Undercharging for Components of Water and Sewer Service

• The Public Utilities Commission loses an estimated $910,000 annually in retail water and sewer rate revenues, including $620,000 due to aging water meters and $290,000 due to reduced sewer flow factors.
  
  
• The Public Utilities Commission loses $620,000 annually in water and sewer revenues due to 5/8-inch water meters that are more than 25 years old and measure water flow by an estimated 2 percent less than the actual water flow. Based on a random sample of Customer Services retail water and sewer accounts, 24 percent of 5/8-inch meters for multi-family residences and 45 percent of 5/8-inch meters for single family residences are more than 25 years old.
  
  
• In FY 2003-2004, the Water Enterprise only replaced 2,270 5/8-inch meters, which is a 49.4 percent decrease from the 4,486 5/8-inch meters that were replaced in FY 2002-2003. Over the past three fiscal years, annual funding for meter replacement has decreased from approximately $700,000 in FY 2002-2003, to $580,000 in FY 2003-2004, and $480,000 in FY 2004-2005.
  
  
• The Public Utilities Commission should direct the General Manager of the Public Utilities Commission to present a cost analysis of meter replacement costs and revenue loss from aging meters. If the Water Enterprise were to replace 4,200 5/8-inch meters per year instead of the 2,270 meters replaced in FY 2003-2004, the Water Enterprise's revenues would increase incrementally in each year, resulting in estimated cumulative increased revenues over a ten-year period of $1.8 million.
  
  
• The Public Utilities Commission loses $290,000 annually in commercial and residential revenues from sewer flow factors that have been set too low. Sewer rates are based on 90 to 95 percent of water consumption, or "flow factor," but commercial and residential customers can request reduced flow factors of less than 90 to 95 percent if water is used for irrigation or other purposes, and therefore, not discharged to the sewer.
  
  
• Customer Services assigns reduced flow factors for residential customers based on two methods of calculation: (a) calculation of maximum irrigation potential and (b) comparison of water consumption during wet and dry months. According to Public Utilities Commission policy, Customer Services staff should assign reduced flow factors based on the calculation method that results in average daily consumption between 40 gallons per occupant per day if ultra low flush toilets are installed and 80 gallons per occupant per day if no ultra low flush toilets are installed.
  
  
• Based on a random sample, the Budget Analyst found that Customer Services failed to document the number of occupants and use of ultra low flush toilets and uniformly assigned the lowest flow factor derived from the two methods of calculation regardless of other factors, resulting in an estimated revenue loss of $220,000 annually. The Bureau of Environmental Regulation and Management has not re-inspected most commercial accounts that were assigned reduced flow factors more than four years ago, resulting in an estimated loss to the Public Utilities Commission in sewer rate revenues of approximately $70,000 annually.
  
  
• The City's policies to provide water free of charge to City General Fund departments and City neighborhood associations that plant and maintain vegetation on median strips and public spaces have resulted in poor water conservation. Over the past four years, City General Fund departments have increased water usage by 2 percent on average, although commercial accounts, which pay for water use, have decreased water usage by 4 percent on average. Also, many homeowners' associations have significantly increased their water use over the past five years. For example, the Forest Hill Homeowners' Association has increased annual water use by 115 percent over the past four years.
  
  
• The Public Utilities Commission's water conservation affidavit program, in which City retail customers pay one-third less per unit of water if they have signed an affidavit stating that they have installed low-flow fixtures, has no demonstrable direct impact on water conservation. Average water use by customers who sign such affidavits is comparable to average water use by City customers who have not signed such affidavits. The Public Utilities Commission should eliminate the water conservation affidavit program and evaluate implementation of water conservation rates when the current water rate freeze expires on June 30, 2005.

Billing and Collecting for Water and Sewer Use

The Public Utilities Commission's Customer Services Division is responsible for billing and collecting on the City's retail water and sewer accounts. Customer Services Division staff read and record retail accounts' water meter data, monitor water consumption to identify unusual and unexplained high consumption, develop and implement water conservation programs, and prepare monthly or bimonthly combined water and sewer bills.

Billing for Water and Sewer Use

The Customer Services Division bills most City retail accounts for combined water and sewer use every two months. Some commercial and industrial accounts are billed monthly. Customer Services Division Field Services staff read the water meters, enter meter read data into hand held computers, and download the meter read data into the billing system.

