
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Overview of Rate Setting Principles 12
City of San Luis Obispo – Wastewater Rate Study
wastewater costs are typically allocated as volume‐2, strength‐(BOD, TSS, etc.)3, and
customer‐related.4
3. Once the costs are allocated to the appropriate component(s), they are distributed to
each customer class of service. The distribution is based on each customer class’s relative
(proportional) 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
distributed to each class of service based on the total number of customers in that class
of service. Once costs are distributed, the revenues from each customer class of service
required to achieve cost‐based rates can be determined.
2.4 Designing Utility Rates
Proposed rates are designed based on the results from both the revenue requirement and the
cost of service analysis. This approach results in rates that are cost‐based and proportional. In
designing the final proposed rates, factors such as ability to pay, continuity of past rate
philosophy, economic development, ease of administration, and customer understanding may
be taken into consideration. However, the proposed rates must take into consideration each
customer class’s proportional share of the costs distributed through the cost of service analysis
to meet Proposition 218 requirements.
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 wastewater utility incurs additional costs to treat higher strength
wastewater. It follows that the customers who create and discharge higher strength wastewater
into the system create additional operating costs and should pay for the costs associated with
treating higher strength waste and any other maintenance costs
associated with their discharges. When costing and pricing techniques
are refined, consumers have a more accurate understanding of what
the service costs to collect and treat wastewater. This price‐equals‐
cost concept provides the basis for the subsequent analysis. This is
further reflected in the requirements of Proposition 218 which
references the need for cost‐based and proportional rates.
2.6 Summary
This section of the report has provided a brief introduction to the general principles, techniques,
and approach used to develop cost‐based wastewater rates. These principles and techniques are
the basis for the City’s Study reviewed and discussed in this report.
2 “Volume” refers to the amount of wastewater discharged
3 “Strength” refers to the concentration of dissolved and suspended matter in sewage, as indicated, for example, by
biochemical oxygen demand or suspended solids.
4 “Customer‐related” refers to such costs as billing and collections
“Economic theory
suggests that the price
of a commodity must
roughly equal its cost if
equity among customers
is to be maintained.”
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Wastewater Revenue Requirement 13
City of San Luis Obispo – Wastewater Rate Study
Wastewater Revenue Requirement
This section of the report details the development of the revenue requirement analysis for the
City’s wastewater system. The revenue requirement analysis is the first analytical step in the
comprehensive wastewater rate study process. From this analysis, a determination can be made
as to the overall level of rate revenue adjustments needed to provide adequate and prudent
funding for both O&M and capital infrastructure needs of the utility. The primary objective of the
rate study was to develop cost‐based and proportional wastewater rates that comply with the
California Constitution, while attempting to minimize the long‐term rate impacts to the City’s
customers.
3.1 Determining the Revenue Requirement
In developing the City’s wastewater revenue requirement, a key objective is that the utility must
financially stand on its own and be properly funded. That is to say, no revenues are being
transferred from other City departments or funds to support the wastewater utility. As a result,
the revenue requirement analysis assumes the full and proper funding needed to operate and
maintain the wastewater system on a financially sound and prudent basis for the long‐term.
3.2 Establishing a Time Frame and Approach
To begin calculating the revenue requirement for the City’s wastewater utility, a time frame was
established for the analysis (i.e., the Study time period). The budget year for FY 2022‐23 was the
starting point and costs were then projected for the 10‐year review period of FY 2023‐24 through
FY 2032‐33. The costs from the City’s budget were projected over the 10‐year projected time
period based on estimated escalation (inflation) factors. Reviewing a multi‐year projected time
period is recommended in an attempt to identify major expenses that may be on the horizon. By
anticipating future financial requirements, the City can begin planning for these changes sooner,
thereby minimizing short‐term rate impacts and overall long‐term rates.
The second step in determining the revenue requirement was to decide on the basis for
accumulating costs. As discussed in Section 2 of this report, the revenue requirement analysis
was developed using the “cash basis” approach. The cash basis approach is the most commonly
used methodology by municipal utilities to set their revenue requirement. This is also the
methodology that the City has historically used to establish its wastewater 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’s wastewater utility.
The primary financial inputs in the development of the revenue requirement were the City’s
adopted FY 2022‐23 budget documents, recent 12‐months of customer billing data as well as
historical customer characteristics, historical financial reports, and the City’s Capital
Improvement Plan (CIP). Presented below is a detailed discussion of the steps and key
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Wastewater Revenue Requirement 14
City of San Luis Obispo – Wastewater Rate Study
assumptions contained in the development of the City’s wastewater revenue requirement
analysis.
3.3 Projecting Rate and Other Miscellaneous Revenues
The first step in developing a projection of the wastewater rate revenues, at present rate levels,
was to determine the projected billing units (fixed and volumetric charges) for each customer
class of service (single‐family residential, multi‐family, commercial). The billing units for each
customer class were based on the most recent 12‐month period to determine the current
customer usage and billing units. These billing units were then multiplied by the current adopted
wastewater rates. This method of independently calculating rate revenues links the projected
revenues used within the analysis to the projected billing units. It also helps to confirm that the
billing units used within the Study are reasonable for purposes of projecting future revenues,
distributing costs and, ultimately, establishing the proposed wastewater rates. The rate revenues
are also shown in Exhibit 3 of the
Technical Appendix, under “Rate
Revenues” for FY 2022‐23.
