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The previous Water Cost of Service Rate Analysis was performed in 2017 and resulted in five years of fixed rate increases followed by no increases in 2022 and 2023. During the last two years those rates did not recover the actual cost to provide service. Projected operating costs and necessary investments in capital improvements continue to exceed the revenue generated from current rates in 2024 and beyond. Rate increases are necessary for:
As shown in the chart below, the Water Funds cash balance would be negative by 2025. We would be forced to eliminate our investment in necessary capital improvements in the distribution system and other areas. This would lead to more frequent infrastructure failures, water service interruptions, water loss, street damage and property damage. The end result would be higher operating costs, thereby reducing the funds now slated for infrastructure investments. By 2027, we would not be able to pay debt service. Reserve funds would be exhausted leaving the water system vulnerable to emergencies such as earthquakes.
Many costs associated with the water system are fixed costs that are incurred whether customers consume water or not. For example, meters must be read, bills must be sent out, the water must be tested, treated and the pressurized system maintained to ensure water is available including emergency repairs to water pipes that occur between 70 and 110 times per year. Customers have fire protection around the clock.
Due to the wide variety of usage patterns among these customers, it is extremely difficult to develop equitable tiers for these classes. Unlike residential customers that typically double or triple their water use in the summer, commercial customers tend closer to a steady pattern of use. Multi-family, commercial, and irrigation accounts will retain a single quantity charge structure, and they will also pay a fixed service charge based on the size of their meter, or capacity that is provided to their property.
The City reads more than 25,500 water meters to generate bills. There is a significant amount of work involved to read the meters, prepare the bills, process payments, and provide customer service each billing period. Given our staffing levels, it is much more efficient to perform this work every two months rather than monthly. The schedule allows staff to perform essential work like meter repair, meter replacement, maintenance, and service calls in-between billing cycles.
The City maintains a significant number of facilities necessary to deliver water to your home or business. Much of the system has been in service for 50-70 years or more. The system is valued at $941 million today. The City is finalizing a 30-year capital improvement plan to prioritize system improvements and replacements needed to maintain a high level of service and avoid the disruptions and large costs associated with failing infrastructure. The plan has already identified $100 million in improvements needed including upgrades to the Lake Hennessey Treatment Plant that has served its useful life. The system is old and complex. It is not responsible to continue to invest at the current level recognizing that the cost of constructing improvements costs more today than it did in 2017. The proposed rates include a phased increase from $6 million per year to $8 million in annual investments by the end of the study period in 2028. Some planned investments in the near term include:
As shown in the graph below, there are significant capital improvement needs for the water system and the increased contribution is necessary to pay for these improvements.
New development pays a capacity fee based on the size of their water service to "buy in" to the existing system. For example, a new single-family home pays $6,296 to connect to the water system. Funds collected from new development are used for system-wide capital improvements. In 2020- 2023 City has been collecting about $0.80 to $1.1 million per year from new development. Those connection fees are used to offset the amount ratepayers contributed for capital improvements. New development is required to pay for and install infrastructure required to serve their project. For example, if a new or larger water main is required to supply a new subdivision, the City does not pay for it out of capital improvement funds. The new development pays all costs. The $6 million increasing to $8 million in annual capital improvements supported by the rates are not used to benefit new development.
Water supply (17%) and labor (24%) that is available 24 hours per day 7 days per week combine to represent 41% of annual operating costs. Operating costs for equipment, machinery, pumps and supplies makes up 34%. Chemicals used for water treatment are a significant fixed cost. See below to view a break down based on a dollar spent on the system.
SINGLE-FAMILY RESIDENTIAL: With the initial January 2024 rate increase, the City remains one of the lowest cost water providers in the region for the average single-family residential customer. All agencies are delivering a similar service, although they vary by size and system age. For average summer usage (8,000 gallons monthly), Napa customers pay among the lowest rates in the Bay Area. As shown in the chart below, total yearly water costs for the average single-family residential customer remain among the lowest even if the proposed January 2024 rates were implemented immediately.
Customers that use lower quantities of water still pay less than customers who use higher quantities of water. Although water use is lower, the cost of providing reliable water service includes mostly fixed costs that don’t vary commensurate with the reduced quantity of water sold. Many water agencies are now including a drought surcharge to make up the difference in actual costs versus sales revenue during drought years. Napa did not implement a drought surcharge. Rates need to be adjusted to cover operating costs and continue investments in infrastructure.