The water bill equals the retail water rate per unit of water, which is currently $1.49 per unit¹, multiplied by the number of units of water consumption. The sewer bill equals the sewer service charge per unit of water consumption, multiplied by a percentage flow factor and the number of units of water consumption. In FY 2004-2005, the residential customers' sewer service charge equals $2.15 per unit for the first three units of water use and $5.37 per unit for each additional unit of water use. Single family residential customers pay sewer rates based on a 90 percent flow factor and multi-family residential customers pay sewer rates based on a 95 percent flow factor, which assumes that 90 to 95 percent of water use is discharged to the sewer system. Most commercial accounts pay a sewer service charge of $5.82 per unit for all units of water use, which includes a 90 percent flow factor.

Flow Factors and Standard Industrial Classification Codes

The Public Utilities Commission Bureau of Environmental Regulation and Management monitors sewer service charges for commercial and industrial customers, who pay for sewer service charges based on both the flow factor and the standard industrial classification code.

Commercial and Industrial Accounts' Standard Industrial Classification Codes

The standard industrial classification code defines the types and concentration of pollutants that are discharged to the sewer system by different categories of commercial and industrial users. For example, the standard industrial classification code for restaurants defines the concentration of oil and grease, total suspended solids, and chemical oxygen demand from the breakdown of biologic matter that restaurants typically discharge to the sewer system. Therefore, the sewer service charge for restaurants, which is adjusted in accordance with the standard industrial classification code, is $6.98 per unit for each unit of water used, compared to the standard commercial sewer service charge of $5.82 per unit.

The Bureau of Environmental Regulation and Management samples and tests some commercial and industrial users who discharge a high volume of waste water, or large concentrations of pollutants to the sewer system, and assigns them specific concentrations of oil and grease, total suspended solids, and chemical oxygen demand, rather than the standard pollutant assignments contained in the standard industrial classification codes. These specific commercial and industrial customers pay sewer service charges based upon the Bureau of Regulation and Environmental Management's assignment.

Residential, Commercial, and Industrial Accounts' Flow Factors

Sewer rates are based on a percentage of water consumption that is discharged to the sewer system, or flow factor. Most residential, commercial, and industrial accounts pay sewer rates based on a 90 percent flow factor. Multi-family residential accounts pay sewer rates based on a 95 percent flow factor. However, residential, commercial, and industrial account customers can request a reduced flow factor if a lower percentage of the water consumed is discharged to the sewer system, due to irrigation and other uses. The Customer Services Division is responsible for inspecting and assigning reduced flow factors to residential accounts and the Bureau of Environmental Regulation and Management is responsible for assigning reduced flow factors to commercial and industrial accounts.

Water and Sewer Account Collections

The Public Utilities Commission sets water and sewer retail account collection policy, and the Customer Services Division collects retail water and sewer account payments.

The Customer Services Division has several tools to collect from delinquent retail and sewer accounts, including (a) assessing and collecting a service fee on past due balances, (b) terminating water service, and (c) placing a lien on commercial, multi-family residential, and owner-occupied single family residential properties. For accounts in which the Customer Services Division is unable to place a lien, such as tenant-occupied single family residential properties², the Customer Services Division refers past due accounts to the Office of the Treasurer and Tax Collector Bureau of Delinquent Revenue.

Over the past five years, the Public Utilities Commission's accounts receivables on June 30, the last day of the fiscal year, have ranged from $19.6 million to $20.6 million, or approximately 10 percent of the Public Utilities Commission's total water and sewer sales, which ranged from $192.7 million to $200 million.

The Customer Services Division transfers delinquent accounts to Recorder or Tax Collector liens each month. The annual net lien amount, which is the total amount of delinquent accounts that were transferred to Tax Collector or Recorder liens less the amount of payments against the liens, has decreased each year. Overall, as shown in Table 4.1, the total accounts receivable and net liens have declined each year as a percentage of total sales, indicating an overall increase in collection of delinquent accounts.