As can be seen in the graph, the
majority of the City’s rate revenues
are derived from residential and
multi‐family customers. The City also
serves a variety of commercial
customers of varying levels of
wastewater strength. In total, and at
adopted present rate levels, the City’s wastewater system is projected to receive approximately
$18.4 million in rate revenues in FY 2022‐23. Based on current City planning documents, the
projection of rate revenues has assumed minimal customer growth at 0.5% per year. The
projection of rate revenues by FY 2027‐28, ‐ assuming no rate adjustments – is projected to be
approximately $19.2 million based on the growth assumptions noted above. The detailed
calculation of the revenues at present rates can be found on Exhibit 5 of the Technical Appendix.
In addition to the rate revenues collected, the City also receives other miscellaneous revenues.
These are revenues related to other utility charges, industrial charges, miscellaneous penalties,
interest income, etc. In total, the City is projected to receive approximately $1.6 million in
miscellaneous revenues in FY 2022‐23. The majority of this is derived from Cal Poly for providing
wastewater conveyance and treatment service. Miscellaneous revenues were estimated to
increase slightly over the study time period and are anticipated to increase to $1.8 million by FY
2027‐28.
On a combined basis, and taking into account the rate revenues and the miscellaneous revenues,
the City’s wastewater utility has total projected revenues of approximately $20.1 million in FY
2022‐23, which increases to approximately $21.0 million by FY 2027‐28. The projection of rate
and miscellaneous revenues can be found on Exhibit 3 of the Technical Appendix.
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Wastewater Revenue Requirement 15
City of San Luis Obispo – Wastewater Rate Study
3.4 Projecting Operation and Maintenance Expenses
Operation and maintenance (O&M) expenses are incurred by the City to maintain the wastewater
collection, conveyance, treatment, and disposal system at a consistent service level. The starting
point of the projection of O&M expenses was the City’s adopted FY 2022‐23 budget. Budgeted
O&M expenses were projected over the rate study time period based on estimated escalation,
or inflationary, factors from the City’s fund analysis. These factors took into consideration the
City’s recent cost trends and increases, along with any anticipated future increases. Additional
O&M expenses were also added for future staffing needs which are projected to be
approximately $113,000 in FY 2023‐24. The total operation and maintenance expenses for the
wastewater utility are budgeted to be approximately $11.6 million in FY 2022‐23. Based on
assumed escalation of costs, the total O&M expenses are projected to increase to approximately
$15.3 million by FY 2027‐28. A summary of the O&M expenses is shown as a line item on Table 3
– 2 and detailed in Exhibit 3 of the Technical Appendix.
3.5 Projecting Capital Funding Needs
A key component in the development of the wastewater revenue requirement was to properly
and adequately fund capital improvement needs in the near‐, and long‐, term. One of the major
issues facing many utilities across the U.S. is the amount of deferred capital projects and the
funding pressure from regulatory‐related improvements. The proper and adequate funding of
capital projects is an important issue for all wastewater utilities and not just a local issue or
concern of the City. To accomplish this, the City has an adopted Capital Improvement Plan (CIP)
to address both the near‐ and long‐term needs of the wastewater utility. The City’s CIP will help
guide and prioritize capital projects over time and the capital investments that may be needed
to expand the capacity of facilities to accommodate future customers.
In general, there are three types of capital projects that the City may need to fund. These include
the following types:
Renewal and replacement projects
Growth/capacity expansion projects
Regulatory‐related projects
A renewal and replacement project is essentially a project to maintain the existing system that is
in place today. Existing facilities become worn out, obsolete, etc. The City should be investing
continuously in order to maintain the integrity of its facilities with renewal and replacement
projects. In contrast, growth / capacity expansion projects are related to providing service (i.e.,
capacity) to new customers. This may be through expansion of the existing system or
construction of new facilities to provide service to customers within the City’s service area.
Finally, certain projects may be a function of a regulatory requirement in which the Federal or
State government mandates the need for an improvement to the system to meet regulatory
standards. Understanding these different types of capital projects is important because it may
help to explain why costs are increasing and the cost drivers for any needed rate adjustment.
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City of San Luis Obispo – Wastewater Rate Study
The way in which projects are funded may also vary by the type of capital project. For example,
renewal and replacement projects should be funded through annual rates 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 a proportional share of the cost of improvements required as a result of their connection
(impact). Finally, regulatory projects may be funded by a variety of different means, which may
include one or more sources such as rates, long‐term debt, grants, etc.
While the above discussion appears to neatly divide capital projects into three clearly defined
categories, the reality of working with specific capital projects may be more complex. For
example, a pump may be replaced, but while being replaced, it is up‐sized to accommodate the
need for greater capacity. There are many projects that share these “joint” characteristics. At the
same time, projects may not be “replacement” related, but rather “improvement” related.
As a specific part of this Study, the City wanted to maintain an adequate level of funding as “pay‐
as‐you‐go” (rate) as part of the City’s capital funding plan to maintain the wastewater system
(e.g., renewal and replacement needs). In addition to the annual renewal and replacement
needs, the City is also making very significant upgrades to the treatment plant. As a result, there
are significant capital improvement needs over the next 10‐year period. Over the 5‐year review
period, FY 2023‐24 through FY 2027‐28, the City anticipates funding their capital infrastructure
needs of $84.2 million in reserve funding (the majority being through existing borrowed funds),
$2.8 million in grant funding, and $23.5 million in rate funding. The rate funding of capital ranges
from $7.2 million in FY 2023‐24 reducing to $2.8 million in FY 2027‐28 as long‐term debt service
is added due to the funding of the treatment plant. In conducting the Study and developing this
capital funding plan, HDR is not acting in a municipal advisory role to the City.
Provided below in Table 3 – 1 is a summary of the wastewater capital funding analysis.
