REPORT TO COUNCIL
SUBJECT
Title
Public Hearing: Action on Resolutions Approving Water, Sewer and Recycled Water Rates to be Effective July 1, 2022 (NOT TO BE HEARD BEFORE 7:00 PM)
Report
COUNCIL PILLAR
Deliver and Enhance High Quality Efficient Services and Infrastructure
BACKGROUND
In November 1996, California voters approved Proposition 218, which amended the State Constitution to establish a new category of fees and charges referred to as “property-related fees and charges” and created new procedural requirements for their adoption. Under these requirements, water, sewer, and solid waste service fees or charges are subject to a written notice of proposed increases, public hearing on proposed fees or charges not less than 45 days after the mailing of the notice, and majority protest procedure for their approval. At the public hearing, all protests against the proposed fees or charges are tabulated and if protests are presented by a majority of owners (50% plus 1), the fees or charges cannot be imposed. If there is not a majority of owners protesting the proposed fees or charges, Council can make and act on a motion to approve increases.
The City updates the rates it charges Santa Clara residents and businesses for water, sewer, and recycled water services on an annual basis. Each of these three utilities is self-sustaining and rates are adopted to pay for revenue requirements associated with operations and maintenance (O&M) costs, capital improvement program (CIP) projects and, when possible and feasible, the funding for reserves associated with the respective utility systems.
Staff is seeking approval of the attached resolutions assigning water and recycled water rates (Attachment 1), as well as sewer rates (Attachment 2) to be effective July 1, 2022.
The Water & Sewer Utilities Department engaged Black & Veatch Management Consulting, LLC (Black & Veatch) to conduct an ongoing study of water, sewer, and recycled water rates charged to City residents and businesses.
DISCUSSION
In December 2017, staff initially contracted with Black & Veatch to do an updated study for rates charged to customers beginning in July 2018 and updates to those rates beginning in July 2019, then again in 2020 and 2021. In the fall of 2021, the City conducted a new competitive procurement, and in December 2021, entered into a new agreement with Black & Veatch for consulting services related to rate setting for the next five (5) years.
Black & Veatch conducted a cost of service analysis for all three utilities, projected three years of rates and created a ten-year financial plan to fund operating and capital expenditures with adequate reserves. Black & Veatch also updated the rate study (Attachment 3) to reflect funding reserves analysis and financial plans on cost of service analyses. The methodology in the rate study allocates cost components of each utility’s operation and capital costs to customers and customer classes within each utility based on their use of the respective systems.
Water Rates
The potable water rates charged to Santa Clara residents and businesses are primarily driven by wholesale water purchases, O&M costs, and capital infrastructure improvements for rehabilitation and replacement of aging infrastructure. The San Francisco Public Utilities Commission (SFPUC) voted on May 10, 2022 to raise the rates it charges to its wholesale customers by 15.9% for FY 2022/23 and is proposing a 10.5% increase for FY 2023/24. On May 10, 2022, the Santa Clara Valley Water District (Valley Water) Board adopted a 15.0% increase for FY 2022/23 and a proposed 15% per year for the following two (2) years. The City’s Water Utility is proposing to complete approximately $22.5 million in CIP projects over the next five years to address aging infrastructure and ensure ongoing water quality standards are met. These costs, including O&M costs, have resulted in the need to propose a 9.6% increase in the potable water rate. For an average residential customer that uses 12 units (1 unit=1 HCF=748 gallons) of water, the monthly water bill will increase by $7.68. In addition, there is an increase in minimum monthly charges for the water meter based on its size.
Sewer Rates
The sewer rates charged to Santa Clara customers are primarily driven by the City’s contribution to the capital and O&M costs at the San José-Santa Clara Regional Wastewater Facility (RWF), of which the City is a co-owner. O&M and capital costs on the City’s collection system are also drivers of sewer rates. The RWF is currently undergoing a large rehabilitation/replacement project that may last upwards of 30 years. Santa Clara’s share of this project’s costs is currently budgeted to be approximately $76.5 million over the next five (5) years. The Sewer Utility issued $50 million in financing in 2020, in the form of a rolling line of credit facility, to mitigate the rate impacts of the RWF capital project as well as to ensure generational equity as the project is funded. The costs associate with the Sewer Utility have resulted in the need to propose a 5.2% increase for single family residential customers. Based on the cost-of-service analysis, multi-family residential customers, will see a proposed 0.4% increase to their sewer rate. Non-residential customers will see a proposed average 4% increase to their sewer rates, but the actual number will be based on their customer class.
If proposed rates are adopted, single family residential customers will see their monthly sewer bill increase by $2.29 and multi-family residential customers will see their monthly sewer bill increase by $0.16.
Recycled Water Rates
The recycled water rates charged to City customers are primarily driven by wholesale rates charged by the City of San José through South Bay Water Recycling (SBWR). SBWR’s rates are tied to the groundwater charge levied by Valley Water. Per SBWR’s letter dated May 17, 2022, the rates charged to the City of Santa Clara to purchase recycled water will increase by 16%. These costs along with O&M costs, have resulted in the need to propose a 10.5% increase in the recycled water rate. Recycled water is used by non-residential customers for irrigation, dual plumbing and various industrial processes.
ENVIRONMENTAL REVIEW
The action being considered is subject to a statutory exemption from the California Environmental Quality Act (“CEQA”) pursuant to Public Resources Code section 21080(b)(8) and CEQA Guidelines section 15273 as it concerns the establishment, modification, structuring, restructuring, or approval of rates, tolls, fares, or other charges that are for the purpose of (A) meeting operating expenses, (B) purchasing or leasing supplies, equipment, or materials, (C) meeting financial reserve needs and requirements, or (D) obtaining funds for capital projects necessary to maintain service within existing service areas. As described above, the proposed rate increases will cover operations and maintenance (O&M) costs, capital improvement program (CIP) projects and the funding of reserves associated with the respective utilities’ systems.
FISCAL IMPACT
The proposed rates are not yet factored into the FY 2022/23 proposed operating budget. The Department will bring the necessary budget amendments forward as part of a Monthly Financial Report if the City Council approves the proposed rate increases. Failure to adopt the proposed rates will result in lower than expected revenues and the need to amend the upcoming budgets by further drawing down reserve funds for the three utilities and to change the ten-year financial outlook for each of the utilities.
COORDINATION
This report has been coordinated with the Finance Department and the City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov> .
ALTERNATIVES
1. Adopt the Proposed Resolutions Establishing Water Rate Schedule 2022-01, Recycled Water Rate Schedule 2022-02 and Sewer Rate Schedule S-22
2. Do Not Adopt the Proposed Resolutions and Direct Staff to Return with Necessary Budget Amendments
RECOMMENDATION
Recommendation
Alternative 1: Adopt the Proposed Resolutions Establishing Water Rate Schedule 2022-01, Recycled Water Rate Schedule 2022-02 and Sewer Rate Schedule S-22
Staff
Reviewed by: Gary Welling, Director, Water & Sewer Utilities
Approved by: Rajeev Batra, City Manager
ATTACHMENTS
1. Proposed Resolution Establishing Water Rate Schedule 2022-01 & Recycled Water Rate Schedule 2022-02
2. Proposed Resolution Establishing Sewer Rate Schedule S-22
3. Draft Updated 2022 Rate Study Report by Black & Veatch Management Consulting, LLC