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HomeMy WebLinkAbout4/29/2025 Item 7a, Floyd and Ridgeway - Staff Agenda CorrespondenceCity of San Luis Obispo, Council Memorandum City of San Luis Obispo Council Agenda Correspondence DATE: April 29, 2025 TO: Mayor and Council FROM: Aaron Floyd, Utilities Director Prepared By: Julie Ridgeway, Utilities Business Manager VIA: Whitney McDonald, City Manager SUBJECT: ITEM 7A - INTRODUCTION OF THE 2025-27 WATER AND SEWER RATES AND AUTHORIZATION TO RELEASE THE ASSOCIATED PROPOSITION 218 NOTICE Staff received the following questions, regarding the draft 2025-27 water and sewer rates. The questions are below with staff’s response shown in italics: 1) Can you please explain a little more about how the 2023 cost of services analysis is still applicable to this current rate analysis? There are many parts of the staff report that talk about increasing costs (inflation, the need for CIP work, etc.) so I am not clear why we don’t need a new cost of service analysis. (Specifically, this statement is confusing to me: “As a part of the 2025 updated analysis, HDR confirmed that the cost of service still reflects the current customer characteristics of the City’s customer basis.”) A cost of service analysis examines all the costs associated with providing water service — from initial source to final use — and then allocates those costs among the different customer classes (such as residential, irrigation, commercial, etc.). The goal is to ensure that each customer class pays its fair share of the overall costs, promoting both financial sustainability and equitable pricing. Because cost of service focuses on the relative distribution of costs among customer classes, a new full analysis is not necessarily needed every time overall system costs increase due to inflation or capital improvement needs. What would require a new analysis is a significant change in customer characteristics or how different customer classes are using the system. In 2023, the City hired HDR to complete a comprehensive cost of service analysis as part of the 2023 Rate Study. Although only the first two years of rate adjustments were adopted at that time, the cost of service analysis projected through FY 2026-27 and established the proportionality between customer classes. Industry standard is to complete a full cost of service study approximately every five years. This balances the need for up-to-date cost assessments with the resources required to perform such analyses. Of course, utilities may always opt Item 7a. 2025-27 Water and Sewer Rates and Authorization to release Prop. 218 Notice Page 2 for more frequent studies if they experience significant operational changes, major shifts in customer demographics, or new regulatory requirements. As part of the current 2025 rate update, HDR reviewed the City's customer basis and confirmed that the relative use among customer classes remains stable. Because the underlying distribution of costs has not significantly shifted, it was determined to be appropriate to continue relying on the 2023 cost of service analysis. Staff plan to conduct a full re-evaluation of both the cost of service and rate structure in the next rate study, which is anticipated to cover rates for FYs 2027-29. 2) If not during this process, is there an appropriate time to look at the rate? As mentioned above, a full cost of service review is planned for the FY 2027-29 period. Staff also plan to have the overall rate structure reviewed during that time as well. 3) Can you explain in a little more detail the impact of Cal Poly’s new WRRF is having on our wastewater and water rates separately? a. It seems like we need to make up approximately $900k each year because they will be processing their own wastewater(sewer). Is that correct? Yes, that is correct for FY 2025-26 and 2026-27 staff projects Cal Poly sewer revenues to be roughly $900,000 less than what was collected during FY 2023-24. This is based on the projected sewer flow volumes discharged by the University to the City, which are expected to decrease by roughly 75% in FY 2025-26. Future discharges will return gradually as the University constructs additional student housing on campus, but are not anticipated to reach current volumes. b. Will we also need to generate more revenue to account for a loss in revenue from Cal Poly on the water side as well? Although the University’s new Water Reclamation Facility (WRF) could potentially reduce its potable water demand by offsetting it with recycled water on campus, the University did not advise that there will be a significant change in overall water consumption. At this time, any potential reduction in potable demand is anticipated to be offset by the planned increase in on- campus residents. Due to the uncertainty in the timing and magnitude of these changes, no adjustments were made to projected water revenues. c. Was part of the WRRF expansion done to accommodate Cal Poly’s needs? Although Cal Poly had historically purchased and maintains a capacity share in the City’s Water Resource Recovery Facility (WRRF), Cal Poly Item 7a. 2025-27 Water and Sewer Rates and Authorization to release Prop. 218 Notice Page 3 elected not to purchase additional capacity in the City’s WRRF during the initial design phase of the City’s WRRF upgrade project. The expansion and upgrades conducted at the City’s WRRF were primarily driven by regulatory requirements related to the City’s wastewater treatment needs, not to accommodate Cal Poly. Cal Poly’s decision to construct its own on-campus Water Reclamation Facility (WRF) was independent of the City’s project. It is staff’s understanding that Cal Poly built its facility to diversify its water supply portfolio by producing recycled water used for irrigation purposes to help support the planned increase in on-campus growth. 