Table 3 – 1
Summary of the Capital Funding Plan (000’s)
FY 2022‐23 FY 2023‐24 FY 2024‐25 FY 2025‐26 FY 2026‐27 FY 2027‐28
Total CIP $76,343 $10,212 $3,852 $8,621 $2,390 $9,102
Other Funding Sources
Operating Fund Reserves $0 $0 $0 $0 $0 $0
Capital Fund Reserves 67,761 1,401 2,002 6,746 0 6,302
Grants 1,386 1,386 0 0 0 0
WRRF Upgrade Debt 0 0 0 0 0 0
Assumed Low Interest Loan 0 0 0 0 0 0
Additional Revenue Bonds 0 0 0 0 0 0
Total Funding Sources $69,148 $2,787 $2,002 $6,746 $0 $6,302
Rate Funded Capital $7,195 $7,425 $1,850 $1,875 $2,390 $2,800
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Wastewater Revenue Requirement 17
City of San Luis Obispo – Wastewater Rate Study
While the total amount of capital projects may vary from year to year, the wastewater capital
funding plan has attempted to provide a consistent funding source for the replacement of
deteriorating system assets when possible. As a point of reference, the City’s annual depreciation
expense was approximately $3.6 million in FY 2021‐22. A desirable minimum funding target for
rate funded CIP is an amount equal to or greater than annual depreciation expense in order to
fund the amount of assets in the system which are annually deteriorating. In FY 2022‐23, the City
is funding through rates significantly higher than the annual depreciation expense but that
number decreases substantially in FY 2024‐25 which is due to the debt service for the WRRF
capital project. Although the funding starting in FY 2024‐25 is less than annual depreciation
expense, the investment is increased steadily over the review period until it is projected to be
$4.8 million by FY 2032‐33 (not shown in Table 3 – 1).
In discussing the use of rate funding and annual depreciation expense, it is important to
understand that annual depreciation expense is not the same as replacement cost. Thus, funding
an amount which exceeds the annual depreciation expense is both prudent and appropriate to
address the difference in cost between annual depreciation expense and replacement cost of an
asset. As noted, to help establish a prudent level of annual replacement funding through rates,
HDR worked with City staff to develop a funding plan for the CIP. In developing this financial plan,
HDR and the City have attempted to minimize rate impacts while funding the planned capital
projects of the City.
3.6 Projection of Debt Service
The City currently has four outstanding long‐term debt issues or annual debt service payments
with total $1.4 million in FY 2022‐23. As noted above in the capital funding plan (Table 3 – 1), the
City is not anticipated to issue any new long‐term debt to fund capital improvement projects over
the period. However, the WRRF related SRF loan was secured in 2019 but the full debt service is
not scheduled to impact the City’s wastewater utility until FY 2024‐25. Based on these
assumptions, the City is projected to have a debt service payment schedule that is estimated at
$7.1 million per year by FY 2027‐28.
3.7 Reserve Funding
The final component of the revenue requirement analysis is reserve funding. This can be
described as transfers of revenue to/from reserve funds to maintain prudent ending fund
balances or for future funding of specific or unanticipated projects/emergencies. Additionally,
any balance of funds after the expenses are paid is maintained within the wastewater utility and
transferred to the operating fund to fund/manage cash flow variances. As will be shown, the
overall financial plan and proposed rate levels are at sufficient levels and the reserve funds are
being maintained to meet or exceed minimum target levels.
Operating Fund: The operating fund reserve primarily serves to manage cash flow of the
City’s wastewater utility. Typically, an operating reserve will have a minimum target of
between 30 and 180 days depending on the intended use and a number of other factors.
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City of San Luis Obispo – Wastewater Rate Study
For the City’s Study, a target minimum was set at 20% of O&M which equals
approximately $2.3 million for FY 2022‐23.
Capital Fund: The capital fund reserve is used to provide funding of capital projects. The
main source of funding is through development impact fee revenues, but funds may also
be transferred to this reserve when funds are available. As the City maintains the funds
in the capital reserve, they can be utilized for capital improvement projects in order to
lessen the rate impact to the City’s wastewater customers. This is currently no minimum
target for the capital fund, however, a prudent level is at lea st an annual amount of capital
projects which would be in the $8 million to $10 million range. Over the review period,
the City’s capital fund exceeds this target.
Rate Stabilization Fund: A rate stabilization fund reserve shall be established and
maintained at a level equal to approximately 5% of the annual rate revenue derived from
the wastewater utility. For FY 2022‐23 this equates to $922,000. These funds are
unrestricted, but their use shall be limited to mitigating large or unanticipated rate
impacts, or emergency/catastrophe situations.
3.8 Summary of the Wastewater Revenue Requirement
Given the above projections of revenues and expenses, a summary of the City’s wastewater
revenue requirement analysis can be developed. In developing the revenue requirement
analysis, consideration was given to the financial planning considerations of the City. Presented
below in Table 3 – 2 is a summary of the City’s wastewater revenue requirement. Detailed
exhibits of this analysis can be found in the Technical Appendix (Exhibits 1 through 5).
