Staff Report, Water and Wastewater Rates Study - Amazon Web ...
AGENDA ITEM CITY COUNCIL MEETING DATE – MARCH 1, 2016 BUSINESS ITEMS DATE
:
February 22, 2016
TO
:
City Manager
FROM
:
Finance Director
SUBJECT
:
INTRODUCTION OF WATER AND WASTEWATER RATE STUDY
RECOMMENDATION: Receive the draft Water and Wastewater Rate Study and provide direction regarding the following recommendations: It is recommended that the City Council select the rate design of 30% fixed and 70% variable for the residential water rates. It is recommended that the City Council select the rate design of adding a volumetric charge to the residential wastewater rates with a cap of 18 hundred-cubic-feet (hcf) per bi-monthly bill. It is recommended that the City Council approve the redesign of the Commercial/Industrial customer classes into low-, medium-, and highstrength groups with their individual rate. It is recommended that the City Council approve a flat fee for the citywide AMI and replacement of water meters. Staff will adjust the amount down to match the actual funding terms. It is recommended that the drought surcharge stop upon the adoption of the proposed water rates and be replaced with the rates stabilization rates proposed. It is recommended that the Council direct staff to return on April 5, 2016 with a finalized rate study. EXECUTIVE SUMMARY: On August 28, 2015, the staff presented a ten-year forecast on the Water and Wastewater utilities. Each utility had a structural deficit and the City Council directed staff to develop a rate proposal that would promote a fiscally healthy and sustainable future for the utility funds. The attached rates designed were developed by NBS, and staff and NBS will be presenting the study to Council and requesting direction relative to a number of recommendations in order to complete the study. On April 5th, staff will return with the final rate study and initiate a 45-day notice period, with a public hearing scheduled for May 24, 2016 in order to conduct the hearing and tabulate protests. If approved, adoption of new water and wastewater utility rates would go into effect on July 1, 2016.
BUDGET INFORMATION: The budget impact on the City’s enterprise funds will be dependent on the direction to be provided by Council relative to various scenario options in the rate study (i.e., Optimal funding vs. Achievable funding), which are described in more detail in the staff report and attached rate study. GENERAL PLAN: Relevant General Plan Goals: Overarching Goal of the General Plan: Sustainability o Goal 2.36: Ensure an adequate water supply for current and future residents and businesses. STRATEGIC PLAN: Relevant Strategic Plan Goals and Strategies: Strategic Issue #1: Protecting Community Health and Safety Strategic Issue #2: Protecting and Enhancing the Environment o Strategy #2: Implement new water conservation projects/programs Strategic Issue #3: Strengthening Economic and Fiscal Conditions o Strategy #4: Manage City finances prudently Strategic Issue #4: Preserving and Enhancing Infrastructure o Strategy #4: Provide adequate funding for ongoing infrastructure needs BACKGROUND: A comprehensive utility rate study, whether for water or sewer rates, typically encompasses three major components: (1) the utility’s overall revenue requirements and financial plan, (2) the cost-of-service for each customer class, and (3) rate structure design. These three components were used in this study, and are summarized in Figure 1. Figure 1. Primary Components Of A Rate Study
1
FINANCIAL PLAN / REVENUE REQUIREMENTS
Step 1: Financial Plan/ Revenue Requirements - Compares current sources and uses of funds and determines the revenue needed from rates, and projects rate adjustments.
2
COST-OF-SERVICE ANALYSIS
Step 2: Cost-of-Service Analysis Allocates revenue requirements to customer classes in a “fair and equitable" manner that complies with industry standards.
3
RATE DESIGN
Step 3: Rate Design - Considers what rate structure alternatives will best meet the City’s need to collect rate revenue from each customer class.
1. Financial Plan/Revenue Requirements: In 2012, the City adopted new water and wastewater rates over a five year period. The rate increase for both utilities in 2012 was the only revenue increase since 2006. To minimize the impact on ratepayers and keep the rate increases as low as possible, the City scaled back the preventive maintenance and capital projects for the City’s aging infrastructure to include only crucial infrastructure repairs and improvements, which impact the health and safety of the City’s customers. Additionally, staff lowered enterprise budgets by implementing significant cost saving measures including reduced salaries, frozen staff positions, and long-term energy savings projects. At that time, the adopted rate adjustments were considered “the bare minimum” increases needed to ensure that the water and wastewater utilities covered expenses, complied with debt service coverage requirements, and met the reserve fund targets at the end of the five-year period. The City adopted the utilities’ FY 2015-2017 budget with only minimum maintenance and no capital costs; for the wastewater fund, it was the fifth budget year that capital costs were removed from the annual budget in order to fund operations and debt payments. On August 25, 2015 at a joint City Council and Finance Committee meeting, staff presented the ten-year finance forecast on the City’s Water and Wastewater funds. The forecast provided inflationary growth of operations, which includes salary and benefits, utility costs, water purchases, and routine maintenance and contract expenses. The forecast also provided the debt service payments required for the each utility. Finally, the utility ten-year forecast introduced a planned preventative maintenance and capital budgets over the next 5, 10, and 20 years. The definition of the capital and preventative maintenance models are: Preventive Maintenance is the planned maintenance of plant infrastructure and equipment with the goal of improving equipment life by preventing excess depreciation and impairment. See Exhibit 2 for listing of capital improvement projects listed in each fund. Capital costs are the purchase of new or the full replacement of a fixed asset. A fixed asset is an item with a useful life greater than one reporting period, and which exceeds an entity's minimum capitalization limit. A fixed asset is not purchased with the intent of immediate resale, but rather for productive use within the entity. See Exhibit 2 for listing of capital improvement projects listed in each fund. At that time, staff introduced capital and preventative maintenance expenses under three different funding alternatives, Optimal, Achievable, and Minimal. The Optimal model was derived from the 2012 Water and Wastewater Master Plan and is considered the best-practice standard for preventive
maintenance and capital. The Achievable model was derived from staff’s evaluation of the infrastructure and systems and determining the current strengths and weaknesses to assess the risk of system failure. The projects that were the most critical to effectively and efficiently meet service levels were given the highest priority. Whereas, other projects were determined appropriate to defer without undo harm to the facilities and the ability to serve customers. The Minimal model was derived from staff’s evaluation of what is critical to system integrity and the ability to serve its customers. This model represents the least effort to keep the facilities effective. However, this model is equivalent to “run to failure” or “pay as you go” forecasting that only fund repair or replacement when systems break. Under each scenario, the ten-year forecast projected that the current revenues in each fund would not sustain fiscal requirements to properly run the utilities. By FY2018-2019 the funds would have negative cash balances and be unable to meet their operations, debt, and capital needs. Additionally, it appears the City will not meet its debt coverage requirement of 1.25 for its 2002 Refunding Bonds; with these rate increases, the utility will still miss this requirement until the second year (FY 2017/18).