4) When will the new AMI technology be available to residents and can you explain how that will work? Staff forecast that it will take approximately two additional years, for a total of 3 years, to finish the transition of all ~17,000 water meters to AMI capable water meters and to install radios on each AMI capable meter. Although staff forecast completing the transition and installations in approximately two years, it is important to note that this timeline may fluctuate depending on inventory availability, staffing, and site-specific factors. For example, installations in the downtown area may require additional time due to working in a highly trafficked area. To date, approximately 2,500 radios have already been installed that provide AMI capabilities. Community members with an installed radio have already been granted access to the EyeOnWater platform. Once a radio is installed, customers receive a door hanger with instructions on how to sign up for the platform. The City’s Water Resources team also sends a follow-up email approximately one month after the doorhanger is left to remind residents that they can create an account to monitor their water usage and set up leak alerts. Of the 2,500 customers that could sign up, 313 have done so to date. 5) If a lesser rate than what is proposed were approved by the council, can you describe what the trade-offs of that would be, in the current CIP or otherwise in the 25-27 financial plan specifically? Approving a lesser rate increase than proposed would result in reduced revenue for the Water and Sewer Funds compared to what is needed to meet projected operating and capital costs. Generally, trade-offs would have to come from delays and/or deferrals of planned capital improvement projects (CIP), because operating expenditures are primarily fixed costs. The specific projects that would need to be deferred would depend on the extent to which the proposed rate increases would be reduced. As an example, if Council were to reduce the proposed rate increases by half (2.75% for water and 3.25% for sewer each year), staff would need to reduce Water Fund capital expenses Item 7a. 2025-27 Water and Sewer Rates and Authorization to release Prop. 218 Notice Page 4 and/or operating expenses by approximately $715,000 in FY 2025-26 and $1.48 million in FY 2026-27 to balance the total revenue requirement. The Sewer Fund would need to decrease capital and/or operating expenses by approximately $627,000 in FY 2025-26 and $1.31 million in FY 2026-27. Because the proposed rates were sized to balance affordability with funding critical capital and operating needs while avoiding over-reliance on debt, any material reduction would require a thorough assessment of the City's Water and Sewer CIP. It should also be noted that the CIP projects associated with the proposed rates were carefully selected based on an assessment of risk for each project. Should projects be further delayed or deferred there is an inherent risk that should be considered. Lastly, it is also important to note that delaying CIP maintenance and upgrades typically result in higher costs in the future and can increase the risk of system failures that lead to emergencies that are more expensive and disruptive than planned projects. Should significant increases for projects that are delayed occur, higher rate increases could be needed to catch up in the future. 6) Can staff provide a history of water and sewer rate changes over the last 10 years? A breakdown of water and sewer rate changes since 2013 is provided below: Date Water Rates Sewer Rates Notes July 1, 2024 7.5% 4% Resolution No. 11427 (2023 Series) Resolution No. 11428 (2023 Series) July 1, 2023 8.5% 4% Resolution No. 11427 (2023 Series) Resolution No. 11428 (2023 Series) July 1, 2022 3.5% 3.5% Resolution No. 11257 (2021 Series) Resolution No. 11257 (2021 Series) July 1, 2021 3.5% 3.5% Resolution No. 11257 (2021 Series) Resolution No. 11257 (2021 Series) July 1, 2020 5.5% Delayed due to COVID pandemic 5.0% Delayed due to COVID pandemic Resolution No. 11023 (2019 Series) Resolution No. 11024 (2019 Series) July 1, 2019 5.5% 5.5% Resolution No. 11023 (2019 Series) Resolution No. 11024 (2019 Series) July 1, 2018 Complete Rate Structure Change Complete Rate Structure Change Resolution No. 10909 (2018 Series) Resolution No. 10910 (2018 Series) July 1, 2017 Base Fee: 23.5% Variable Charge: 5% on Tier 1 and Tier 2 None Resolution No. 10805 (2017 Series) July 1, 2016 Base Fee: 30.8% Drought surcharge added 3% Resolution No. 10637 (2015 Series) Resolution No. 10638 (2015 Series) Item 7a. 2025-27 Water and Sewer Rates and Authorization to release Prop. 218 Notice Page 5 Date Water Rates Sewer Rates Notes July 1, 2015 Base Fee: 44.5% Drought surcharge added 4.6% Resolution No. 10637 (2015 Series) Resolution No. 10638 (2015 Series) July 1, 2014 5.5% 3.0% Resolution No. 10442 (2013 Series) Resolution No. 10441 (2013 Series) July 1, 2013 7.5% 4.0% Resolution No. 10442 (2013 Series) Resolution No. 10441 (2013 Series) 7) Is there any update on the status of the FEMA reimbursements? Staff are continuing to work through FEMA reimbursement efforts related to the 2023 winter storms. Approximately 42% of the requested funding is still pending review. For projects that have been determined to be "obligated," staff have been notified that payment is currently being processed and a "Notification of Payment" should be issued with a check in the near future. For projects deemed ineligible (approximately 53%), the Finance Department plans to submit an appeal. Staff have been working closely with FEMA and the State’s Financial Processing Unit throughout this process. Regarding the FEMA funding referenced in the water rate study analysis, the projected reimbursement is for the Salinas Dam Access Road project, which is being managed by the County of San Luis Obispo’s Public Works Department. Following the County’s guidance that the project is eligible for FEMA reimbursement, the rate analysis assumes reimbursement to avoid overcollection through rates. If reimbursement is not received, adjustments will have to be made to the City’s water-related capital improvement program (CIP) and would be reflected in the next rate analysis. City staff remain in communication with the County regarding the status of this project to remain up to date on the project status and potential reimbursement through FEMA. 8) For Water, is the debt service increasing over time as a percentage of expenses? No, debt service is based on the actual debt that the funds have taken on, plus any projected debt. The Sewer Fund does not project taking on any additional debt at this time; however, the Water Fund anticipates taking on additional debt for the T- 3 Water Storage Tank Replacement and a large 30” pipeline replacement along Santa Rosa Street. Additional details regarding debt service (actuals and projected) can be found on Page 8 of 19 in the Technical “Appendix A – Water Analysis” and on page 7 of 17 in the “Technical Appendix B – Wastewater Analysis”.