Table 3 ‐ 2
Summary of the Wastewater Revenue Requirements (000’s)
2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28
Revenues
Rate Revenues $18,441 $18,589 $18,738 $18,887 $19,039 $19,191
Miscellaneous Revenues 1,609 1,874 1,864 1,840 1,827 1,802
Total Revenues $20,050 $20,463 $20,602 $20,728 $20,865 $20,993
Expenses
Total O&M $11,620 $12,547 $13,417 $14,259 $14,766 $15,291
Rate Funded Capital 7,195 7,425 1,850 1,875 2,390 2,800
Debt Service 1,231 1,232 6,856 6,949 6,940 6,938
Reserve Funding 4 2 8 3 4 9
Total Revenue Requirement $20,050 $21,207 $22,131 $23,086 $24,099 $25,038
Bal./(Def.) of Funds $0 ($744) ($1,529) ($2,358) ($3,234) ($4,046)
Bal. as a % of Rate Rev. 0.0% 4.0% 8.2% 12.5% 17.0% 21.1%
Proposed Revenue Adj. 0.0% 4.0% 4.0% 4.0% 4.0% 3.5%
Add’l Rev. from Adj. $0 $744 $1,529 $2,358 $3,234 $4,046
Total Bal. / (Def.) of Funds $0 $0 $0 $0 $0 $0
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City of San Luis Obispo – Wastewater Rate Study
As can be seen in Table 3 ‐ 2, the revenue requirement has summed the O&M expenses, rate
funded capital, debt service, and reserve funding. The total revenue requirement is then
compared to the total sources of funds which include the rate revenues, at present rate levels,
and other miscellaneous revenues. From this comparison, a balan ce or deficiency of funds in each
year can be determined. This balance or deficiency of funds is then compared to the current level
of wastewater 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. Over the
period, the total deficiency is projected to be $4.0 million by FY 2027‐28.
Table 3 – 2 has also included a set of proposed revenue adjustments (blue highlighted band)
which are sufficient to meet the annual revenue requirement over the projected time period,
based on the assumptions and data used within this analysis. As noted above, the proposed rate
adjustments are primarily a function of the need to adequately fund the capital improvements.
However, it is also a function of assumed inflation/escalation of operating costs over this time
period. This financial plan strengthens the City’s funding for capital infrastructure, while also
meeting minimum reserve levels, funding annual debt service payments, and meeting or
exceeding legally required minimum debt service coverage ratios. If the proposed wastewater
rate adjustments are not implemented, the City will not have sufficient funding to prudently
operate and maintain the wastewater system. In addition, the City’s existing wastewater rates
are not sufficient to support the issuance of long‐term debt to fund the planned capital projects.
It is important to note that the overall revenue adjustments shown in Table 3 ‐ 2 may not reflect
the final rate adjustments, or bill impacts, incurred by the City’s individual customers as the cost
of service analysis will proportionally distribute the revenue requirement among the customer
classes. The overall revenue adjustment reflects the needed revenues for the system as a whole.
A more detailed revenue requirement is included in Exhibit 3 of the Technical Appendix.
3.9 Debt Service Coverage Ratios
When long‐term debt is issued it may have certain rate covenant s 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 target 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 wastewater utility before and after the proposed rate adjustments.
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City of San Luis Obispo – Wastewater 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 6.97 6.16 1.11 1.00 0.94 0.89
After Rate Adjustment 6.97 6.70 1.33 1.33 1.40 1.46
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 2026‐27. 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.
3.10 Consultant’s Conclusions
Based on the revenue requirement analysis developed herein, HDR has recommended that the
City adjust wastewater revenues 4.0% annually in FY 2023‐24 and FY 2024‐25. HDR has reached
this conclusion for the following reasons:
Revenue adjustments are necessary to fund the City’s capital needs, of which a significant
portion is driven by the funding of substantial treatment plant improvements
Revenue adjustments are necessary to support the City’s planned issuance of long‐term
debt. Absent the proposed revenue adjustments, the City will be unable to meet overall
debt service coverage ratios and issue long‐term debt to fund necessary capital projects.
The revenue adjustments also reflect the need to fund the estimated cost impacts of
inflation or cost escalation to the operation and maintenance expenses of the wastewater
utility
The proposed revenue adjustments position the City’s wastewater utility to strengthen
its financial health and provide long‐term sustainable funding levels for the City’s
wastewater utility
3.11 Summary
This section of the City’s comprehensive wastewater rate study report has provided a discussion
of the City’s wastewater revenue requirement analysis. The revenue requirement analysis
developed a rate/revenue transition plan to support the City’s O&M and capital needs. The next
section of this report will discuss the cost of service analysis developed for the City’s wastewater
utility which is the basis for establishing cost‐based and proportional wastewater rates.
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City of San Luis Obispo – Wastewater Rate Study
Wastewater Cost of Service
In the previous section, the revenue requirement analysis focused on the total sources and
application of funds (i.e., revenues vs. expenses) required to adequately fund the City’s
wastewater utility. This section will provide an overview of the cost of service analysis developed
for the City’s wastewater utility.
The wastewater cost of service analysis is concerned with the proportional distribution of the
total revenue requirement among the customer classes of service (residential, multi‐family, non‐
residential) to meet the requirements of Proposition 218. The previously developed revenue
requirement analysis for FY 2023‐24 was utilized in the development of the cost of service
analysis.
4.1 Objectives of a Cost of Service
There are two primary objectives in conducting a wastewater cost of service analysis:
Proportionally distribute the City’s revenue requirement among the customer classes of
service; and
Derive average unit costs (i.e., cost‐based rates) for subsequent rate designs.
The primary objective of the cost of service analysis is the proportional manner to collect the
revenue requirement from the City’s various customer classes of service. The second rationale
for conducting a cost of service analysis is to allow for the development of proposed wastewater
rates that properly reflect the costs incurred by the City and impacts customer place on the
wastewater system. For example, a wastewater utility typically incurs costs related to flow
(wastewater volumes), strength, and customer cost components. Each of these types of costs
may be collected in a slightly different manner to allow for the development of rates that collect
costs in the same manner as they are incurred.
