Creative Approaches to Water Conservation Through Rate Structuring

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City of Lynnwood, Washington
Comprehensive Utility Rate Study
S T OR MW A T E R
?
?
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S E W E R
W A T E R
DRAFT REVENUE REQUIREMENTS AND COST OF SERVICE
RESULTS
September 18, 2006
8201 164th Ave. NE, Suite 300, Redmond, WA
98052 ? 425-867-1802
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Discussion Outline

• Fiscal Policies
• Utility Revenue Requirement Cost of Service
  Findings
• Water utility
• Sewer utility
• Storm utility
• Policy Direction

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List of Key Acronyms

• FTE Full Time Employee
• ERU Equivalent Residential Unit
• NPDES National Pollutant Discharge Elimination
  System
• CFC Capital Facilities Plan
• COSA Cost of Service Analysis

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Rate Comparison
2012 rate Level 68.77
2012 rate Level 68.77
2012 rate Level 33.51
2012 rate Level 17.75
Single Family (1 ERU) 5/8, 3/4 Meter 16 CCF
bi-mo water use Lynnwood new rate overall
average increase
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Overview of Rate Study Process
INCORPORATE FINANCIAL POLICIES
FORECAST OPERATING COSTS
DEFINE CAPITAL NEEDS CIP
RATE REVENUE REQUIREMENT
ALLOCATE COSTS BY FUNCTION
CUSTOMER
USAGE
ALLOCATE COSTS TO CUSTOMER CLASSES
RATE DESIGN
VARIABLE CHARGES
FIXED CHARGES
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Fiscal Policies

• Operating Contingency

• To provide sufficient cash flow to meet daily
  operating expenses (short-term, annual revenue
  cycles)
• Filling in the Hole Thats Been Dug

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Fiscal Policies

• System Reinvestment

• To ensure ongoing system integrity through
  reinvestment in the system
• To charge customers commensurate with the
  consumption of facility useful lives (rate
  equity)
• To maintain rate stability

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Fiscal Policies

• Capital Contingency

• To provide a source of funding for emergency
  repairs (other than catastrophic events),
  unanticipated capital expenditures, and project
  cost overruns

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Fiscal Policies

• Debt Service Coverage

• To ensure compliance with existing loan / bond
  covenants
• To maintain credit worthiness for future debt
  issuance

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Fiscal Policies

• Rate Stabilization

• To address periods of short-term revenue
  instability (financial performance objectives can
  be maintained with rates based on average cost
  patterns in normal operating years)

• Expressed as a percentage of revenue
• Water and sewer utility 10 of rate revenue
• Storm N/A due to fixed nature of revenue
• Establish when existing operating/capital
  contingency balances are in excess of minimum
  threshold

PROPOSED
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Revenue Requirement Key Factors

• Study period 2007 2012
• Rate revenue calculated using City provided
  customer statistics (meter size, customer count,
  ERUs, billed volume)
• General fund transfer for senior/low income
  eliminated
• Used 2005-2006 budget as base for expenses
• Future year expenses calculated by applying
  escalation factors (reviewed with City)
• Incorporate fiscal policies operating and
  capital contingency, system reinvestment
  (depreciation funding) and 1.50 debt service
  coverage (stand alone)
• Develop funding strategy for 6-year CFP

Updated indirect costs (all) Asset mgmt.position
(shared) Treatment plant FTE (sewer) NPDES FTE
and OM (storm)
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COST OF SERVICE ANALYSIS
Water Utility Revenue Requirement
2012 rate Level 33.51
Single Family 5/8, 3/4 Meter 16 CCF bi-mo water
use Lynnwood new rate overall average increase
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Water Utility Revenue Requirement Summary

