REPORT TO COUNCIL
SUBJECT
Title
Public Hearing: Action on Resolutions Approving Water, Sewer and Recycled Water Amended Rates to be Effective July 1, 2024
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, proposed fees or charges for water, sewer, and recycled water service are subject to a written notice and public hearing not less than 45 days after the mailing of the notice as well as an explanation of the protest procedure for customers who may wish to formally protest their adoption. At the public hearing, all protests against the proposed fees or charges are tabulated and if protests are presented by a majority of utility customers (50% plus 1), the fees or charges cannot be imposed. If there is not a majority of utility customers protesting the proposed fees or charges, Council can make and act on a motion to approve increases. The required number of protests needed to deny Council the option to approve rate increases is 13,888.
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 are 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), and sewer rates (Attachment 2) to be effective July 1, 2024.
The Water & Sewer Utilities Department engaged Black & Veatch Management Consulting, LLC (Black & Veatch) to conduct an ongoing cost-of-service study of water, sewer, and recycled water rates charged to City residents and businesses.
DISCUSSION
In the fall of 2021, the City conducted a 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.
As in years past, 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 O&M 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 utilities.
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 improvements for rehabilitation and replacement of aging infrastructure. The San Francisco Public Utilities Commission (SFPUC) voted on May 14, 2024 to raise the rates it charges to its wholesale customers by 8.8% for FY 2024/25. On May 14, 2024, the Santa Clara Valley Water District (Valley Water) Board adopted a 12.9% increase of wholesale water rates for FY 2024/25. The City’s Water Utility is proposing to complete approximately $25.7 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 an 11.6% 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 $11.16. In addition, there is an 8.8% average 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 has been 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 $86 million over the next five (5) years. The Sewer Utility issued $35 million in installment sale financing Certificates of Participation (COPs) in October of 2023 in an effort to mitigate the rate impacts of the RWF capital project and to ensure generational equity as the project is funded. The costs associated with the Sewer Utility have resulted in the need to propose an 8.5% increase for single family residential customers. Based on the cost-of-service analysis, multi-family residential customers will see a proposed 7.5% increase to their sewer rates. Non-residential customers will see a proposed average 13.7% increase to their sewer rates, however the actual increase for individual customers will be based on their customer class.
If proposed rates are adopted, single family residential customers will see their monthly sewer bill increase by $4.09 and multi-family residential customers will see their monthly sewer bill increase by $3.43.
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. The rate charged to the City of Santa Clara to purchase recycled water will increase by 13.6%. These costs along with O&M costs, have resulted in the need to propose an 11.8% 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 not subject to 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 reflected in the FY 2024/25 amended Water & Sewer Utilities operating budget, recommended as part of the FY 2024/25 and FY 2025/26 Proposed Capital Improvement Budget. 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, City Manager’s Office 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> .
Additionally, on April 8, 2024, which is not less than 45 days before the public hearing, as required by Article XIII D of the California Constitution (Proposition 218), notices were mailed to all 27,773 current utility customers in the City Utility Billing System. Also, staff reached out to utility customers via social media platforms and through the utility rates page on the City’s website.
ALTERNATIVES
1. Adopt the Proposed Resolutions Establishing Water Rate Schedule 2024-01, Recycled Water Rate Schedule 2024-02 and Sewer Rate Schedule S-24
2. Do Not Adopt the Proposed Resolutions Establishing Water Rate Schedule 2024-01, Recycled Water Rate Schedule 2024-02 and Sewer Rate Schedule S-24 and Direct Staff to Return to Council with Necessary Budget Amendments.
RECOMMENDATION
Recommendation
Alternative 1: Adopt the Proposed Resolutions Establishing Water Rate Schedule 2024-01, Recycled Water Rate Schedule 2024-02 and Sewer Rate Schedule S-24
Staff
Reviewed by: Gary Welling, Director, Water & Sewer Utilities
Approved by: Jovan D. Grogan, City Manager
ATTACHMENTS
1. Proposed Resolution Establishing Water Rate Schedule 2024-01 & Recycled Water Rate Schedule 2024-02
2. Proposed Resolution Establishing Sewer Rate Schedule S-24
3. Draft 2024 Water and Sewer Rate Study Report by Black & Veatch Management Consulting, LLC