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.
Customers are grouped together in similar or homogenous groups based upon the type of
customer, their usage characteristics, strength characteristics or facility requirements. The
classes of service used within the cost of service analysis were as follows:
Residential
Multi‐Family
Non‐Residential
HDR reviewed the current customer characteristics and facility requirements to determine the
classes of service, which were the City’s current customer classes (i.e., rate schedules) and are
consistent with typical industry practices.
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City of San Luis Obispo – Wastewater Rate Study
4.3 General Cost of Service Procedures
In order to determine the proportional cost to serve each
customer class of service on the City’s wastewater system, a cost
of service analysis is conducted. A cost of service analysis utilizes
a three‐step approach to review costs. These steps are outlined
and discussed in Chapters 6 and 7 of the Water Environment
Federation Manual of Practice No. 27 (WEF MOP #27). These
steps take the form of functionalization, allocation, and
distribution. Provided below is a detailed discussion of the
wastewater cost of service analysis conducted for the City, and
the specific steps taken within the analysis.
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 (plant) data by major operating functions
(e.g., collection, pumping, treatment). Within this Study, the
City’s accounting records functionalized a majority of the
expenses and assets. For those costs or assets that were not fully
functionalized, HDR worked with City staff to review and
functionalize the expense or asset
4.3.2 Allocation of Costs
The second analytical task performed in a wastewater cost of
service study is the allocation of the costs. Allocation determines
why a specific expense is incurred or what type of need is being
met. The following cost allocators were used to develop the
City’s cost of service analysis:
Volume‐Related Costs: Volume‐related costs are those
costs which tend to vary with the total quantity of
wastewater collected and treated. A majority of collection
system costs are included in this component. An example
of a volume‐related cost is electricity used for pumping or
treating wastewater.
Strength‐Related Costs: Strength‐related costs are those
costs associated with the additional handling and the
treatment of high “strength” wastewater. For the City’s
study, strength was differentiated between biochemical
oxygen demand (BOD), total suspended solids (TSS), and
ammonia (AMN). These constituents represent the
strength factors that drive the City’s treatment‐related
costs. Increased strength levels equate to increased
treatment costs for wastewater treatment systems.
Terminology of a
Wastewater Cost of Service
Analysis
Functionalization – The
arrangement of the cost data by
functional category (e.g.,
collection, pumping, treatment).
Allocation – The assignment of
functionalized costs to cost
components (e.g., volume,
strength, and customer related).
Distribution – Distributing the
allocated costs to each class of
service based upon each class’s
proportional contribution to that
specific cost component.
Volume Costs – Volume‐related
costs vary with the total flow of
wastewater (e.g., power for
pumping).
Strength Costs – Strength‐
related costs refer to the
constituent characteristics of the
wastewater and the treatment
function. Typically, strength‐
related costs are further defined
as biochemical oxygen demand
(BOD), suspended solids (SS), and
Ammonia (A). Customers may
have high level wastewater (i.e.,
greater than domestic strength
characteristics), which costs more
to treat. Components of the
treatment process are designed
and sized around treating
wastewater strength.
Customer Costs – Customer‐
related costs vary with the
number of customers on the
wastewater system, e.g., billing,
collecting, and accounting costs.
Direct Assignment – Costs that
can be clearly identified as
belonging to a specific customer
or group of customers.
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City of San Luis Obispo – Wastewater Rate Study
Customer‐Related Costs: Customer‐related costs vary with the addition or deletion of a
customer or a cost which is a function of the number of customers served. Customer‐
related costs typically include the costs of billing, collecting, and accounting. Customer‐
related costs can be further defined as either actual or weighted. An actual customer cost
is not disproportionate between customers (i.e., postage for billing). In contrast, a weighted
customer costs have a disproportionate cost per customer associated with it (e.g.,
wastewater sampling for strength).
Capacity‐Related Costs: The WEF MOP #27 also discusses a capacity component as an
allocation component. For the City’s Study the capacity allocation reflects the capacity
placed on the system by a customer in comparison to a residential equivalent (e.g., flow per
account in terms of the number of residential customers) and is reflected through the sizing
of the system to meet volume requirements of the system.
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 gross utility revenue.
The basis, or methodology, for the allocation process is outlined in the WEF MOP #27. The
methodology provided in the manual was then applied to the City’s specific and unique
circumstances, facilities, customers, costs, and system operation to develop the appropriate
allocation approach.
4.3.3 Development of Distribution Factors
Once the allocation process is complete, and the customer groups have been defined, the
allocated costs were proportionally distributed to each customer class of service. The City’s costs
were distributed to the customer classes of service using the following distribution factors.
Volume‐Distribution Factor: Volume‐related costs are generally distributed on the basis of
contribution to wastewater flows. In order to develop this distribution factor, some
knowledge of the contribution to flows must be determined. Wastewater flows were
estimated based on billed usage and winter water consumption plus assumed I&I5 for each
class of service for the projected test period, FY 2023‐24. Winter water consumption is used
as a surrogate for wastewater flows as wastewater flows are not metered. Winter water
reasonably reflects the “indoor consumption” and the amount that is discharged into the
wastewater system. The calculation of the volume distribution factor is shown in Exhibit 6
of the Technical Appendix.
Customer Distribution Factor: Customer costs within the cost of service analysis are
distributed to the customer classes of service based upon their respective number of
customer accounts. Two types of customer distribution factors were developed: actual and
weighted customer service and accounting. The actual customer distribution factor
assumes that there is no disproportionate cost associated with serving a customer (e.g.,
postage for bills is the same regardless of the size or usage of the customer) and the
5 I&I the inflow and infiltration of water into the wastewater system. This can be from rainwater, groundwater, or
other sources of water that make it into the wastewater system.