• Rate increase required 4.0 per year for
  2007-2009 3.25 in 2010 3.0 in 2011 and 2012
• Rate plan supports
• On-going operating and maintenance needs of the
  system
• Additional staffing needs (share of asset mgmt
  position)
• Updated indirect costs
• 3.7 million in capital funding adopted
  comprehensive plan
• covered through existing reserves and annual
  depreciation funding no new debt obligations
  required
• Annual depreciation funding (existing and new
  capital)
• 90 days operating fund minimum
• 1 of system fixed asset for capital contingency
• Average 6-year bi-monthly single family bill
  impact 1.05
• current bill27.20, 2012 bill33.51
  difference 6.31/6 years

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Summary of Water Utility Revenue Requirement
Increase rate by 1 0.27 bi-mo rate impact Cut
expenses by 100,000 3.3 rate reduction
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Summary of Water Fund
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Level68.77 Sewer and Storm Utility Financial
Requirements
Sewer Utility Revenue Requirement
2012 rate Level 68.77
Single Family 5/8, 3/4 Meter 16 CCF bi-mo water
use Lynnwood new rate overall average increase
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Sewer Utility Financial Requirements

• On-going operating and maintenance expenses
• Additional staffing needs (treatment plant FTE,
  share of asset mgmt position)
• Updated indirect costs
• Capital Costs
• 24.4 million 6 year total adopted
  comprehensive plan
• Key projects
• Lift station 8 - 6.3 million
• Lift station 16 - 4.5 million
• Incinerator control - 1.2 million
• New debt service obligation

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Sewer Utility Revenue Requirement Summary

• Rate adjustments are required to meet revenue
  needs 17.5 in 2007, 17 in 2008, 8 in 2009 6
  2010 and 2 annually thereafter
• Reduce annual rate impacts through
• Mix of capital funding sources - existing
  reserves, Edmonds capital contribution, rate
  funding (depreciation) and new debt
• 15.9 million in new debt during 2007/ 2008 (30
  yr, 5 interest, pay interest only first two
  years)
• Elimination of debt 1990 PWTF in 2011 and 1996
  revenue bond in 2014 1.2 million annual debt
  obligation
• Rate adjustments will fund
• Phase-in 50 depreciation funding by 2012,
  elimination of debt in 2014 will bring
  depreciation funding near target
• 45 days operating fund minimum
• 2 of system fixed asset for capital contingency
• 1.50 or greater debt service coverage
• Average 6-year single family bi-monthly bill
  increase 4.46
• Current bill42.00, 2012 bill 68.77
  difference 26.77/6 years

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Summary of Sewer Utility Revenue Requirement
Increase rate by 1 0.42 bi-mo rate impact Cut
expenses by 100,000 2.1 rate reduction
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Summary of Sewer Fund
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COST OF SERVICE ANALYSIS
Storm Utility Revenue Requirement
2012 rate Level 17.75
One (1) ERU Lynnwood new rate overall average
increase
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Storm Utility Financial Requirements

• On-going operating and maintenance expenses
• Additional staffing needs (share of asset mgmt
  position)
• Updated indirect costs
• Capital Costs
• 15.2 million 6 year total adopted
  comprehensive plan
• Includes storm portion of road projects
• New debt service obligation
• Federal Regulations (NPDES)
• NPDES FTE
• operating compliance costs

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Storm Utility Revenue Requirement Summary

• Rate increase required 82 in 2007, 15.5 in
  2008, 15.0 per year in 2009-2010 13.0 in 2011
  and 2012
• Reduced annual rate increases through
• Mix of capital funding sources - existing
  reserves, rate funding (depreciation) and the
  issuance of 12.8 million in debt.
• 400K loan payback has been rolled in with 2007
  new debt issue to minimize rate impact
• Rate Increases Support
• Annual depreciation funding (existing and new
  CIP)
• 30 days operating fund minimum
• 1.50 or greater debt service coverage
• 1 of system fixed asset for capital contingency
• NPDES regulatory compliance
• expenses from 151K to 213K per year
• Average 6-year bi-monthly single family bill
  impact 2.12
• Current bill5.00, 2012 bill 17.75
  difference 12.75/6 years