Upon acceptance of the ten-year forecast, the City Council directed staff to return with a new rate study. Staff, working with rate consultant NBS, developed proposed water and wastewater rates based upon the forecast and the funding options of Optimal and Achievable capital and preventative maintenance projects. Water Fund: Water fund revenues are currently woefully inadequate for the utility’s needs. The current adopted budget shows that revenues are not sufficient to meet operational and debt expenditures. The need to fund preventive maintenance and capital must be considered in terms of providing adequate services to customers. The adopted water fund budget does not include major capital or preventative maintenance expenses. Finally, the City does not currently have sufficient reserves, which leaves it unprepared for capital replacement and incapable of effectively responding to emergency maintenance and replacement needs. The ten-year forecast in the water fund projects shows that by June 30, 2016 the operating reserves will be less than the 20% reserve required by adopted City policy and below 16% by June 30, 2017. This goes down to less than 10% if capital and preventative maintenance expenses are added back into the budget (under the Achievable scenario). See the next page for the summary of the five-year financial forecast.
Below is the Water Fund Ten-year Forecast with the Optimal funding model as presented to the City Council in August 2015. Note that under this scenario, the utility is at negative cash reserves by FY 2017-2018. Water Ten-Year Forecast with Optimal Capital and Preventative Maintenance Budget (before proposed rate increase)
Proposed
Proposed
Projected
Projected
Projected
Projected
FY 15-16
FY 16-17
FY 17-18
FY 18-19
FY 19-20
FY 20-21
8,056
7,448
7,866
7,866
7,866
7,866
8,525
8,814
9,287
9,665
8,620
9,612
(469)
(1,366)
(1,421)
(1,799)
(754)
(1,746)
Beginning Fund Balance
2,577
2,108
742
(679)
(2,478)
(3,232)
Ending Fund Balance
2,108
742
(679)
(2,478)
(3,232)
(4,978)
26.20%
10.00%
-8.60%
-31.50%
-41.10%
-63.30%
(in thousands) Original Revenue Projections Total Expenses Net Revenues
% of Fund Balance to Revenue
Water Fund models: • OPTIMAL • Capital costs are $7.8 million in the next ten years (out of the identified $17 million) • Preventive maintenance is $5.2 million. • The annual average revenue shortfall is 22%, with some years as great as 47%. • ACHIEVABLE • Capital costs are $6.6 million in the next ten years (out of the identified $17 million) • Preventive maintenance is $4.8 million. • The annual average revenue shortfall is 17%, but vary from 8-45% year to year.
CIP Funding Scenarios – City staff developed three levels of funding for capital improvement projects. Each carries a different level of funding and revenue requirements: 1. Optimal Funding Scenario – Funds a total of $3.6 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 20%, 16%, 10%, 3% and 3%. 2. Achievable Funding Scenario – Funds a total of $3.4 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 20%, 12%, 8%, 4% and 4%. 3. Minimal Funding Scenario – Funds no CIP projects from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 10%, 10%, 10%, 7% and 7%. Effective Dates Optimal Funding Scenario Rate Revenue Increases Cumulative Rate Increases^ Achievable Funding Scenario Rate Revenue Increases Cumulative Rate Increases^ Minimal Funding Scenario Rate Revenue Increases Cumulative Rate Increases^
7/1/2016
7/1/2017
7/1/2018
7/1/2019
7/1/2020
20.00%
16.00%
10.00%
3.00%
3.00%
20.00%
39.20%
53.12%
57.71%
62.45%
20.00%
12.00%
8.00%
4.00%
4.00%
20.00%
34.40%
45.15%
50.96%
57.00%
10.00%
10.00%
10.00%
7.00%
7.00%
10.00%
21.00%
33.10%
42.42%
52.39%
*Note that the current rate increase of 4% on January 2017 is replaced by these rate increases; as well as the current drought surcharge. ^Note that the cumulative rate increases account for compounding effect of the rates over time.
Wastewater Fund: Wastewater fund reserves are above the 20% required by adopted City policy; however, for the last five years, no major capital or preventative maintenance has been budgeted, creating a back log of repair, replacement and maintenance projects that cannot be funded without an increase in revenues. Wastewater fund revenues are inadequate for the utility’s long-term needs. The current adopted budget shows that revenues are not sufficient to fund major preventive maintenance and capital. The City’s current pay- as-you go approach to infrastructure places the utility at risk of not being able to provide adequate service levels. The City’s infrastructure is more than 100 years old in many areas, and the risk of failure is real. Preventive maintenance and capital replacement simply cannot continue to be left unfunded. The ten-year forecast in the wastewater fund projects that the operating reserves will be 33% at June 30, 2016. However, it drops to less than 6% if capital and preventative maintenance expenses are added back into the budget (under the
Achievable scenario). See the next page for the summary of the five-year financial forecast. Note that under this scenario, the utility is at negative cash reserves by FY 20172018. Wastewater Ten-Year Forecast with Optimal Capital and Preventative Maintenance Budget (before proposed rate increase)
(in thousands)
Proposed FY 15-16
Proposed FY 16-17
Original Revenue Projections
8,728
8,904
Total Expenses
8,451
11,892
Net Revenues
277
Beginning Fund Balance
2,616
Ending Fund Balance
2,893
% of Fund Balance to Revenue
33.10%
(2,988) 2,893
(95) -1.10%
Projected FY 17-18
Projected FY 18-19
Projected FY 19-20
Projected FY 20-21
8,905
8,905
8,905
8,905
11,219
11,528
12,843
11,173
(2,314)
(2,623)
(3,938)
(2,268)
(95)
(2,409)
(5,032)
(8,970)
(2,409)
(5,032)
(8,970)
(11,238)
-27.10%
-56.50%
-100.70%
-126.20%
Wastewater Fund models: •
•
OPTIMAL • Capital costs are $18.3 million in the next ten years (out of the identified $25 million) • Preventive maintenance is $19.2 million. • The annual average revenue shortfall is 30%, with some years as great as 47%. ACHIEVABLE • Capital costs are $11.5 million in the next ten years (out of the identified $25 million) • Preventive maintenance is $9.8 million. • The annual average revenue shortfall is 13%, but vary from 3-26% year to year.