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City of San Luis Obispo – Wastewater Rate Study
proportional distribution to each class is based on the number of accounts in each class of
service. In contrast, a weighted customer distribution factor assumes that there is some
disproportionality associated with serving different types of customers This factor attempts
to reflect the different capacity demands and costs associated with meeting varying
wastewater flows of customers. This difference in capacity demands is best viewed from
the perspective of the customer’s water meter. For example, there is a significant difference
in the resulting volumetric flows associated with a customer with a 6” water meter as
compared to one with a 5/8” water meter. This difference in potential capacity is reflected
within the distribution factor. The proportion or distribution of capacity demands is based
on the capacity demands the customer can place on the system based on the size of their
water meter. Exhibit 7 of the Technical Appendix provides the calculation of the customer
distribution factors.
Strength‐Distribution Factor: Strength‐related costs are distributed between BOD, TSS, and
Ammonia. These costs are distributed to each of the classes of service based upon the
estimated strength levels from industry standards as well as limited data from the City. The
strength levels in total, for each customer class of service, were utilized to calculate the
pounds removed for each constituent. Exhibit 8 in the Technical Appendix provides the
calculation of the strength‐distribution factors.
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 as developed in Exhibit 3. A summary of the revenue distribution factor is provided
in Exhibit 9 of the Technical Appendix.
The development of the distribution factors is based on generally accepted principles as outlined
in the WEF MOP #27.
4.4 Summary of the Wastewater Cost of Service Analysis
In summary, the cost of service analysis began by functionalizing the City’s wastewater assets
(infrastructure) and O&M expenses. The functionalized asset and expense accounts were then
allocated into their various cost components. Provided below is a summary of the allocation of
the City’s FY 2023‐24 test period revenue requirement using the above described methodology
and tailoring that methodology to the City’s specific facility requirements and operations.
Provided in Exhibits 10 and 11 of the Technical Appendix is a detailed summary of the allocation
of the City’s infrastructure and revenue requirement. Provided below in Table 4 – 1 is a summary
of the plant in service allocation.
Table 4 – 1
Summary of the Allocation of the Plant in Service
Volume BOD AMN SS AC WCMS RR
60.2% 12.4% 7.4% 12.4% 0.0% 7.6% 0.0%
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City of San Luis Obispo – Wastewater Rate Study
Table 4 – 1 shows the relationship of the functional categories and based on the allocated totals.
This can then be used to allocate the costs from the revenue re quirement that are shown in Table
4 – 2.
Table 4 – 2
Summary of the Allocation of the FY 2023‐24 Revenue Requirement ($000’s)
Total Volume BOD AMN SS AC WCMS RR
$19,332 $7,459 $2,436 $1,461 $2,436 $0 $5,541 $0
Based on generally accepted methodologies and approaches, and the City’s specific operating
and capital costs associated with their wastewater collection and treatment system, the City’s
revenue requirement of approximately $19.3 million was allocated between the functional
components.
Once the total costs are allocated, they are then proportionally distributed to the customer
classes of service based on the distribution factors previously developed. The distributed costs
are then summed to develop the total distribution of costs to each customer class of service.
Provided in Table 4 – 3 is a summary of the distribution of costs to the customer classes of service.
Table 4 – 3
Summary of the Distribution of the FY 2023‐24 Revenue Requirement ($000’s)
Classes of
Service Volume BOD AMN TSS Customer RR / DA Total
Residential $3,589 $1,127 $703 $1,129 $3,681 $0 $10,229
Multi‐Family 1,683 528 330 529 742 0 3,812
Non‐Residential 2,187 780 428 778 1,118 0 5,291
Total $7,459 $2,436 $1,461 $2,436 $5,541 $0 $19,332
As shown in Table 4 – 2 the total revenue requirement for FY 2023‐24 has been equitably
allocated between the various cost components based on generally accepted methodologies and
the City’s system characteristics. Next, the individual allocation totals were distributed
proportionally to the customer groups based on the corresponding distribution factors. For
example, volume‐related costs were proportionally distributed based on each customer class’s
share of total wastewater flows. By using generally accepted me thodologies (i.e., WEF MOP #27)
and tailoring the analysis to the City’s specific system and customer characteristics, provides the
basis to meet the requirements of Proposition 218.
The total distributed costs are summed for each class of service and then compared to the current
revenues of each class of service to determine the overall change in revenues needed from each
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City of San Luis Obispo – Wastewater Rate Study
class of service to reflect the proportional distribution of costs. Provided below in Table 4 ‐ 4 is
the summary of the City’s wastewater cost of service analysis.
Table 4 ‐ 4
Summary of the Wastewater Cost of Service Analysis ($000)
Class of Service
Current
Rate Revenues
Distributed
Costs
$
Difference
%
Difference
Residential $9,868 $10,229 ($361) 3.7%
Multi‐Family 3,644 3,812 (168) 4.6%
Non‐Residential 5,077 5,291 (214) 4.2%
Total $18,589 $19,332 ($744) 4.0%
The results of the cost of service analysis indicate minor cost differences between the customer
classes of service. When reviewing the results of the cost of service analysis, it is important to
understand that the results will not be “exact” each time the City updates its cost of service
analysis. This is due to changing customer wastewater characteristics, external impacts such as a
drought impacts on winter water average use, and changes over time in how the City incurs costs.