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Summary of Storm Utility Revenue Requirement
Increase rate by 1 0.05 bi-mo rate impact Cut
expenses by 100,000 12.8 rate reduction
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Summary of Storm Fund
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COST OF SERVICE ANALYSIS
COST OF SERVICE ANALYSIS Steps to Equity
splitting the pie

• Presentation Order
• Water Utility
• Sewer Utility
• Storm Utility

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Cost of Service Overview

• An equitable allocation of costs that considers
• Usage characteristics
• Facility requirements
• Snapshot of one point in time First COSA
  completed in over 10 years
• Generally, /- 5 of overall average within range
  of reasonableness
• Any cost of service adjustments may have added
  impacts to customers beyond overall rate
  adjustment

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Water Cost of Service Process

• Step 1 Allocate total utility costs by function

• Water Utility Functions
• Customer
• Meters Services
• Base Demand (costs to provide average level of
  consumption)
• Peak Demand (costs to provide peak
  usage/capacity)
• Fire Protection

• Step 2 Develop allocation factors using
  customer facility requirements and usage
  characteristics
• Step 3 Allocate Costs to customer classes

Industry Standard Methodologies AWWA
Principles of Water Rates, Fees and Charges, M1
Manual
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Water Costs by Function
Step 1- allocate costs to functions 2007
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Water Cost Allocations by Customer Class
Step 2- Develop allocation factors with customer
facility requirements and usage characteristics
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Water Costs by Customer Class
Step 3 - allocate costs to customer classes
Mobile home customers currently billed as
commercial, cost of service has reviewed them
independently (new class)
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Water Cost of Service Phase-in over 6 Year Period
- Residential customer class at cost of service
receives overall annual rate adjustment, except
final year - Multi-family class held constant
first 3 years to make up for deficiency in other
classes during initial periods, rate decrease
during year 4 5, year 6 held constant - Commerc
ial at cost of service by year 6 - Mobile home at
cost of service by year 6
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Sewer Cost of Service Process

• Step 1 Allocate total utility costs by function

• Sewer Utility Functions
• Customer
• Flow Collection
• Strength
• Suspended Solids (TSS)
• Biochemical Oxygen Demand (BOD)

• Step 2 Develop allocation factors using
  customer facility requirements and usage
  characteristics
• Step 3 Allocate Costs to customer classes

Industry Standard Methodologies Water
Environment Federation Financing and Charges for
Wastewater Systems Manual 27
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Sewer Costs by Function
Step 1- allocate costs to functions - 2007
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Sewer Cost Allocations by Customer Class
Step 2- Develop allocation Factors with customer
facility requirements and usage characteristics
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Sewer Costs by Customer Class
Step 3 - allocate costs to customer classes
Mobile home customers currently billed as
commercial, cost of service has reviewed them
independently (new class)
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Sewer Cost of Service Phase-in over 6 Year Period
- Residential funds deficiency of other classes
during initial year when other classes phased-in
lower in 2008 and 2009 - Multi-family pays
more than class cost of service during initial
years and reduced in following years -
Comm-average/ Comm-med at overall average
first three years while others phased in , lower
adjustments latter years - Comm-high/Comm-very
high larger increases needed in initial years to
reach COSA in year 6 - Mobile homes larger
increases needed in initial years to reach COSA
in year 6
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Storm Cost of Service Process

• Step 1 Identify total utility costs
• Step 2 Calculate total number of ERUs
• Step 3 Divide total utility costs by total ERUs

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Storm Utility Costs by Function
Breakdown of 2007 Storm Utility Costs
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Requested Policy Direction

• Revenue Requirement
• Overall rate adjustment level for each utility
• Move forward with overall proposed increases?
• Do we need to run alternative scenarios before
  this can be decided?
• Cost of service
• Phase water and sewer cost of service adjustments
  in over 6 year time period?
• How to handle mobile home customers?
• Other scenarios?
• Next Phase Rate Design (monthly fixed fee and
  variable charge)

Lessons Learned Review rates more frequently
every four years