Table 4.1
Accounts Receivables and Liens, as a Percentage of Annual Water and Sewer Sales, and Annual Write Off of Non-collectable
ater and Sewer Accounts
FY 1999-2000 through FY 2003-2004

	Total Water and Sewer Sales as of June 30	Total Accounts Receivable as of June 30	Total Delinquent Accounts Transferred to Liens Less Lien Payments (Net Liens) as of June 30	Total Accounts Receivable and Net Liens as of June 30	Total Accounts Receivable and Net Liens as a Percentage of Total Payments	Total Write Off of Accounts at Year End
FY 1999-2000	$195,195,542	$20,571,895	$4,456,620	$25,028,515	12.8%	$44,145
FY 2000-2001	$194,251,834	$19,631,991	$3,894,729	$23,526,720	12.1%	$78,618
FY 2001-2002	$192,737,765	$20,175,459	$4,490,312	$24,665,771	12.8%	$20,658
FY 2002-2003	$196,787,143	$20,518,234	$4,525,682	$25,043,916	12.7%	$5,258
FY 2003-2004	$199,988,334	$20,115,750	$3,363,593	$23,479,343	11.7%	$45,685

Source: Customer Services Division Billing and Collections System

Public Utilities Commission policies allow the Customer Services Division to write off up to $200,000 annually for non-collectable delinquent accounts. As noted in Table 4.1, the Customer Services Division has written off non-collectable delinquent accounts, for total annual write off amounts ranging from $5,258 to $78,618 annually.

Components of the Combined Water and Sewer Bill

The combined water and sewer bill charges consist of:

• The service fee, which assesses a charge to pay for the costs of meter maintenance and reading and customer services support. The service fee for the standard size 5/8-inch meter is $4.00 per month.
• The water charge, which is $1.49 per unit of water multiplied times the number of units of water consumed.
• The sewer service charge, which includes the sewer service charge multiplied times the flow factor and the number of units of water consumed.

The Budget Analyst tested a random sample of the Customer Services Division retail water and sewer accounts. The retail water and sewer account sample analysis pointed out several deficiencies in the Public Utilities Commission's policies and procedures for replacing water meters, and assigning water conservation rates and sewer service flow factors.

Revenue Loss from Outdated Water Meters

The Public Utilities Commission is losing an estimated $620,000 annually in retail water and sewer rate revenues from outdated meters. In 1994, the Water Enterprise's City Distribution Division conducted a study of 5/8-inch water meters in San Francisco and determined that, on average, meters more than 25 years old were not measuring at least 2 percent of the actual water flow. Approximately 70 percent of single and multi-family residential accounts have 5/8-inch meters. Many of these meters are more than 25 years old, resulting in under-recording of actual water flow. Based on the Customer Services Division retail water and sewer account sample, an estimated 24 percent of 5/8-inch meters for multi-family residences and 45 percent of 5/8-inch meters for single family residences were installed prior to 1980.

Meter testing and replacement for 5/8-inch meters

Funds for replacement of retail water meters are included in the Water Enterprise's City Distribution Division's annual repair and replacement budget. Since 1994, the Water Enterprise has replaced approximately 42,000 5/8-inch meters, or approximately 4,200 5/8-inch meters per year. In FY 2003-2004, the Water Enterprise only replaced 2,270 5/8-inch meters, which is a 49.4 percent decrease from the 4,486 5/8-inch meters that were replaced in FY 2002-2003. Over the past three fiscal years, funding for the meter replacement has decreased, from approximately $700,000 in FY 2001-2002 and FY 2002-2003 to $580,000 in FY 2003-2004 and $480,000 in FY 2004-2005.

If the Water Enterprise were to replace 4,200 5/8-inch meters annually, which was the average replacement rate for the ten-year period from FY 1994-1995 through FY 2003-2004, the Water Enterprise will have replaced all the 5/8-inch meters installed prior to 1980 by the year 2015. 15 percent of the remaining 5/8-inch meters will have been installed between 1980 and 1990, and therefore will be more than 25 years old in 2015. However, if the Public Utilities Commission reduces annual 5/8-inch water meter replacement to the FY 2003-2004 rate of 2,270, 32 percent of all 5/8-inch meters will be more than 25 years old in 2015, resulting in continued revenue loss of approximately $500,000 annually, based on current retail water rates.

During the annual budget preparation and review, the Water Enterprise should develop and present each year to the Public Utilities Commission a cost analysis of the meter replacement program, including (a) the number of meters replaced during the fiscal year, (b) the cost of replacing meters and the number of meters to be replaced in the coming fiscal year, (c) the projected number of meters that will be replaced over the ten-year period, and (d) the projected cost of replacing meters over the ten-year period compared to the expected impact on meter reading accuracy and revenues.