To comply with the requirements of article XII D, section 6 (b) of the California Constitution
(Proposition 218), HDR recommends that cost of service adjustments be made in accordance with
the results of the Study. To accomplish this, the distributed costs shown in the prior tables are
used to develop average unit costs (i.e., cost‐based rates) which become the proposed rates. In
this way, the proposed rates are proportional and cost‐based an d reflect the results of the Study.
Provided below in Table 4 – 5 is the development of the monthly fixed charge average unit cost
calculation. For the City, the fixed charge is the same for all customers with residential customers
assumed to have the equivalent impact as a ¾” and less meter. The equivalent meter calculation
incorporates the potential demand or capacity of each meter according to the size of the meter.
In this way, it is possible to review each customers impact on the system given a different meter
size. The costs were taken from Table 4 – 3. These unit costs then become the basis for the
proposed wastewater rates under the rate design section.
Table 4 – 5
Summary of the Fixed Charge Average Unit Costs
Total Costs
Billing
Units
Unit
Cost
Actual Customer $0 15,884 # of meters $0.00
Weighted Customer $5,540,962 19,584 # of equivalent meters 23.58
Total $5,540,962 $23.58
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City of San Luis Obispo – Wastewater Rate Study
The approach to establishing the average unit costs is similar for the variable charges, although,
the costs are developed for each customer class individually. The current rate structure is
maintained for all customers with the variable charge as uniform volumetric rate. Table 4 – 6
shows the development of the variable charge unit cost calculation. The costs shown were
derived from Table 4 – 3 and the calculated average unit costs will become the basis for the rate
designs for the City’s customers.
Table 4 – 6
Summary of the Variable Charge Average Unit Costs
% Distribution
of Total Total Costs
Billing
Units
Unit
Cost
Residential
Volume 48.1% $3,589,169 693,440 $5.18
BOD 46.3% 1,126,999 693,440 1.63
AMN 48.1% 703,233 693,440 1.01
TSS 46.3% 1,128,885 693,440 1.63
RR 53.1% 0 693,440 0.00
DA 0 693,440 0.00
Total $6,548,286 $9.44
Multi‐Family
Volume 22.6% $1,682,755 325,114 $5.18
BOD 21.7% 528,385 325,114 1.63
AMN 22.6% 329,706 325,114 1.01
TSS 21.7% 529,269 325,114 1.63
RR 19.6% 0 325,114 0.00
DA 0 325,114 0.00
Total $3,070,115 $9.44
Non‐Residential
Volume 29.3% $2,186,778 422,493 $5.18
BOD 32.0% 780,282 422,493 1.85
AMN 29.3% 428,460 422,493 1.01
TSS 31.9% 777,510 422,493 1.84
RR 27.3% 0 422,493 0.00
DA 0 422,493 0.00
Total $4,173,030 $9.88
The distributed costs for each customer class of service are used to develop the proposed rates
for the test period, in this case, FY 2023‐24. The total costs are divided by the billing units (e.g.,
number of equivalent meters and water consumption in CCF), to develop average unit costs
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City of San Luis Obispo – Wastewater Rate Study
which become the rates. The development of the cost of service and average unit costs are
provided in Exhibit 14 of the Technical Appendix.
4.5 Consultant’s Conclusions
The results of the cost of service analysis show that minor cost differences exist, and HDR is
recommending that the City implement cost of service adjustments and realign the rate
structures at this time. This realignment is a natural progression in designing rates as the results
of the calculation may change between analyses based on customer characteristics, the manner
in which costs are incurred, system design or operation, etc. Given this the proposed rates
presented in the next section of this report will reflect the results of the cost of service analysis
and specifically the average unit costs developed in Tables 4 ‐ 5 and 4 ‐ 6.
4.6 Summary
This section of the report has provided a summary of the cost of service analysis developed for
the City’s wastewater utility. This analysis was prepared using generally accepted cost of service
methodologies, techniques and principles along with the City’s specific costs, and customer and
system characteristics, to meet the requirements of Proposition 218. The next section of the
report will review the present and proposed wastewater rates for the City.
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City of San Luis Obispo – Wastewater Rate Study
Wastewater Rate Design
5.1 Introduction
The third and final step of the City’s wastewater rate study is the design of proposed rates. The
rates are designed to collect a specific level of revenues, based on the results of the revenue
requirement and cost of service analyses. In reviewing the City’s rates, consideration is given to
both the level of the rates and the structure of the rates.
5.2 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 utility to administer
Consideration of the customer’s ability to pay
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)
Compliance with State law
It is important that the City provide its customers with a prop er price signal as to what their usage
or volumetric contributions are costing. This goal may be approached through rate level and
structure. When developing the proposed rate designs, all the above‐listed criteria can be 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. For example, it may be difficult to design
a rate that takes into consideration customers’ ability to pay, and one which is cost‐based. In
designing rates, there are always trade‐offs between these various goals and objectives.
However, Proposition 218 requires the implementation of proportional rates as developed in the
cost of service analysis (i.e., average unit costs) as such, the above goals and objectives must be
considered as part of the development of the cost of service analysis.
