Water Rates Public Hearing May 13, 2019 Item #15

Recommendation Find that the Public Hearing for the recommended adjustments to the water rates is exempt from CEQA; Open a Public Hearing to receive public comment on recommended adjustments to the water rates; Direct the City Clerk to report on the written comments received from the public; Close the Public Hearing; Approve the aforementioned recommended adjustments to the water rates; and Direct the City Attorney to prepare an amendment to the Water Rate Ordinance implementing the changes proposed.

Factors Influencing Water Rates Adjustments Court Settlement to eliminate rate differential between customers inside and outside Pasadena Insufficient Revenues to meet Expenses No adjustment to D&C since FY2012 No adjustment to CIC since FY2016 No adjustment to Commodity since FY2017

Distribution & Customer (33%) Water Rate Components CURRENT SYSTEM AVERAGE RATE Commodity Charge Volumetric charge that covers costs of purchased water, costs related to producing groundwater supplies, water treatment and water operations Distribution & Customer (D&C) Fixed charge that covers operations and maintenance costs Capital Improvement (CIC) Volumetric charge that covers capital improvements and investments Commodity (47%) $2.406 Distribution & Customer (33%) $1.685 CIC (20%) $1.005 Talking Points: Cost of Service Revenue Requirements Meter Connection Size Prop 218 $5.096 per Billing Unit Billing Unit = 748 gallons

Area a / Area B Rate Litigation Settlement Proposed Rate Adjustments EFFECTIVE JUNE 1, 2019 Area a / Area B Rate Litigation Settlement

Area A and Area B

Area A + B Effective 6/1/2019 AREA A Settlement Terms AREA A+B AREA B Inside the City Limits Approximately 31,700 PWP water customers Area A water rates Settlement Terms AREA A+B Total service territory Same water rates for all customers Effective 6/1/2019 AREA B Outside the City Limits Approximately 6,500 PWP water customers Area B water rates

Area A + B Effective 6/1/2019 Sample Bill Impact – Area A Sample Bill Impact – Area B Meter Size Number of Customers Average Use Average Monthly Bill $ Change % Change 5/8” – 3/4" 17,000 11 BU $48.48 + $1.48 + 3.1% 1” 10,000 17 BU $81.68 + $2.47 + 3.0% 1½” 2,000 32 BU $160.52 + $5.91 + 3.7% The staff recommendation is to eliminate the Area B differential from all rate components, although the CIC differential was specifically challenged in this litigation Staff is not confident that the CIC differential can be properly documented with bona fide costs About 17% of Pasadena water customers are located in Area B, roughly 6500 of the total 38,200 water services The rate action to remove the differential would re-allocate the revenue that is generated from the differential to ALL PWP customers The revenue requirement is “real,” so this action would essentially change “who” pays it These charts show the impact for primarily residential customers both inside and outside the City limits 85% of Area A customers are residential, and over 90% of Area B customers are residential For these customer groups, Area A (inside City) would see an average increase between 3-4% Area B (outside City) would see a decrease of about 17%, mostly because they are a much smaller number of customers This action would not generate new revenue for PWP – it is just a redistribution of the revenue generated from the differential (about $1.8 million annually) After this action, the rate components would be the same for all customers, whether inside or outside of the City Area B customers would still be identified separately because other components of the bill (taxes, etc.) are different for customers outside the City limits Meter Size Number of Customers Average Use Average Monthly Bill $ Change % Change 5/8” – 3/4" 4,000 11 BU $60.24 - $10.29 - 17.1% 1” 2,000 17 BU 101.54 - $17.39 1½” 300 32 BU $199.25 - $32.82 - 16.5% BU = billing unit (equivalent to 748 gallons)

Proposed Rate Adjustments EFFECTIVE AUGUST 1, 2019 AND JULY 1, 2020 1. DISCONTINUE SEASONAL RATES 2. D&C CHARGE INCREASES 3. COMMODITY CHARGE INCREASES

Background: Cost of Service Internal Cost of Service study completed 2018 Revenue from existing water rates are insufficient to cover operating costs Increases in cost of labor, materials, purchased water, and water treatment Insufficient pay-go funding for infrastructure investment Service/ Rate FY 2019 (Budget in $ millions) FY 2020 (Projection in $ millions) FY 2021 Revenue Required Rate Revenue +/- D&C $23.6 $19.0 ($4.6) $24.4 ($5.4) $25.1 ($6.1) Commodity $26.3 $27.7 $1.4 $27.3 $27.8 $0.5 $28.4 $27.9 ($0.5) Total $49.9 $46.7 ($3.2) $51.7 $46.8 ($4.9) $53.5 $46.9 ($6.6)

PWP Actions Taken Permanently eliminated 8 positions in FY 2018 Balancing staff for long-term vs. short-term projects Seeking maximum funding from State and Federal sources Reassessing capital projects Applications for possible grants Managing impacts from MWD rate increases Average annual increase of 3.2% Prudent use of cash reserves