Water Conservation Affidavits

The Public Utilities Commission has established a two-tier retail water rate for all residential, commercial, and industrial customers. To pay the base rate of $1.49 per unit of water, the retail customer must file an affidavit with the Public Utilities Commission certifying that the customer has installed low-flow fixtures where possible. Retail customers who do not file the water conservation affidavit pay a higher water rate of $2.24 per unit of water. In 1991, the Public Utilities Commission entered into a Memorandum of Understanding with the California Urban Water Conservation Council as part of a statewide effort to reduce individual and overall water consumption. Of the suggested methods for reducing water consumption, the Public Utilities Commission adopted the use of affidavits, which requires the Public Utilities to certify through a signed affidavits process that at least 75 percent of all customers have installed low-flow fixtures. Under the terms of the Memorandum of Understanding, the Public Utilities Commission would be in compliance with the water conservation affidavit provision if the percentage of accounts with affidavits on file remains at 75 percent or higher.

Currently, the Public Utilities Commission estimates that more than 90 percent of all customers have filed affidavits. Most of these affidavits were filed within the first two years of the program in 1994 and 1995. Of current residential affidavits, 55 percent were completed within the first year of the program, and 96 percent were completed within two years.

Affidavits' Impact on Water Usage

The water conservation affidavits have no demonstrable direct impact on water conservation. City customers' water consumption has remained relatively stable over the past five years, resulting largely from changes in plumbing codes that require manufacturers to produce water efficient plumbing fixtures. The current Federal plumbing codes, which apply to toilets and showerheads, set higher conservation standards than are set by the water conservation affidavits. State standards for commercial clothes washers are set to begin in 2007 and residential washer standards will also be adopted in 2007, pending final approval.

The average water consumption for a single family residential account does not vary between customers who have filed affidavits and pay $1.49 per unit of water and customers who have not filed affidavits and pay $2.24 per unit of water. According to Customer Services Division billing records, single family residential customers consume 7 units of water per month on average, regardless of whether the customer has filed an affidavit and pays $1.49 per unit of water or has not filed an affidavit and pays $2.24 per unit of water. Further, filing the affidavit and paying the lower conservation water rate of $1.49 per unit of water does not necessarily result in lower water consumption. For example, in the sample of Customer Services Division retail water and sewer accounts, 8 percent of single family residential accounts with affidavits on file consumed 15 units of water or more each month and one percent of single family residential accounts with affidavits on file consumed 25 units of water or more each month. Multi-family and single family residential customers who have not filed a water conservation affidavit pay $1.27 million annually in additional water rate charges for the higher non-conservation water rate although they do not consume more water on average than residential customers who have filed an affidavit.

Because the water conservation affidavit employs standards that are out of date and difficult to monitor, the affidavit is not an effective tool in promoting water conservation and unnecessarily increases charges for customers who have not filed an affidavit, the Public Utilities Commission should eliminate the water conservation affidavit program in FY 2006-2007, when the existing freeze on water rates is lifted. During FY 2005-2006, the Financial Services Section staff should analyze and report to the Rate Fairness Board and the Public Utilities Commission on the effectiveness of water conservation rates, in which the rate per unit of water increases with an increase in the units of water consumed, as an alternative to the water conservation affidavit.

Water Conservation and Municipal Accounts

City General Fund departments do not pay for water usage. Although neither the Public Utilities Commission nor the Board of Supervisors has adopted a formal resolution to provide water free of charge to the City's General Fund departments, the City has had a long standing practice of not including funds to pay for water usage in the City General Fund departments' annual budgets.

Currently, the Public Utilities Commission does not have a water conservation program designed specifically for City General Fund departments, although the City General Fund departments can participate in various conservation incentive programs offered to all customers. Consequently, City General Fund departments' water usage has increased compared to other City retail customers, as shown in Table 4.2.

Table 4.2
Average Monthly Water Consumption ¹ per Account for Customer Classes
FY 2000-2001 through FY 2003-2004

	FY 2000-2001	FY 2001-2002	FY 2002-2003	FY 2003-2004	Percent Increase/ (decrease) FY 2000-2001 through FY 2003-2004
City General Fund Departments	114	110	114	116	1.9%
City Enterprise Departments	142	138	127	124	(12.5%)
Commercial Accounts	43	39	39	41	(4.0%)
Industrial Accounts	212	188	129	109	(48.6%)
Multi-family Residential Accounts	31	30	30	30	(3.4%)
Single Family Residential Accounts 2	7	7	7	7	1.9%
Building and Construction	45	33	26	20	(54.9%)
Docks and Ships Accounts	66	55	64	94	41.5%

Source: Public Utilities Commission Customer Services

¹ Consumption is measured in one unit of water, which equals one hundred cubic feet or 748 gallons.