CIP Funding Scenarios – As with the water rate analysis, City staff developed three levels of funding for capital improvement projects for consideration;
1. Optimal Funding Scenario – Funds a total of $7.2 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 16%, 12%, 9%, 7% and 5%. 2. Achievable Funding Scenario – Funds a total of $4.3 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 8%, 6%, 6%, 3% and 2%. 3. Minimal Funding Scenario – Funds a total of $2.0 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 4%, 3%, 3%, 3% and 3%. Effective Dates
FY 2015/16
FY 2016/17
FY 2017/18
FY 2018/19
FY 2019/20
Rate Revenue Increases
16.00%
12.00%
9.00%
7.00%
5.00%
Cumulative Rate Increases^
16.00%
29.92%
41.61%
51.53%
59.10%
Rate Revenue Increases
8.00%
6.00%
6.00%
3.00%
2.00%
Cumulative Rate Increases^
8.00%
14.48%
21.35%
24.99%
27.49%
Rate Revenue Increases
4.00%
3.00%
3.00%
3.00%
3.00%
Cumulative Rate Increases^
4.00%
7.12%
10.33%
13.64%
17.05%
Optimal Funding Scenario
Achievable Funding Scenario
Minimal Funding Scenario
*Note that the current rate increase of 2% on July 2016 is replaced by these rate increases. ^Note that the cumulative rate increases account for compounding effect of the rates over time.
Water Meter Replacement: In 2015, the City responded to a Solano County Grand Jury report about unaccounted water. The report showed that 25-30% of the City’s water leaves the plant and is not reported as billed consumption. The industry expectation for unaccounted water is between 10-15%. After a year of managing infrastructure leaks, the City estimates that 12-15% of unaccounted water is assumed to come from underperforming, aging water meters. The City Council approved a contract to design a citywide water meter replacement project. Based on other agencies costs, the City estimates the project will cost $5.5 million dollars for the design, installation, and technology of advanced metering infrastructure (AMI) and new meters. This replacement program is expected to have a positive impact on revenue from volumetric rates (i.e., previously unrecorded water will now be billed to customers).
Below is the calculation assumption for AMI. These fees will be adjusted to match the actual costs of the project. $5.5 million at 5% for 10 years divided by 10 years divided by total number of water meters estimated per bill amount for 5/8 or 3/4 meters estimated per bill amount for meters larger than 5/8 or 3/4
$ 7,122,751.62 $ 712,275.16 $ 75.56 $ 12.00 $ 14.00
2. Cost of Service Analysis: A second component of a rate study is the requirements to allocate revenue requirements to customer classes in a “fair and equitable" manner that complies with industry standards and legal requirements. The current water rate study incorporated the guidelines of the San Juan Capistrano case, which requires that the rates and tiers demonstrate the actual cost basis for each tier. These costs were developed in the ten- year forecast and represent both historical expenses and projected costs. Another fundamental components in rate design is the relationship between fixed and variable costs, and the vast majority of rate structures contain a fixed charge in combination with a volumetric charge. Water Fund: The analysis concluded that the majority of the utility costs were fixed costs in the Water Fund. Fixed costs typically do not vary with the amount of water consumed; debt service and personnel are examples of a fixed cost. In contrast, variable costs tend to change with the quantity of water sold, such as the cost of purchased water, chemicals, and electricity. However, in the City’s case, purchased water is primarily a fixed cost, because City’s water purchases are typically not based upon volume purchased. Rather, the City pays the same regardless of the quantity used. Wastewater Fund: The updated rates considered the net revenue requirements, number of customer accounts, number of equivalent dwelling units (EDUs), water consumption, and the estimated amount and strength of the effluent. The cost of service was divided among three customer classes; Residential (including single-family, multi-family and mobile home residential properties), Commercial/Industrial, and Municipal. For the purpose of allocating costs to customer classes, the sewer revenue requirements were “functionalized” into four categories: (1) flow (volume) related costs; (2) strength costs related to biochemical oxygen demand (BOD); (3) strength costs related to total suspended solids (TSS); and (4) customer service related costs. The effluent strength factors were derived from the State Water Resources Control Board guidelines. These cost allocation factors have different implications for the costs of
serving customers. For example, effluent from customers with higher levels of BOD and TSS is more costly to treat at the sewer treatment plant and, therefore, those customers should be allocated a greater proportion of treatment costs compared to residential customers, who have lower-strength effluent. 3. Rate Design Analysis: NBS developed multiple water and wastewater rate alternatives over the course of this study; all of them were developed using industry standards and cost-of-service principles and were “revenue neutral” (i.e., they all generated the same amount of rate revenue). These rate alternatives also reflect the input from City staff and direction from the City Council, and the decision for selecting the alternative implemented ultimately lies with the City Council. Water Fund: The City decided that two rate structure alternatives should be evaluated as part of this rate study. Both are revenue neutral (i.e., they collect the same amount of revenue from individual customer classes): Alternative #1 – collects 70 percent of revenue from volumetric charges and 30 percent of revenue from fixed charges, and Alternative #2 – collects 30 percent of revenue from volumetric charges and 70 percent of revenue from fixed charges. Rate Design: The two primary components of rate design involve (1) the percentages collected from fixed vs. variable charges, and (2) the number of tiers used in collecting volumetric charges.
Fixed vs. Variable Costs – The cost of service analysis indicated that approximately 77% of the City’s costs are fixed and 23% are variable. Although state regulatory agencies, such as the California Urban Water Conservation Council, recommend water utilities collect at least 70% of rate revenue from volumetric rates, many utilities prefer to collect less than 70% from volumetric rates, because it offers greater revenue stability. NBS developed two fixed/variable alternatives: one collects 70% of revenue from fixed charges and 30% of revenue from volumetric charges, while the other alternative collects 30% of revenue from fixed charges and 70% of revenue from volumetric charges and more in line with their actual fixed/variable cost basis.