Distribution & Customer No Seasonal Rates 8/1/2019 Eliminate Seasonal Commodity Rates Current Rate Structure: Summer: APR – SEP Winter: OCT – MAR No new money for PWP CURRENT SYSTEM AVERAGE RATE Commodity $2.406 Distribution & Customer $1.685 CIC $1.005 Season Block1 Block2 Block3 Block4 Summer $1.42537 $3.07344 $3.60377 $4.38395 Winter $1.39801 $2.99570 $3.51934 $4.27991 8/1/2019 $1.41199 $3.03984 $3.56962 $4.33916 $5.096 per Billing Unit Billing Unit = 748 gallons

Distribution & Customer Rate Increases 8/1/19 & 7/1/20 Increasing cost of labor and materials Insufficient funding for capital infrastructure Adjust D&C Rate #1 ↑ 5.7% on 8/1/2019 Adjust D&C Rate #2 ↑ 5.8% on 7/1/2020 Adjust Commodity ↑ 0.7% on 7/1/2020 PROPOSED SYSTEM AVERAGE RATE Commodity 8/1/19: $2.406 7/1/20: $2.442 Distribution & Customer 8/1/19: $1.974 7/1/20: $2.288 Commodity $2.406 The staff proposal for the Distribution and Customer Charge: Adjustments for two consecutive years for the system average rates: About 5.7% effective 8/1/2019 Generates about $3.4 million each year of new revenue (for a full year) First adjustment on 8/1/19 so will collect for 11 months (about $3.1 million) Allows the bills for the settlement actions to go through a complete billing cycle A second adjustment of 5.8% effective 7/1/2020 (for FY2021) Generates about $3.7 million each year of new revenue After both adjustments, the actual revenues will be about $1 million above projected revenue requirements, which is a margin of about 4% If the projections hold, these funds would provide funding for capital investment Certain costs may increase beyond the projections, so it is uncertain whether even this very small margin will be created Similarly, the Commodity cost of service analysis indicated that within the three year planning period, a modest increase is needed to essentially “break even” and meet the revenue requirements. MWD’s already approved increases are included in these projections Approximately 3.4% for FY2019 Approximately 2.6% for FY 2020 Certain other charges actually decreased, including the Water Stewardship Rate and Readiness to Serve Charge Relatively modest increases Pasadena buys about 17-18,000 acre feet of MWD water annually Staff is proposing a very modest increase of about 0.7% effective 7/1/2020, which would ensure that revenues from the Commodity charge meet with revenue requirements through FY2021 Distribution & Customer $1.685 CIC $1.005 $5.735 per Billing Unit Billing Unit = 748 gallons

Cumulative Bill Impacts – Area A Meter Size No. of Customers Avg. Monthly Usage Monthly Billing June 1, 2019 August 1, 2019 July 1, 2020 Cumulative Impact New Monthly Billing $ Change % Change 5/8” & 3/4” 16,996 11 $48.47 $1.48 3.1% $2.69 5.4% $3.89 7.4% $8.06 16.6% $56.53 1” 10,012 17 $81.58 $2.57 3.2% $5.28 6.3% $7.25 8.1% $15.10 18.5% $96.68 1 ½” 1,935 32 $160.32 $6.11 3.8% $10.80 6.5% $14.77 8.4% $31.68 19.8% $192.00 2” 1,641 59 $315.41 $9.56 3.0% $26.10 8.0% $33.61 9.6% $69.27 22.0% $384.68

Historical Water Rate Adjustments No D&C Increases since 2012 MWD rate increases passed-through Commodity charge CIC adjusted based on formula (CapEx and debt service) D&C Commodity CIC Effective $0.300 $0.120 - FY 2012 FY 2013 $0.100 FY 2014 FY 2015 $0.050 $0.340 FY 2016 $0.020 FY 2017 FY 2018 FY 2019

Other Utilities’ Water Rates BU = billing unit (equivalent to 748 gallons)

Customer Outreach Water Rates Public Hearing Notice Water Rates Community Meetings 4/11/2019 Robinson Park Recreational Center 4/25/2019 PCC Community Education Center Large Commercial Customer Group 4/24/2019 Caltech Athenaeum City website homepage and PWPweb.com Including links to detailed information PWP Website with Water Rate Calculator Social Media posts

PWPweb.com/ProposedWaterRateAdjustments Next Steps PWPweb.com/ProposedWaterRateAdjustments Date Action Item 5/13/2019 Public Hearing and 1st Reading of Water Rate Ordinance 5/20/2019 2nd Reading of Water Rate Ordinance 6/01/2019 Implement elimination of Area A/B rate differentials 8/01/2019 Implement elimination of seasonal Commodity differentials Implement increase to the D&C charge 7/01/2020 Implement increases to the D&C and Commodity charge

