To:                     Honorable Mayor and Members of City Council

From:                     Jacques R. LaRochelle, Public Works Director

Prepared By:                     Joy Eldredge, Water General Manager

TITLE:

Title

Water Rate Updates Over a Five-Year Period

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RECOMMENDED ACTION:
Recommendation

Adopt a Resolution Approving Increases to Water Rates Over a Five-Year Period, through October 2021, for all Water Rate Customers (Inside City and Outside City) Including Single-Family Residential, Multi-Family Residential, Commercial, Irrigation, Fire Service Charges, and Pumped Zone Surcharges; and Establishing the Amount of Rateshare Program for Lower Income Customers

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DISCUSSION:

The City provides safe, reliable and life sustaining water service to all customers, through the Water Enterprise, managed by the Water Division of the Public Works Department.  The City takes extraordinary steps to manage the water enterprise in a cost-effective manner, and water rates are set to provide revenue equal to the cost of providing water service.  The water service funded by water rates includes the continuous and ongoing availability of infrastructure, water supply, health and safety, fire protection and reliability.

The City performs a cost of service analysis every five years to ensure that costs are recovered and allocated equitably to each customer class based on the service provided.  As a result of the most recent cost of service analysis, the City determined that the current rate structure does not generate sufficient revenue to cover the cost of providing water service, and the City calculated proposed updates to rates over a five year period to ensure the cost of service is recovered.  Details of the 2017 rate analysis and reasons for the changes to water rates are described in the Water Cost of Service Rate Study (Attachment 1 - Exhibit A), and the September 19, 2017 staff report to City Council (Attachment 2).  The proposed updates to the water rates include a fixed service charge for all customer classes, in addition to a quantity charge for water used.  The quantity charge is a tiered rate structure for single family residential customers.  Napa’s water rates are currently, among the lowest in the Bay Area with the lowest fixed cost; and, under the proposed updates, they will remain among the lowest.

At the core of the proposed rate changes is an increase in annual Capital Improvement Project (CIP) investments from the current $3M to $4M in FY 2019 and gradually increasing to $6M in 2022.  As with nearly every water utility in California and across the United States, the City of Napa continues to rely on infrastructure that was built over the last 100 or more years and consistent investments are needed for the renewal, replacement and upgrades to these facilities.  The cost of replacing the system today is $480 million.  Treatment plants have a lifespan of 40 years while pipelines are assumed to have a useful life of 100 years. An annual investment of $3M is not sufficient to keep up with depreciation.  Underinvestment does not negate the need for asset replacement, but results in higher overall costs and impacts to daily operations including increased service interruptions, spot repairs, and emergency call-outs to maintain an acceptable level of service.

On September 22, 2017, a total of 30,994 Notices of Public Hearing (Attachment 1-Exhibit B) was sent to all account holders and physical addresses pursuant to Proposition 218 and Government Code 53755.  As indicated in the Notice, consistent with Proposition 218, an opportunity was provided to submit a written protest to the proposed water rates. If the City receives a written protest from a majority of the account holders (one protest per parcel) prior to the close of the hearing on November 7, the City may not implement the proposed water rates.  As of November 2, 2017, the City Clerk has received 1879 written protests. 

If adopted, the proposed water rate adjustment will be implemented December 1, 2017 which means that due to the bimonthly (every two months) billing cycle, customers will first receive bills with charges based on the revised rates in February 2018.

FINANCIAL IMPACTS:

The adoption of this proposed rate increase is required to avoid a revenue shortfall and depletion of fund balance over the stated five-year period, to invest in the identified annual capital improvement program, to maintain necessary reserve levels and to ensure a favorable bond rating is maintained.  It is prudent to ensure continued investment in the critical infrastructure and insure a safe, reliable, water supply system for the City of Napa into the future. 

Establishing the RateShare program as a $25 discount per bi-monthly bill will require $125,000 in revenue from cell tower leases on in-system storage tanks to be set aside for this purpose.  This will allow 833 customers to participate in the program.  If requests for qualified participants exceeds this level, staff will seek Council direction to adjust funding for the program. 

CEQA:

The Public Works Director has determined that the Recommended Action described in this Agenda Report is exempt from CEQA pursuant to Sections 15061(b)(3) and15273 of the Guidelines, which exempts the establishment, modification, restructuring, or approval of rates, tolls, fares, or other charges by public agencies for the purpose meeting operating expenses and obtaining funds for capital projects, necessary to maintain service within existing service areas. Based on staff’s review, there is no indication of unusual circumstances that would create a reasonable possibility that approving the water rates would cause a significant effect on the environment.

DOCUMENTS ATTACHED:

ATCH 1 - Resolution to Adopt Water Rates

EX A - Water Cost of Service Rate Study

EX B - Hearing Notice 2017

EX C - CEQA Findings

EX D - Water Service Customer Classes

ATCH 2 - Agenda Staff Report for the September 19, 2017 Council Meeting (no attachments)

NOTIFICATION:

None.