Volumetric Tiers – The City’s current rate structure includes three tiers for single-family customers and two tiers for non-residential customers. After reviewing the costs that would be recovered from different tiers, NBS recommended a uniform (single-tier) rate for all customer classes
under both fixed/variable alternatives. Collecting 70% of the rate revenue from fixed charges provides the benefit of greater revenue stability, since revenue will change less with a higher amount collected from fixed charges. In contrast, collecting 70% of rate revenue from volumetric rates offers a higher incentive for conservation. The City carefully considered the relative benefits of revenue stability vs. conservation incentives in selecting a rate design alternative. By shifting the rates so that a higher proportion of revenue was collected from the volumetric charges, the rate design encourages water conservation by emphasizing customer usage (consumption) and by making customers’ water behavior a more prominent calculation on their bills. This alternative can be supported with the costs analysis that was completed. By switching to a higher volumetric formula of 30% fixed and 70% consumption, customers who use more water will pay a much higher bill than low water users. The chart on the next page shows the customer bill impacts of the proposed water rates as compared to the current rates. As described above, high consumption customers experience the largest impacts under Rate design #1 rate structure of 30% fixed and 70% volume. To show contrasting rate design, Rate design #2 rate structure of 70% fixed and 30% volume is similar to the current rate design of 68% fixed and 32% volumetric charges. Next, under the rate proposed, “low volume” users see a lower water bills until 14 units of water. Using the average summer bill as an example (25 hcf), the single tier customers pay more for water usage under the proposed rate structure, capturing the impacts of multi-tiered. The average customer at the summer average (25 units) will see approximately a $10 bimonthly ($5 per month) bill increase based on funding the Optimal preventative maintenance and capital.
In addition, the bill comparison shown includes the drought surcharge fee already included in current rates, which can be removed from the customer’s bill upon adoption of the new rates. Under the proposed water rates, the current consumption levels were factored into the development of the rates. This is approximately 30% below the 2013 consumption levels and meets the current mandated conservation levels. However, with the higher dependency on volumetric, a rate stabilization fee is meant to offset the revenue loss from additional conservation mandates. This rate stabilization fee is tied to the City’s drought ordinance. If the City moves to Stage 4 drought conditions, the volumetric rate per hcf goes up to 10% and at Stage 5, the volumetric rate per hcf goes up to 20%. This stabilizes rate revenue despite lower consumption so that the utility remains fiscally healthy even during an increase in droughtrelated conservation. The rate design also considered a low income discount. The current rates adopted in 2012 introduced a Senior Low Income rate and began to phase out the prior “senior” discount rate. The phase out was to conclude in June 2016. The City has been subsidizing the program through a $300,000 transfer annually from the General Fund. The proposed rates offer a low income discount that is broader to allow any households on the PG&E care program to also qualify for the low income discount. At this time, it is unknown the number of households
that may qualify. However, as the prior “senior” program expires, this proposal assumes that the General Fund transfer will remain unchanged or potentially decrease. Wastewater Fund: The proposed rates for wastewater are also subject to the cost analysis requirements of San Juan Capistrano court decision. However, the application of multi-tiers has not been common practice in sewer rates, and therefore, is rarely associated with wastewater rates. The commercial rates have always had a portion of their rate design attributed to water consumption and a portion to customer class. Specifically, prior rates classified commercial/industrial customers based on the type of wastewater discharge they produced. (Users with higher or lower strength characteristics as measured by concentration of BOD and TSS are charged different rates.) The proposed rate design simplifies the standards into three commercial/industrial classes to reflect effluent strength categories of high-, medium-, and low-use customers. This better meets industry practices. Residential customers (including multi-family residential) proposed rate design includes a mix of volumetric and flat fees. Like the proposed water rate design, the wastewater rate design proposes to differentiate between “low volume” users from “average volume” user. For this reason, the residential rate design has a fixed charge with a volume charge that is capped at the average winter consumption level; whereas, the existing rate design is a flat charge for all residential customers. The proposed volumetric charge has a bi-monthly cap of 18 hcf for residential (or 9 hcf/month). This number represents indoor use and the cap is set to exclude water use assumed to reflect outdoor use (landscaping or pool). The cap is 18 hcf which calculates out to a household indoor use of 224 gallons a day for a family of three. Households who use more than the 18 hcf bi-monthly would essentially pay the same as other customers who use 18 hcf. This benefits the “low volume” users by lowering their current utility bill. Customers under 18 units will see a lower bills. The average residential customer will see approximately $22 per bill (or $11 per month) increase. See table below for first year rate proposals.
The rate design for proposed wastewater commercial/industrial accounts combines a fixed charge reflecting the system capacity requirements and a volumetric rate based on their effluent strength (that is, low-, medium-, or highstrength). This streamlines bill calculations to a flat fixed fee and volumetric fee per hcf of water use based upon customer class. Because of the changes resulting from the cost-of-service adjustments, customers will see different increases in their monthly bill depending on their water consumption level and strength class. Similar to the rate design on water, low-strength with low water consumption will see a small reduction on their bill and the medium-strength would have a moderate increase. The high-strength, high consumption users have the greatest correlation to higher service demands, and therefore, will see a larger increase. This new methodology is simpler and easier to understand and administer. The City’s commercial classes were based upon the State Revenue Program Guidelines which can be found in Appendix G.