² Single family residence water use per account has increased by approximately 1.9 percent, from 7.04 units per account in FY 2000-2001 to 7.17 units per account in FY 2003-2004.

The Customer Services Water Conservation Unit should develop and present to the Public Utilities Commission and the Board of Supervisors a water conservation program for City General Fund departments that includes budgetary incentives, such as a water charge for consumption over a baseline amount. Because the costs of City General Fund department water use are shifted to other rate payers, reducing City General Fund water use will reduce the costs to the City's retail ratepayers. Every 5 percent reduction in City General Fund departments water results in cost savings to City ratepayers of approximately $100,000. Reductions in City General Fund departments' water use have no negative rate impact to the Public Utilities Commission.

The Department of Public Works Homeowners' Association Accounts

The Department of Public Works maintains median strips and other public properties in the City's residential neighborhoods. Because some neighborhood groups or homeowners' associations have requested special types of plants or vegetation, the Department of Public Works has assigned responsibility for planting and maintaining the public space to the neighborhood or homeowners' associations.

Although Customer Services has set up separate water accounts for these neighborhood and homeowners' associations, the neighborhood and homeowners' association accounts are included in the Department of Public Works retail water accounts. As a result, the neighborhood and homeowners' associations receive water for irrigation at no charge.

As shown in Table 4.3, some of the neighborhood and homeowners' associations have increased their water use significantly over the past five years. For example, the Forest Hills Homeowners Association more than doubled its water use between FY 1999-2000 and FY 2003-2004. In order to promote conservation and planting of drought-tolerant plants, the Public Utilities Commission should adopt a resolution, (a) establishing baseline water use for the neighborhood and homeowners' associations, based on drought-tolerant plantings, and (b) setting up special assessment districts for neighborhood and homeowners' associations to charge for water use that exceeds baseline use.

Table 4.3
Annual Water Consumption by Homeowners' Associations
FY 1999-2000 through FY 2003-2004

	Annual Units of Water Consumption
	FY 1999-2000	FY 2000-2001	FY 2001-2002	FY 2002-2003	FY 2003-2004	Percent Increase/ (Decrease) FY 1999-2000 through FY 2003-2004
Forest Hill	39	47	71	76	84	115%
Balboa Terrace	58	81	51	47	102	77%
Dolores Heights	44	49	63	53	77	74%
St. Francis Wood	456	447	482	488	634	39%
Miraloma Park	19	22	22	22	25	28%
Ingleside Terrace	56	57	54	56	58	4%
Sea View/Sea Cliff	62	76	53	43	40	(35%)
Filbert Steps	69	72	53	41	43	(38%)
Potrero Hill	88	77	64	43	32	(64%)

Source: Customer Services

Reduced Flow Factors for Residential, Commercial, and Industrial Customers

The Public Works Code authorizes adjustments to the sewer flow factor or exemptions from sewer service charges altogether if the water consumption is for fire service or hydrants, for irrigation, or if none of the water used enters the sewer system, such as cement plants and construction sites. The Customer Services Division evaluates and adjusts flow factors for residential customers who request an adjustment. If a residential customer disputes the Customer Services Division's flow factor adjustment, the customer may appeal to the Residential Users Appeal Board, a three-member board appointed by the Chief Administrative Officer. The Bureau of Environmental Regulation and Management adjusts flow factors for commercial and industrial customers.

Reduced Flow Factors for Residential Customers

Residential customers may file an appeal to reduce their flow factor if they believe that they discharge less than 90 percent (for single family residential accounts) or 95 percent (for multiple family residential accounts) of their water usage to the sewer system. Of 151,210 multiple family and single family residential accounts, approximately 17,730 accounts have a flow factor less than 90 percent for single family residential accounts and 95 percent for multiple family residential accounts. Approximately 3,650 multiple family and single family residential accounts have a flow factor of 69 percent or less, representing approximately $1 million in reduced annual sewer service revenues.

Customer Services Division staff review residential flow factors upon appeal by the customer. Since June 10, 2003, in accordance with the Public Utilities Commission Resolution No. 03-0112, all appeals for reduced flow factor require both (a) an inspection, including calculation of maximum irrigation potential, and (b) comparison of water consumption during wet months, when gardens and lawns need little irrigation, to water consumption during dry months. Prior to June 10, 2003, the wet and dry months' water consumption comparison was initially used to determine a reduced flow factor. If a customer appealed the reduced flow factor results based on the wet and dry months' water consumption comparison, then an inspection was conducted using the maximum irrigation potential formula, which calculates the property's square footage used for irrigating lawns and gardens.

