Title
Staff Report for the City of San Leandro City Council Finance Committee to Receive Wastewater Utility Rates Study and Provide Direction to Staff on Proposition 218 Notices
Staffreport
COUNCIL PRIORITY
• Infrastructure
• Sustainability & Resiliency
• Fiscal Sustainability and Transparency
SUMMARY
The Water Pollution Control Division (WPC) initiated a sewer rate study to determine the fiscal requirements to maintain high quality service, repair aging infrastructure, and meet regulatory requirements. The draft Wastewater Rate Study report includes proposed updated sewer rates to support these expenses and is necessary to initiate the Proposition 218 noticing process.
RECOMMENDATIONS
Staff recommends that the City Council Finance Committee receive the attached draft Wastewater Utility Rate Study, provide feedback, and to move forward with the Proposition 218 process by recommending approval at a future Council Meeting.
BACKGROUND
The City’s wastewater infrastructure serves about 60,000 residents and businesses in the northern two-thirds of the City. The system includes 125 miles of collection system pipelines, 12 lift stations, and a Water Pollution Control Plant (WPCP) that processes an average of about 5 million gallons per day of wastewater. Because of the preponderance of business and industrial users, the WPCP receives some of the strongest wastewater in the Bay Area and processes this water to exceed stringent requirements set by state and federal regulating agencies.
Proposition 218 requires that sewer rates be justified by expenses incurred in the collection and processing of wastewater, including capital expenses and reserve requirements. The City worked with Bartle Wells Associates, a public finance consulting firm with expertise in the areas of utility rates and finance, to analyze all financial data from the wastewater enterprise fund including operating expenses and Capital Improvement Program (CIP) costs to develop cost-of-service based rates.
A Wastewater Rate Study, included as Attachment B, contains financial projections for the next five years and evaluates revenue requirements to cover the cost of services and ensure financial stability. In accordance with Proposition 218, it analyzes the revenue required and proposes rates that are proportionate, equitable and fair to all customers.
Analysis
The three key elements of the Wastewater Rate Study include:
1. Financial projections using historical and estimated future operational and CIP expenditures;
2. Flow and wastewater strength projections using historical usage data and anticipated changes;
3. An evaluation of customer class and fee structure
Financial Projections
There is a projected increase in costs due to increased staffing costs and projects as part of the 10-year CIP to address aging infrastructure and stricter requirements from the State Water Board for nutrient reduction. In addition, the proposed sewer rates support maintaining at least one year of operating funds in reserve, as is standard practice for utilities. This level allows the Water Pollution Control Plant Enterprise Fund to absorb unexpected changes or disasters without reliance on the General Fund.
The City analyzed the upcoming capital improvement needs for the wastewater enterprise over the next 10 years. The CIP plan was presented to City Council on October 21, 2024. The plan aims to address the aging infrastructure with upgrades to the Water Pollution Control Plant, sewer pipelines, and lift stations. While some of these costs are offset by grants, the remainder comes from sewer fees.
In July 2024, the San Francisco Bay Regional Water Quality Control Board (“Water Board”) imposed limits for the first time on the quantity of nitrogen that can be discharged to San Francisco Bay. Complying with this requirement will require changes to the WPCP. The Capital Improvements Plan sets forth a strategy for identifying cost-effective changes while maintaining flexibility to meet lower limits if necessary. However, because the costs for compliance with this requirement are not yet determined, additional debt financing is not recommended over the next five years to reserve future debt capacity if necessary.
Flow and Strength Projections
Residential estimates are based on average home size in San Leandro and median water usage. Commercial usage is based on historical flow data and standard loading by type of business. Industrial usage is based on measured historical flow and load strength. There is currently no anticipated significant increase in new customers.
Customer Classes
Sewer service fees are assessed within three customer classes:
1. Residential: Flat fee for single family homes and multifamily units
2. Commercial: Fees based on water flow by category of business
3. Industrial: Fees based on flow and loading charges
A new fee structure is proposed for commercial users. The current structure specifies rates for certain types of industries, with most businesses falling into a “all other” category. Customers will now be categorized as low, medium, or high based on industry standards for flow strength.
The proposed fees increase the sewer rates by 8% for fiscal year 2025-26 and by 9% for fiscal years 2026-27 through 2029-30. Because the rate study also includes a recalculation of rates relative to one another, this may vary slightly by customer class in the first year.
Previous Actions
Reso 2024-124: Resolution to Appropriate $2,660,000 from the Water Pollution Control Plant Enterprise Fund Balance to account 593-52 for Fiscal Year 2024-2025 Capital Improvement expense.
Applicable General Plan Policies
Policy CSF-6.4 Wastewater Collection and Treatment. Maintain efficient, environmentally sound, and cost-effective wastewater collection and treatment services in San Leandro.
Financial Impacts
The requested rate increases are designed to allow the Water Pollution Control Plant Enterprise Fund to continue to be self-sufficient. Staff requests the Finance Committee forward to City Council the recommendation to initiate Proposition 218 notification process.
It should be noted that the recommended fee increases listed in the attached report would be the maximum recommended rate increases that would be presented for Proposition 218 noticing purposes. As has been past practice, City staff will evaluate actual expenses (capital and operating) annually and propose rate increases to meet the revenue requirements necessary to operate the utility.
ATTACHMENTS
Attachment A: Draft Resolution
Attachment B: Wastewater Rate Study Draft Report
Attachment C: Wastewater Rate Study Presentation
PREPARED BY: Ramya Sankar, Management Analyst II, Water Pollution Control Division
Hayes Morehouse, Water Pollution Control Manager