The commercial class average strengths factors included in the wastewater rate design are:
Similar to the proposed water rates, the proposed wastewater rates also have a rate stabilization fee. With the proposed wastewater rates, the utility’s revenue has a higher dependency on the volumetric component. A rate stabilization fee is meant to offset the revenue loss from additional conservation. This rate stabilization fee is tied to the City’s drought ordinance (the City is currently in Stage 3). If the City moves to Stage 4 drought conditions, the volumetric fee goes up to 8% and at Stage 5, the volumetric fee goes up to 16%. This stabilizes the rates despite the lower consumption so that the utility remains fiscally healthy even during a drought. Water Meter Replacement: the rate proposal will include a flat fee for the water meter replacement project. The full costs and proposal are under development. Staff has estimated that the full costs are approximately $5.5 million and an assumed loan rate of 5% for 10 years. To repay the loan, this alternative proposes to charge a flat charge on every bill dedicated to the repayment of the loan. The average customer bill will be impacted by $12 per bill ($6 a month). The fee would be reduced should the City secure more favorable loan terms upon the finalization of the project and the financing agreement. 4. Results of Rate Study: The proposed rates were developed to meet the operations, debt, preventative maintenance, and capital needs of the water and wastewater utilities. Staff presented two alternatives for preventive maintenance and capital to provide the City Council to consider. In addition, the City Council has two alternatives for rate design on the water utility. Finally, staff is recommending a separate flat fee for all customers to replace the water meters throughout the City. Below is
the average residential per bill increase for the first year at the summer average consumption (25 units) based on funding the Optimal preventative maintenance and capital. . Water: approximately a $10 bimonthly ($5 per month) bill increase based on funding the Optimal preventative maintenance and capital. Wastewater approximately $22 per bi-monthly bill ($11 per month) increase. AMI water meter replacement project: The average customer bill will be impacted $12 per bi-monthly bill for the water meter replacement project ($6 per month). However, the fee would be reduced to match actual rate terms. Expected total increase in bimonthly bill for a customer using 25 hcf of water. Water Wastewater AMI meter replacement Total for 25 hcf (bi-monthly)
$ $ $ $
10 22 12 44
Water: The table below summarizes the sources and uses of funds, net revenue requirements, and the recommended annual percent increases in total rate revenue for the next 5 years. As this figure shows, the water utility runs at a deficit through FY 2017/18 after rate increases, with surpluses in subsequent years. These surpluses are used to build up reserves, with the intent of meeting target reservefund balances at some point in the future. Summary of Water Revenue Requirements Summary of Sources and Uses of Funds and Budget Projected FY 2015/16 FY 2016/17 FY 2017/18 FY 2018/19 Net Revenue Requirements Sources of Water Funds Rate Revenue Under Prevailing Rates $ 6,638,819 $ 5,996,319 $ 5,996,319 $ 5,996,319 Non-Rate Revenues 1,410,685 1,116,685 1,117,921 1,117,921 5,555 8,411 7,546 9,717 Interest Earnings Total Sources of Funds $ 8,055,059 $ 7,121,415 $ 7,121,786 $ 7,123,957 Uses of Water Funds Operating Expenses $ 6,911,127 $ 6,854,831 $ 7,372,981 $ 8,366,593 Debt Service 1,685,462 1,669,707 1,656,908 747,497 Rate-Funded Capital Expenses 475,957 482,548 832,877 Total Use of Funds $ 8,596,589 $ 9,000,496 $ 9,512,437 $ 9,946,966 Surplus (Deficiency) before Rate Increase $ (541,531) $ (1,879,080) $ (2,390,651) $ (2,823,009) Additional Revenue from Rate Increases 1,199,264 2,350,557 3,185,245 Surplus (Deficiency) after Rate Increase $ (541,531) $ (679,816) $ (40,094) $ 362,235 Projected Annual Rate Increase 0.00% 20.00% 16.00% 10.00% Debt Coverage After Rate Increase 0.68 0.88 1.27 2.60 Net Revenue Requirement1 $ 7,180,350 $ 7,875,399 $ 8,386,970 $ 8,819,328 1. Total Use of Funds less non-rate revenues and interest earnings. This is the annual amount needed from water rates.
FY 2019/20 $
$ $
$ $ $
$
FY 2020/21
5,996,319 1,117,921 16,768 7,131,008
$ 5,996,319 1,117,921 36,500 $ 7,150,740
7,712,781 747,666 405,746 8,866,193 (1,735,185) 3,460,692 1,725,507 3.00% 3.85 7,731,504
$ 7,889,696 747,841 1,390,474 $ 10,028,011 $ (2,877,271) 3,744,402 $ 867,131 3.00% 4.02 $ 8,873,590
The table below summarizes the projected reserve fund balances and reserve targets, for the next 5 years. These tables include revenue requirements, reserve funds, revenue source and proposed rate increases for the 10-year period as
presented to the City Council at the August 25, 2015 meeting. Summary of Water Reserve Funds Beginning Reserve Fund Balances and Recommended Reserve Targets Operating Reserve Recommended Minimum Target Capital Rehabilitation & Replacement Reserve Recommended Minimum Target Rate Stabilization Fund Reserve Recommended Minimum Target Debt Reserve Recommended Minimum Target Total Ending Balance Total Recommended Minimum Target
Budget FY 2015/16 $ 1,166,491 1,420,000 $ 515,763 708,200 $ 576,000 $ 749,001 749,001 $ 2,431,255 $ 3,453,201
FY 2016/17 $ 490,420 1,409,000 $ 515,763 700,800 $ 571,000 $ 749,001 749,001 $ 1,755,184 $ 3,429,801
FY 2017/18 $ 455,943 1,515,000 $ 515,763 693,900 $ 614,000 $ 749,001 749,001 $ 1,720,707 $ 3,571,901
Projected FY 2018/19 $ 825,669 1,719,000 $ 515,763 697,300 $ 697,000 $ 749,001 749,001 $ 2,090,433 $ 3,862,301
FY 2019/20 1,745,101 1,585,000 $ 688,200 688,200 $ 643,000 643,000 $ 749,001 749,001 $ 3,825,302 $ 3,665,201 $
FY 2020/21 $ 2,589,667 1,621,000 $ 708,000 708,000 $ 657,000 657,000 $ 749,001 749,001 $ 4,703,668 $ 3,735,001
