Zone 7, which sells treated water to the cities of Pleasanton and Livermore as well as to the California Water Service and the Dublin San Ramon Services District, is looking at raising its wholesale rates because massive infrastructure needs and declining sales due to water conservation during the drought.
The water agency is projecting that it will deplete what money it has left within the next two years.
A meeting of the Zone 7 Water Agency board painted a dire picture of the water wholesaler's future finances if action isn't taken soon.
"Unfortunately, I have to be the bearer of bad news," said Sanjay Guar, vice president of Raftelis Financial Consultants, which was paid to evaluate Zone 7's rate and financial viability. "The situation is grim. We're at bone. There's no fat. There's no muscle. There's just bone."
Board members agreed at a public meeting Wednesday at their Livermore office that changes had to be made and quickly. Some apologized for their hand in leading the agency to the current situation, saying they shouldn't have bowed to pressure from constituents to keep rates low after the recession rather than listening to staff warnings about inevitable financial trouble.
"All the other water agencies have thought about their fixed costs, and we have not," board member Bill Stevens said. "I don't think we've been doing the right thing for the public. We should have done this years ago."
The consultant firm is recommending Zone 7 increase rates enough to raise $3.5 million between Jan. 1 and June 30, then another $7 million from July 1 to June 30, 2017, and then another $5 million from July 1, 2017, to June 30, 2018.
Those rates can be changed in a number of ways, but Wednesday's presentation gave a suggested rate increase of 10%, plus a temporary conservation surcharge of 20%. Given that the Zone 7 board passed a 3% rate increase for this fiscal year, rate in January could be 33% higher than they were this past January.
Some of that increase would be temporary to recoup losses due to lack of sales during the drought, but some could be permanent. The final rate structure, time limits and other details will be described at the next public board meeting Oct. 21 at 7 p.m. at agency offices, 100 North Canyons Parkway in Livermore.
A rate increase could mean higher water bills for residents who get their water from a retailer that buys from Zone 7, and staff at each agency will have to figure out how to deal with that cost.
The city of Pleasanton was among retailers that questioned the proposed structure for increased rates. Under the suggestions shown at Wednesday's meeting, each of Zone 7's four retailers would have a different rate increase based on their historic use.
"We request that Zone 7 spend time evaluating rate structure options and work with the retailers to ensure any new structure is uniform and relatively easy to understand and implement," Pleasanton city manager Nelson Fialho wrote in a letter to the board.
Retailers also questioned the rationale of raising rate immensely when most of the revenue will be used to pay for $20 million capital projects each year and to rebuild the agency's depleted reserves.
"I'm uncomfortable with a 33% rate increase if 90% of (revenue generated) are going to sit in a reserve," board member Angela Ramirez Holmes said.
However, the district has delayed capital improvement projects such as pipe replacement, pump replacement and the building of a new treatment plant for years, which is pushing current infrastructure to the limit, staff said. Pleasanton assistant director of operational services Leonard Olive questioned whether some projects, such as a new ozone treatment plant, could be delayed until the financial chaos is straightened out.
By delaying capital projects, several projects piled up until they couldn't be delayed any longer. Zone 7 staff and some board members said the agency is at that point, and any more delay to defray costs could have serious consequences.
"If our infrastructure fails, it'll be worse than a drought," board member John Greci said. "We won't have any water. Our system is antiquated."
Could Zone 7 deffer more projects and "cross our fingers and hope we don't have failures? Yes. Are there other projects I'm comfortable deferring? No," said Zone 7 general manager Jill Duerig.
Retailers also wondered whether Zone 7 could take out debt to fund capital projects, which ratepayers would fund over a 30-year period, rather than cramming the payment into a few years.
Guar of Raftelis Financial Consultants said taking out debt in about three years would be wise, but agency staff said it wouldn't be possible until then because you have to have reserves -- which Zone 7 doesn't have -- and a good credit rating to get debt issued. Staff members said they would expand upon that subject at the Oct. 21 board meeting.
If Zone 7 doesn't raise rates at all, the agency will run out of money during the 2016-17 budget year and will be $58 million in the red by the end of the 2019-20 fiscal year. Zone 7 fiscal years run from July 1 to June 30, according to the consultant firm's presentation.
"I've been on this board for 21 years, and I think this is the most trying times. We've been pulling on our reserves for the last couple of years. That's not good business," Greci said. There's "no gingerbread in this. It's just existence."
Between the $20 million a year needed to deal with aged infrastructure, lower-than-expected sales due to water conservation during the drought and a historic unwillingness of the board to substantially raise rates, board members understood how the agency got to its current state, but not exactly why.
"Why we got here, I don't know," said board member Jim McGrail. "Why are we here now, and what do we do so we're not here again?"