Accuracy of Low Flow Factor Account Reviews

Based on the sample, single family residence accounts with a flow factor less than 70 percent consumed an average of six units of water per month for household use compared to average household water use of seven units per month for all single family residence accounts, a reduction of approximately 14 percent. The lower average household water use for low flow factor accounts indicates that, on average, the Customer Services Division credits residential accounts for more irrigation water use than is actually used.

In the sample of residential accounts with low flow factors, although the Customer Services Division calculated residential flow factors for 15 accounts with flow factors less than 70 percent, based on both a calculation of wet and dry months' water consumption and maximum irrigation potential, the Customer Services staff always assigned the lower flow factor of the two calculation methods, whether calculated by the wet and dry months' water consumption or by the maximum irrigation potential method. In seven of these 15 files, the variance between the two calculation methods was 10 percentage points or less. However, in eight of these 15 files, the variance between the two calculation methods ranged from 11 to 59 percentage points.

In one example, the Customer Services Division calculated that, based on the wet/dry formula, the account's flow factor was 67 percent and, based on maximum irrigation potential, the account's flow factor was only 8 percent. In this case, the staff assigned a flow factor of 8 percent. Because of this very low flow factor assignment, the customer consumed approximately 16 units of water per month but paid sewer service charges for only 1.5 units of water consumption.

According to the Public Utilities Commission's Resolution 03-0112, the Customer Services Division should assign the flow factor that results in an average daily consumption between 40 gallons to 80 gallons per day per person or that is closest to 40 gallons per day per person if with ultra low flush toilets or closest to 80 gallons per day per person if without ultra low flush toilets. However, the Customer Services Division failed to do this. Instead, the staff assigns the lower flow factor.

By assigning lower flow factors than are required to account for water use for irrigation, the Public Utilities Commission loses approximately $220,000 in annual sewer service charge revenues for residential accounts with flow factors less than 70 percent. The Customer Services Division Manager should establish more rigorous policies for reducing residential flow factors, including requiring (a) documentation on the presence of low flush toilets and number of occupants, and (b) requiring supervisor review for all accounts in which the flow factor calculations vary by more than 10 percentage points between the calculation of wet and dry months' water consumption and maximum irrigation potential.

Reduced Flow Factors for Commercial Customers

The Bureau of Environmental Regulation and Management is responsible for assigning reduced flow factors to commercial customer accounts. The Bureau of Environmental Regulation and Management, in determining reduced flow factors on commercial accounts, analyzes water usage data to calculate the number of units of water that are not returned to the sewer system. In some cases, a reduced flow factor can be determined by calculating how much water goes into the product, such as ice cubes, of a commercial entity and subtracting that total from the total water used. In other instances, such as garden supply centers, a maximum irrigation potential method, in which the total area and product receiving water that is not returned to the sewer is calculated, and a staff size method, in which the total number of employees is incorporated into a formula, are used to determine two different flow factor values, and then averaged together for a reduced flow factor. Because commercial accounts are assigned an average of the two methods, this procedure for commercial accounts varies from the procedure used to determine a reduced flow factor for residential accounts, in which accounts are assigned the lower flow factor of the two methods.

For some large industrial users, the Bureau of Environmental Regulation and Management also determines a reduced flow factor by attaching an outflow meter to large water usage accounts. This meter is checked regularly, and the amount registered on the outflow meter is divided by the amount of water being used to determine a percentage of water that should be charged for sewer service. This method provides a precise flow factor level that can be adjusted over time.

Based on a sample review of commercial and industrial customer accounts with reduced flow factors, the Bureau of Environmental Regulation and Management appropriately assigns and documents reduced flow factors, including detailed calculations in the account file. However, the Bureau of Environmental Regulation and Management does not review most commercial accounts once the flow factor has been assigned. Approximately 125 commercial and industrial accounts have a flow factor of less than 70 percent, but the Bureau of Environmental Regulation and Management has not reviewed 67 percent of these accounts during the past four years to determine if the flow factor assignment is accurate. Many of these accounts were last reviewed prior to the transfer of the Clean Water Enterprise from the Department of Public Works to the Public Utilities Commission, and therefore, the Bureau of Environmental Regulation and Management does not have available account files. These accounts represent an estimated $70,000 in reduced revenues annually. The Manager of Wastewater Collection System Bureau, who is now responsible for these functions under the Public Utilities Commission's recent reorganization, should review the flow factor assignment of all commercial and industrial accounts that have not been reviewed for four years or more prior to September 30, 2005, and provide a report on the flow factor review and assignment to the Assistant General Manager, Clean Water.