THANK YOU

Background: Litigation Date Action JUL 2014 Class action lawsuit filed on behalf of “Area B” customers Alleged Distribution & Customer Charge and Commodity Charge rate differentials charged to customers outside City limits was not compliant with Proposition 218 DEC 2017 City Council approved settlement negotiations OCT 2018 Final settlement language approved by Court: City Council must consider eliminating rate differential charged to Area B customers, effective within one year of approved settlement No retroactive application of elimination (No refund) FEB 2019 Staff presented Water Rate adjustments recommendation to Municipal Services Committee MAR 2019 City Council set Public Hearing Date The class action litigation was filed back in July 2014 by PWP water customers located outside of the City limits, or “Area B” Alleged that the 25% differential on the Commodity and D&C rates violated prop 218 “cost of service” principles Litigation addressed only the differential charged on the Commodity and D&C rates, and did not include the differential on the CIC Settlement terms were presented in December 2017, which was preliminarily approved by the Court in June 2018 Notice of the settlement was mailed to all class action participants last September, and the final settlement was approved by the court in October 2018 Just a reminder to the members of the Committee of the basic terms of the settlement: Within one year of the approved settlement (which would be October 2019), the City Council must consider rate revisions to eliminate the differential charged to Area B customers There is no retroactive application of the elimination, meaning no refund will be made to those customers If differentials are developed in future rate making, they must be based on documented “bona fide” higher costs to serve the group of customers on who they are charged Rate differentials cannot be based solely on a customer’s location inside or outside of the City limits

Sample – 3/4“ Residential Area A Current Bi-monthly Bill Distribution & Customer Charge 3/4” Meter (includes FPS) $35.02 Bi-monthly Usage 18 BU Block 1: 16 HCF @ 1.39537 $22.32 Block 2: 2 HCF @ 2.98851 $5.98 Block 3: 0 HCF @ 3.48921 - Commodity Charge $28.30 CIC Charge @ 0.98506 $17.74 Total Water Service $81.06 Bi-monthly Bill Effective 6/01/2019 Distribution & Customer Charge 3/4” Meter $35.96 Bi-monthly Usage 18 BU Block 1: 16 HCF @ 1.42537 $22.80 Block 2: 2 HCF @ 3.07344 $6.14 Block 3: 0 HCF @ 3.60377 - Commodity Charge $28.94 CIC Charge @ 1.03182 $18.58 Total Water Service $83.48 $2.42 Increase (3.0%) BU = billing unit (equivalent to 748 gallons)

Sample – 3/4“ Residential Area A Bi-monthly Bill Effective 6/01/2019 Distribution & Customer Charge 3/4” Meter $35.96 Bi-monthly Usage 18 BU Block 1: 16 HCF @ 1.42537 $22.80 Block 2: 2 HCF @ 3.07344 $6.14 Block 3: 0 HCF @ 3.60377 - Commodity Charge $28.94 CIC Charge @ 1.03182 $18.58 Total Water Service $83.48 Bi-monthly Bill Effective 8/01/2019 Distribution & Customer Charge 3/4” Meter $42.34 Bi-monthly Usage 18 BU Block 1: 16 HCF @ 1.41199 $22.60 Block 2: 2 HCF @ 3.03984 $6.08 Block 3: 0 HCF @ 3.56962 - Commodity Charge $28.68 CIC Charge @ 1.00501 $18.10 Total Water Service $89.12 $5.64 Increase (6.8%) BU = billing unit (equivalent to 748 gallons)

Sample – 3/4“ Residential Area A Bi-monthly Bill Effective 8/01/2019 Distribution & Customer Charge 3/4” Meter $42.34 Bi-monthly Usage 18 BU Block 1: 16 HCF @ 1.41199 $22.60 Block 2: 2 HCF @ 3.03984 $6.08 Block 3: 0 HCF @ 3.56962 - Commodity Charge $28.68 CIC Charge @ 1.00501 $18.10 Total Water Service $89.12 Bi-monthly Bill Effective 7/01/2020 Distribution & Customer Charge 3/4” Meter $49.32 Bi-monthly Usage 18 BU Block 1: 16 HCF @ 1.44852 $23.18 Block 2: 2 HCF @ 3.07637 $6.15 Block 3: 0 HCF @ 3.60615 - Commodity Charge $29.33 CIC Charge @ 1.00501 $18.10 Total Water Service $96.75 $7.63 Increase (8.6%) BU = billing unit (equivalent to 748 gallons)

Fiscal Impact If approved, the proposed adjustments will generate an estimated $7.3 million over the next 3 years Effective Date D&C Charge Commodity Charge Seasonal Rate Change System Average, % Additional Revenue 6/1/2019 - N/A 8/1/2019 $3.4M 5.7% 7/1/2020 $3.8M $0.5M 6.5% $3.9M Total $6.8M $0 12.2% $7.3M