5.3 Development of Cost‐Based Wastewater Rates
As mentioned, developing cost‐based and proportional rates is of paramount importance in
developing the City’s proposed wastewater rates. While always a key consideration in developing
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 utility rates. Given this, the development of the City’s proposed wastewater rates have been
developed to meet the legal requirements of California Constitution Article XIII D, Section 6
(Article XIII D). A key component of Article XIII D is the development of rates which reflect the
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City of San Luis Obispo – Wastewater Rate Study
cost of providing service and are proportionally distributed among the various customer classes
of service and the customers within each class. HDR would point out that there is no single
methodology for proportionally distributing costs to the various customer groups. The Water
Environment Federation Manual of Practice #27 (WEF MOP #27) pro vides various methodologies
which may be used to establish cost‐based wastewater rates. Article XIII D is not prescriptive and
does not provide a specific methodology for establishing rates. Given that, HDR developed the
City’s proposed wastewater rates based on generally accepted rate setting methodologies to
meet the requirements of Article XIII D.
HDR is of the opinion that the proposed wastewater rates meet the legal requirements of Article
XIII D. HDR reaches this conclusion based upon the following:
The revenue derived from wastewater rates does not exceed the funds required to provide
the property‐related service (i.e., wastewater service). The proposed rates are designed to
collect the overall revenue requirement of the City’s wastewater system.
The revenues derived from wastewater 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 wastewater
rates are used exclusively to operate and maintain the City’s wastewater 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 section of this report focused exclusively on the issue of proportional
assignment of costs to customer classes of service. The proposed rates have appropriately
grouped customers into customer classes of service (residential, multi‐family, non‐
residential) that reflect the varying consumption patterns and system requirements (i.e., the
benefits they receive from and burdens they place on the system) 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, and the manner
in which these costs are incurred and proportionally assigned to customer classes of service
and customers within each class of service based upon their proportional impacts.
5.4 Overview of the Current Wastewater Rate Structure
It is important to understand that each customer class has a separate rate given the different
characteristics as outlined in the cost of service analysis. All the City’s customers have the same
base fixed charge which is ¾” and less for residential customers then multi‐family and non‐
residential customers are charged based on their water meter size to reflect the potential
volumetric flows on the wastewater system. The larger meters are ratioed based on the AWWA
meter weightings on a ¾” meter basis.
Page 400 of 954
Wastewater Rate Design 31
City of San Luis Obispo – Wastewater Rate Study
5.5 Development of the Proposed Wastewater Rates
After discussion with City staff, and reviewing the customer characteristics, no rate structure
changes are recommended at this time. However, it is important to note that the volumetric
charges are based on revised strength assumptions which distribute costs based on assumed
wastewater strength which is higher for non‐residential customers and results in an increased
proportional distribution. The proposed wastewater rates are based on the unit costs as
developed in the cost of service analysis and shown in Table 4 ‐ 5 and Table 4 ‐ 6. As noted, the
proposed wastewater rates are based on the results of the overall revenue needs (revenue
requirement) and the proportional distribution of costs (cost of service results). Provided below
in Table 5 – 1 is a summary of the current and proposed wastewater rates. As a note, the rates
are implemented at the start of the fiscal year, or July 1 of each year.
Table 5 – 1
Summary of the Present and Proposed Wastewater Rates
Present
Rates FY 2023‐24 FY 2024‐25
Fixed Charge
3/4" or Less (Residential) $21.89 $23.58 $24.52
1" 36.55 39.37 40.95
1.5" 72.86 78.51 81.65
2" 116.63 125.67 130.70
3" 218.83 235.78 245.21
4" 364.78 393.04 408.76
6" 729.34 785.85 817.28
8" 1,166.99 1,257.40 1,307.70
10" 1,677.72 1,807.71 1,880.02
Variable Charge
Residential $9.19 $9.44 $9.82
Multi‐Family 9.19 9.44 9.82
Non‐Residential 9.19 9.88 10.27
5.6 Summary
The City’s proposed wastewater rates are contemporary in design and reflect the rate structures
used by other similar utilities in California, both locally and statewide. Based on the City’s
constraints and characteristics, the proposed sewer rates appropriately reflect the cost to
provide service and are cost‐based and proportional to the City’s customers. Full and complete
technical appendices of the development of the City’s comprehensive wastewater rate study and
the proposed rate adjustments can be found in appendices of this report.
Page 401 of 954
Technical Appendix
City of San Luis Obispo – Wastewater Rate Study
Technical Appendix
Page 402 of 954
R ______
RESOLUTION NO. _____ (2023 SERIES)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN LUIS
OBISPO, CALIFORNIA, ESTABLISHING THE SEWER 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 sewer rate study was completed in April 2023 by
HDR Engineering, Inc. including analysis of Sewer 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 sewer 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. Sewer Rates. The sewer rates as set forth in Exhibit A are hereby
adopted, establishing sewer rates 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
sewer 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 service within
existing service areas; and
Page 403 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 ot herwise
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 Counc il 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 404 of 954
Resolution No. _____ (2023 Series) Page 3
R ______
EXHIBIT A: 2023-25 SEWER RATES
Usage (per unit cost) Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family and Multi-
Family Residential Per Unit
Cost
(Up to Sewer Cap)
$9.44 $9.82
Non-Residential Per Unit
Cost
(For all Water Consumption)
$9.88 $10.27
Base Fees Proposed Rates
Effective July 1, 2023
Proposed Rates
Effective July 1, 2024
Single Family Residential
Monthly Base Fee
$23.58 $24.52
Multi-Family and Non-Residential by Water Meter Size
0.75-inch or less meter $23.58 $24.52
1-inch meter $39.37 $40.95
1.5-inch meter $78.51 $81.65
2-inch meter $125.67 $130.70
3-inch meter $235.78 $245.21
4-inch meter $393.04 $408.76
6-inch meter $785.85 $817.28
8-inch meter $1,257.40 $1,307.70
10-inch meter $1,807.71 $1,880.02
Page 405 of 954
Page 406 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 407 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 408 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