Workshop #4 – Water Rate Structure Draft Study and Proposed Rates Workshop

Posted on July 5, 2018

The City of Sonoma’s fourth and final Water Rate Study workshop was held with City Council on Monday, June 25th, 2018.  The primary purpose of this workshop was to present a draft Water Rate Study report which included an updated Financial Plan , the proposed rate structure, and the corresponding proposed water rates for the City Council’s consideration.

The City Council felt it was important to invest in the water system’s infrastructure (including new meters that provide current time water use and leak management), adequate reserves for emergencies and operations, and to balance the need for affordable rates for customers especially those in lower income or fixed incomes. The City’s consultant, Raftelis, used a sophisticated financial dashboard where all operating costs, capital costs, and reserve funds were balanced against revenue requirements. Using this model, the City tried to balance the funding needed for a well-managed water utility with the community’s ability to pay for them. A number of trade-off and reductions were made in order to minimize the rate increases.

In addition, the City is facing new court cases and evolving laws that don’t allow for the use of “conservation tiers” where those with the higher water use are charged more regardless of cost parameters.  The proposed rates comply with current legal parameters which means that water costs are now shifted back to all water users.

The draft water rate study makes changes to the City’s water rate structure including reducing residential water “tiers” from four to three and eliminating tiers in the multi-family and commercial categories.  Residential tier “widths” (measured in kgals – or units of 1,000 gallons) were also reduced to match the City’s sources of supply as required by recent court decisions.

The City’s residential rates used to include a fourth tier designed to encourage conservation. Unfortunately, due to a court case decided in 2015, after the prior water rate study was completed, tiers must be more clearly tied to costs to serve water in the volume available in each tier. One unfortunate consequence is that revenue that used to be collected in the higher conservation tier (i.e., by those who use the most water) now must be collected in the lower tiers, increasing costs to more efficient water users.  The newly proposed residential tiers were designed to minimize the impact to low water users, to the extent allowed by law.

After detailed analysis, the draft Water Rate Study Report showed that there was a need for additional water revenue based on the following key factors:

  • Anticipated 6% annual increases in the Sonoma Water County Agency’s charges to the City for water supplies;
  • Reduction in the number and steepness of water use tiers (i.e., prices that rise with water use) due to changes in the law which sadly reduce the City’s ability to have water tiers that encourage conversation;
  • An average of $1.47 million annual infrastructure investment through Fiscal Year 2023;
  • The need to create financial reserves per policy objectives to protect the Water Utility from future fire, drought, earthquakes and other emergencies; and,
  • An annual inflation amount of 3% for most costs and services.

Additional modifications were made between the June 4th(Workshop #3) and the June 25th(Workshop #4) including:

  • Additional reductions to reduce rates:
    • Operating cost decrease of $40,000 in supplies and conservation costs;
    • Changes to the Rate Stabilization Reserve Fund – now starting at 10% of revenue and moving to 15% . (The goal of 20% of volumetric revenue for this reserve fund will have to wait for the next rate cycle to keep rates affordable for the community.)
  • Shift in the timing of the annual water rate increase to a fiscal year versus calendar year schedule (i.e., to July 1 from January 1 of each year) to align with annual budget process.
  • Refinement of the elevation charge to apply to Zone 2 only, which includes 52 parcels outside the City at higher elevations (see a list of addresses in Zone 2) requiring pumps and other infrastructure and operation costs unique to those elevations.

The suggested overall revenue increases include a 3.5% increase to be collected from rates proposed for implementation in September 2018.  The next proposed 7.5% required revenue increase would occur on July 1, 2019 with additional 7.5% increases every July through 2022. Note that individual customers’ water bill would rise by more or less than the percentage of revenue requirement increases and in some cases, would fall depending on water use.

Due to similar legal considerations as conservation tiers, an additional charge of 15% will no longer be charged to “out-of-city” customers.  A new elevation charge was added to 52 out-of-City customers in Zone 2, where water must be pumped up the hill to serve them. This cost is $XXX per $1,000 gallon of water used.  See a list of addresses in Zone 2. The majority of out-of-town customers will be charged the same rate as customers that reside in the city limits.

As outlined above, the Financial Plan also includes a number of important projects designed to maintain and improve existing water delivery and reliability service.  These include upsizing of pipes for improved fire flow, the systematic replacement of existing pipelines in accordance with the new Water Master Plan, starting in FY 2022, and installation of Advanced Metering Infrastructure (AMI), which will enable customers and the City to track water use more closely, leading to early identification of leaks and better conservation.

After additional deliberation and public comments, the City Council directed City staff to issue the Proposition 218 notice of rate increases (see Water Rates Notice – Part 1  and Water Rates Notice – Part 2) with a Public Hearing set for August 20, 2018.  A notice along with a list of Frequently Asked Questions (FAQs) and answers has been mailed to all customers and property owners.

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