*Note at the end of the 5 year rate period that the water reserve funds exceed the recommended minimum target. The reserve balance is $1 million over the minimum target; however, this is to meet the large capital costs coming in FY 2021/2022 of $3.7 million (MIEX System project). After funding this project, the reserves drop below the target reserves by $2.7 million in the Water Fund. Water Reserve Funds: Operating Reserve is intended to promote financial viability in the event of any short-term fluctuation in revenues and/or expenditures. Fluctuations might be caused by weather patterns, the natural inflow and outflow of cash during billing cycles, natural variability in demand-based revenue streams (for example, variable charges), and – particularly in periods of economic distress – changes or trends in age of receivables. Typical industry practices are to maintain 90 days (or 25 percent) of the Utility’s budgeted annual operating expenses. However, current City policy is to maintain 75 days of budgeted annual revenues, which is equal to two and a half months (or 20 percent). Capital Rehabilitation and Replacement (R&R) Reserve should typically be equal to a minimum of 3 percent of net depreciable capital assets, which equates to a 33-year replacement cycle for capital assets. This target serves simply as a starting point for addressing long-term capital repair and replacement needs. Rate Stabilization Fund is designed to further promote financial stability when there are fluctuations in rate revenue. The target fund balance is set to 30 days of the Utility’s budgeted annual operating expenses, or $576,000 in FY 2016/17. Debt Reserve is the reserve requirement for the outstanding SRF loan, which is $749,001. Wastewater Fund: The table below summarizes the sources and uses of funds, including net revenue requirements, and the recommended annual percent
increases in total rate revenue for the next 5 years. As this figure shows, the sewer utility has a deficit in FY 2016/17 and FY 2017/18, followed by surpluses in subsequent years. These surpluses are used to build up reserves, with the intent of meeting future target reserve-fund balances. Summary of Wastewater Revenue Requirements Summary of Sources and Uses of Funds and Net Revenue Requirements Sources of Sewer Funds Rate Revenue Under Prevailing Rates Non-Rate Revenues Interest Earnings Total Sources of Funds Uses of Sewer Funds Operating Expenses Debt Service Rate-Funded Capital Expenses Total Use of Funds Surplus (Deficiency) before Rate Increase Additional Revenue from Rate Increases Surplus (Deficiency) after Rate Increase Projected Annual Rate Increase Net Revenue Requirement1
Projected
Budget FY 2015/16
FY 2016/17
FY 2017/18
FY 2018/19
FY 2019/20
FY 2020/21
$ 8,626,515 91,798 6,427
$ 8,626,515 91,798 13,452
$ 8,626,515 91,798 5,474
$ 8,626,515 91,798 5,505
$ 8,626,515 91,798 12,797
$ 8,626,515 91,798 12,533
$ 8,724,740
$ 8,731,765
$ 8,723,787
$ 8,723,818
$ 8,731,110
$ 8,730,846
$
6,274,572 $ 2,330,392 -
$ $
8,604,964 119,775 119,775 0.00% 8,506,740
$ $
9,241,282 $ 2,332,672 498,623
7,833,246 $ 2,334,205 1,316,736
8,096,263 $ 2,334,883 1,409,137
$ 12,072,577 $ 11,484,187 $ 11,840,283 $ (3,340,812) $ (2,760,400) $ (3,116,465) 1,380,242 2,581,053 3,589,734 $ (1,960,570) $ (179,347) $ 473,269 16.00% 12.00% 9.00% $ 11,967,327 $ 11,386,915 $ 11,742,980
8,393,258 $ 8,414,346 2,339,390 1,941,299 2,631,552 1,194,052
$ 13,364,200 $ $ (4,633,091) $ 4,444,872 $ (188,219) $ 7.00% $ 13,259,606 $
11,549,697 (2,818,852) 5,098,441 2,279,590 5.00% 11,445,367
1. Total Use of Funds less non-rate revenues and interest earnings. This is the annual amount needed from Sewer rates.
The table below summarizes the projected reserve fund balances and reserve targets, for the next 5 years. These tables include revenue requirements, reserve funds, revenue source and proposed rate increases for the 10-year period as presented to the City Council at the August 25, 2015 meeting. Summary of Wastewater Reserve Funds
*Note at the end of the 5 year rate period that the wastewater reserve funds are still below the recommended minimum target by $800,000. It should also be noted that the capital improvement budget has a wastewater project planned in FY 2021/2022 that requires $3.9 million (see Exhibit 2 in wastewater for details) that has not been sufficiently funded under this rate proposal.
Wastewater Reserve Funds: Operating Reserve is intended to promote financial viability in the event of any short-term fluctuation in revenues and/or expenditures. This reserve is often set to equal 90 days of the Utility’s budgeted annual operating expenses. However, the City’s policy is to hold 75 days of the budgeted annual revenues in reserve, which is equal to a two-and-a-half month (or 20 percent) cash cushion for normal operations. Capital Rehabilitation and Replacement Reserve equal to a minimum of 3 percent of net depreciable capital assets (or approximately $1,570,200 based on a total system asset value of approximately $53.9 million). This reserve provides for capital repair and replacement needs. Rate Stabilization Fund is designed to further promote financial stability when there are fluctuations in rate revenue. The target fund balance is set to 30 days of the Utility’s budgeted annual operating expenses, or $770,000 in FY 2016/17. 5. Regional Comparisons: Below is three graphs assumed consumption is 18 hcf per bimonthly bill to show how the proposed rates compare to other agencies in the region. The City’s proposed water rates are in the mean of other agencies. The range is $57.46 to $117.08 and the City Alternative #1 (30% fixed and 70% variable) is $90.78. City of Benicia- Regional Comparisons BI-Monthly Water Bill $140 Fixed $120
Variable $104.76
Fixed Proposed
Bi-Monthly Bill
$100
$75.11
$80
$67.35 $57.46
$60 $40 $20 $-
$89.28 $89.46 $89.76 $90.78
Variable Proposed $80.54 $81.75
$110.40
$114.20 $117.08
The City’s proposed wastewater rates are at the high end of the regional comparison. The range is $23.20 to $134.66. However, it should be noted that the lower some of these comparisons are for agencies that are charging for only conveyance and do not have treatment included in the costs of services.
The last three cities are probably the best comparable to Benicia with American Canyon being the smallest of the list (and smaller than Benicia) with water and sewer treatment. AGENCY: TYPE OF SERVICES Antioch: water treatment only/sewer collection only EBMUD: water and sewer treatment Fairfield: water treatment only/ sewer collection only DSRSD: water and sewer treatment Contra Costa San: sewer only Napa: no treatment, water collection only/sewer collection only Vallejo: water treatment only/sewer collection only American Canyon:water and sewer treatment Brentwood: water and sewer treatment Vacaville: water and sewer treatment
City of Benicia - Regional Comparisons Bi-Monthly Combined Bill $250 Water, Fixed
Water, Variable
Wastewater
Monthly Bill
$200
$150
$100
$50
$-
* New rates pending. ^ New rates implemented in 2015.