Conclusion

The Public Utilities Commission should enact policies and procedures to increase water conservation and more efficiently bill for water and sewer use. Specifically, the Public Utilities Commission should terminate the existing water conservation affidavit program and evaluate the costs and benefits of implementing conservation water rates in FY 2006-2007. Further, the Public Utilities Commission needs to establish policies to promote water conservation in the City's General Fund departments.

The Customer Services Division and the Clean Water Enterprise's Pretreatment, Pollution Prevention and Storm Water Program should establish more rigorous policies and procedures to assign and review sewer flow factors to customer accounts requesting reduced flow factors. Also, the Water Enterprise should develop a cost analysis of meter replacement, to ensure timely replacement of meters, more accurate meter reading, and increased revenues from improved meter reading accuracy.

Recommendations

The Public Utilities Commission should:

4.1 Terminate the Water Conservation Affidavit program in FY 2006-2007.

4.2 Direct the Director of Financial Services to present a financial analysis on the costs and benefits of implementing water conservation rates in FY 2006-2007.

4.3 Direct the Customer Services Water Conservation Unit to develop and present to the Public Utilities Commission and the Board of Supervisors a water conservation program for City General Fund departments that includes budgetary incentives, such as a water charge for consumption over a baseline amount.

4.4 Adopt a resolution, (a) establishing baseline water use for the neighborhood and homeowners' associations, based on drought-tolerant plantings, and (b) setting up special assessment districts for neighborhood and homeowners' associations to charge for water use that exceeds baseline use.

The Assistant General Manager, Water, should:

4.5 Develop and present to the Public Utilities Commission, as part of the annual budget review, a cost analysis of the meter replacement program, including:

(a) the number of meters replaced during the fiscal year,

(b) the cost of replacing meters and the number of meters to be replaced in the coming fiscal year,

(c) the projected number of meters that will be replaced over the ten-year period, and

(d) the projected cost of replacing meters over the ten-year period compared to the expected impact on meter reading accuracy and revenues.

The Assistant General Manager, Clean Water, should:

4.6 Direct Manager of Wastewater Collection System Bureau to review the flow factor assignment of all commercial and industrial accounts that have not been reviewed for four years or more prior to September 30, 2005, and provide a report on the flow factor review and assignment to the Assistant General Manager, Clean Water.

The Customer Services Manager should:

4.7 Resume a schedule for review of all residential accounts at least every four years that have been assigned a flow factor less than 70 percent.

4.8 Enforce the division's policy to review all accounts with a reduced flow factor within a four year cycle.

4.9 Establish more rigorous policies for reducing residential flow factors, including requiring:

(a) documentation on the presence of low flush toilets and number of occupants, and

(b) requiring supervisor review for all accounts in which the flow factor calculations vary by more than 10 percentage points between the calculation of wet and dry months' water consumption and maximum irrigation potential.

Costs and Benefits

Implementation of these recommendations would increase retail sewer and water revenues by an estimated $290,000 annually, resulting from adjustments to residential and commercial flow factors.

Additionally, the Public Utilities Commission loses an estimated $620,000 annually in residential and commercial sewer and water rate revenues due to 5/8-inch meters that are more than 25 years old, resulting in an estimated 2 percent under-recording of meter flow. If the Water Enterprise were to replace 4,200 5/8-inch meters per year, which was the average replacement rate between 1994 and 2004, instead of the FY 2003-2004 installation rate of 2,270, the Water Enterprise's revenues will increase revenues incrementally in each year: $33,000 in year two, $63,000 in year three; $93,000 in year four. In year ten, the Public Utilities Commission would increase annual revenues by an estimated $270,000, based on FY 2004-2005 sewer and water rates. Total increased revenues over the ten-year period would exceed an estimated $1.8 million.

¹ One unit of water equals 748 gallons.

² State Assembly Bill 1770 prohibits the Public Utilities Commission from placing a lien on tenant-occupied single family residences.