6. Next Steps: This report was presented to the City Council for consideration of the rate increases for the water and wastewater utility. Staff is asking for direction on the following: 1. Approval of revenue requirements a. Staff presented a 10 year forecast as the foundation of the rate study with two funding alternatives. b. The estimated average residential summer customer bill changes for Optimal is $44 per bi-monthly bill ($22 per month)
c. AMI water meter replacement project: The fee will be reduced to match actual cost of the project and final rate terms. Optimal Model: Expected total increase in bimonthly bill for a customer using 25 hcf of water. Water Wastewater AMI meter replacement Total for 25 hcf (bimonthly)
$ $ $
10 22 12
$
44
d. The estimated average residential summer customer bill changes for Achievable model is $35 per bill ($22 per month). Note that the water Achievable capital funding is only one cent difference than the Optimal capital funding rates. The wastewater capital funding rate is $9 per bi-monthly bill lower under the Achievable funding option. Achievable Model: Expected total increase in bimonthly bill for a customer using 25 hcf of water. Water Wastewater AMI meter replacement Total for 25 hcf (bimonthly)
$ $ $
10 13 12
$
35
2. Approval of rate design a. It is recommended that the City Council select the rate design of 30% fixed and 70% variable for the residential water rates. b. It is recommended that the City Council select the rate design of adding a volumetric charge to the residential wastewater rates with a cap of 18 hcf per bi-monthly bill. c. It is recommended that the City Council approve the redesign of the Commercial/Industrial customer classes into low-, medium-, and high-strength groups with their individual rate. d. It is recommended that the City Council approve a flat fee for the citywide AMI and replacement of water meters. Staff will adjust the
amount down to match the actual funding terms. e. It is recommended that the drought surcharge stop upon the adoption of the proposed water rates and be replaced with the rates stabilization rates proposed. After direction is provided, staff will return on April 5, 2016 with a finalized rate study. After the 45 day notice period, the City Council will conduct a public hearing on May 24, 2016. The adoption of new water and wastewater utility rates would go into effect on the July 2016 utility bills. Attachment: Water and Wastewater Rates Study – Draft Report
:
February 22, 2016
TO
:
City Manager
FROM
:
Finance Director
SUBJECT
:
INTRODUCTION OF WATER AND WASTEWATER RATE STUDY
RECOMMENDATION: Receive the draft Water and Wastewater Rate Study and provide direction regarding the following recommendations: It is recommended that the City Council select the rate design of 30% fixed and 70% variable for the residential water rates. It is recommended that the City Council select the rate design of adding a volumetric charge to the residential wastewater rates with a cap of 18 hundred-cubic-feet (hcf) per bi-monthly bill. It is recommended that the City Council approve the redesign of the Commercial/Industrial customer classes into low-, medium-, and highstrength groups with their individual rate. It is recommended that the City Council approve a flat fee for the citywide AMI and replacement of water meters. Staff will adjust the amount down to match the actual funding terms. It is recommended that the drought surcharge stop upon the adoption of the proposed water rates and be replaced with the rates stabilization rates proposed. It is recommended that the Council direct staff to return on April 5, 2016 with a finalized rate study. EXECUTIVE SUMMARY: On August 28, 2015, the staff presented a ten-year forecast on the Water and Wastewater utilities. Each utility had a structural deficit and the City Council directed staff to develop a rate proposal that would promote a fiscally healthy and sustainable future for the utility funds. The attached rates designed were developed by NBS, and staff and NBS will be presenting the study to Council and requesting direction relative to a number of recommendations in order to complete the study. On April 5th, staff will return with the final rate study and initiate a 45-day notice period, with a public hearing scheduled for May 24, 2016 in order to conduct the hearing and tabulate protests. If approved, adoption of new water and wastewater utility rates would go into effect on July 1, 2016.
BUDGET INFORMATION: The budget impact on the City’s enterprise funds will be dependent on the direction to be provided by Council relative to various scenario options in the rate study (i.e., Optimal funding vs. Achievable funding), which are described in more detail in the staff report and attached rate study. GENERAL PLAN: Relevant General Plan Goals: Overarching Goal of the General Plan: Sustainability o Goal 2.36: Ensure an adequate water supply for current and future residents and businesses. STRATEGIC PLAN: Relevant Strategic Plan Goals and Strategies: Strategic Issue #1: Protecting Community Health and Safety Strategic Issue #2: Protecting and Enhancing the Environment o Strategy #2: Implement new water conservation projects/programs Strategic Issue #3: Strengthening Economic and Fiscal Conditions o Strategy #4: Manage City finances prudently Strategic Issue #4: Preserving and Enhancing Infrastructure o Strategy #4: Provide adequate funding for ongoing infrastructure needs BACKGROUND: A comprehensive utility rate study, whether for water or sewer rates, typically encompasses three major components: (1) the utility’s overall revenue requirements and financial plan, (2) the cost-of-service for each customer class, and (3) rate structure design. These three components were used in this study, and are summarized in Figure 1. Figure 1. Primary Components Of A Rate Study
1
FINANCIAL PLAN / REVENUE REQUIREMENTS
Step 1: Financial Plan/ Revenue Requirements - Compares current sources and uses of funds and determines the revenue needed from rates, and projects rate adjustments.
2
COST-OF-SERVICE ANALYSIS
Step 2: Cost-of-Service Analysis Allocates revenue requirements to customer classes in a “fair and equitable" manner that complies with industry standards.
3
RATE DESIGN
Step 3: Rate Design - Considers what rate structure alternatives will best meet the City’s need to collect rate revenue from each customer class.
1. Financial Plan/Revenue Requirements: In 2012, the City adopted new water and wastewater rates over a five year period. The rate increase for both utilities in 2012 was the only revenue increase since 2006. To minimize the impact on ratepayers and keep the rate increases as low as possible, the City scaled back the preventive maintenance and capital projects for the City’s aging infrastructure to include only crucial infrastructure repairs and improvements, which impact the health and safety of the City’s customers. Additionally, staff lowered enterprise budgets by implementing significant cost saving measures including reduced salaries, frozen staff positions, and long-term energy savings projects. At that time, the adopted rate adjustments were considered “the bare minimum” increases needed to ensure that the water and wastewater utilities covered expenses, complied with debt service coverage requirements, and met the reserve fund targets at the end of the five-year period. The City adopted the utilities’ FY 2015-2017 budget with only minimum maintenance and no capital costs; for the wastewater fund, it was the fifth budget year that capital costs were removed from the annual budget in order to fund operations and debt payments. On August 25, 2015 at a joint City Council and Finance Committee meeting, staff presented the ten-year finance forecast on the City’s Water and Wastewater funds. The forecast provided inflationary growth of operations, which includes salary and benefits, utility costs, water purchases, and routine maintenance and contract expenses. The forecast also provided the debt service payments required for the each utility. Finally, the utility ten-year forecast introduced a planned preventative maintenance and capital budgets over the next 5, 10, and 20 years. The definition of the capital and preventative maintenance models are: Preventive Maintenance is the planned maintenance of plant infrastructure and equipment with the goal of improving equipment life by preventing excess depreciation and impairment. See Exhibit 2 for listing of capital improvement projects listed in each fund. Capital costs are the purchase of new or the full replacement of a fixed asset. A fixed asset is an item with a useful life greater than one reporting period, and which exceeds an entity's minimum capitalization limit. A fixed asset is not purchased with the intent of immediate resale, but rather for productive use within the entity. See Exhibit 2 for listing of capital improvement projects listed in each fund. At that time, staff introduced capital and preventative maintenance expenses under three different funding alternatives, Optimal, Achievable, and Minimal. The Optimal model was derived from the 2012 Water and Wastewater Master Plan and is considered the best-practice standard for preventive
maintenance and capital. The Achievable model was derived from staff’s evaluation of the infrastructure and systems and determining the current strengths and weaknesses to assess the risk of system failure. The projects that were the most critical to effectively and efficiently meet service levels were given the highest priority. Whereas, other projects were determined appropriate to defer without undo harm to the facilities and the ability to serve customers. The Minimal model was derived from staff’s evaluation of what is critical to system integrity and the ability to serve its customers. This model represents the least effort to keep the facilities effective. However, this model is equivalent to “run to failure” or “pay as you go” forecasting that only fund repair or replacement when systems break. Under each scenario, the ten-year forecast projected that the current revenues in each fund would not sustain fiscal requirements to properly run the utilities. By FY2018-2019 the funds would have negative cash balances and be unable to meet their operations, debt, and capital needs. Additionally, it appears the City will not meet its debt coverage requirement of 1.25 for its 2002 Refunding Bonds; with these rate increases, the utility will still miss this requirement until the second year (FY 2017/18).
Upon acceptance of the ten-year forecast, the City Council directed staff to return with a new rate study. Staff, working with rate consultant NBS, developed proposed water and wastewater rates based upon the forecast and the funding options of Optimal and Achievable capital and preventative maintenance projects. Water Fund: Water fund revenues are currently woefully inadequate for the utility’s needs. The current adopted budget shows that revenues are not sufficient to meet operational and debt expenditures. The need to fund preventive maintenance and capital must be considered in terms of providing adequate services to customers. The adopted water fund budget does not include major capital or preventative maintenance expenses. Finally, the City does not currently have sufficient reserves, which leaves it unprepared for capital replacement and incapable of effectively responding to emergency maintenance and replacement needs. The ten-year forecast in the water fund projects shows that by June 30, 2016 the operating reserves will be less than the 20% reserve required by adopted City policy and below 16% by June 30, 2017. This goes down to less than 10% if capital and preventative maintenance expenses are added back into the budget (under the Achievable scenario). See the next page for the summary of the five-year financial forecast.
Below is the Water Fund Ten-year Forecast with the Optimal funding model as presented to the City Council in August 2015. Note that under this scenario, the utility is at negative cash reserves by FY 2017-2018. Water Ten-Year Forecast with Optimal Capital and Preventative Maintenance Budget (before proposed rate increase)
Proposed
Proposed
Projected
Projected
Projected
Projected
FY 15-16
FY 16-17
FY 17-18
FY 18-19
FY 19-20
FY 20-21
8,056
7,448
7,866
7,866
7,866
7,866
8,525
8,814
9,287
9,665
8,620
9,612
(469)
(1,366)
(1,421)
(1,799)
(754)
(1,746)
Beginning Fund Balance
2,577
2,108
742
(679)
(2,478)
(3,232)
Ending Fund Balance
2,108
742
(679)
(2,478)
(3,232)
(4,978)
26.20%
10.00%
-8.60%
-31.50%
-41.10%
-63.30%
(in thousands) Original Revenue Projections Total Expenses Net Revenues
% of Fund Balance to Revenue
Water Fund models: • OPTIMAL • Capital costs are $7.8 million in the next ten years (out of the identified $17 million) • Preventive maintenance is $5.2 million. • The annual average revenue shortfall is 22%, with some years as great as 47%. • ACHIEVABLE • Capital costs are $6.6 million in the next ten years (out of the identified $17 million) • Preventive maintenance is $4.8 million. • The annual average revenue shortfall is 17%, but vary from 8-45% year to year.
CIP Funding Scenarios – City staff developed three levels of funding for capital improvement projects. Each carries a different level of funding and revenue requirements: 1. Optimal Funding Scenario – Funds a total of $3.6 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 20%, 16%, 10%, 3% and 3%. 2. Achievable Funding Scenario – Funds a total of $3.4 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 20%, 12%, 8%, 4% and 4%. 3. Minimal Funding Scenario – Funds no CIP projects from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 10%, 10%, 10%, 7% and 7%. Effective Dates Optimal Funding Scenario Rate Revenue Increases Cumulative Rate Increases^ Achievable Funding Scenario Rate Revenue Increases Cumulative Rate Increases^ Minimal Funding Scenario Rate Revenue Increases Cumulative Rate Increases^
7/1/2016
7/1/2017
7/1/2018
7/1/2019
7/1/2020
20.00%
16.00%
10.00%
3.00%
3.00%
20.00%
39.20%
53.12%
57.71%
62.45%
20.00%
12.00%
8.00%
4.00%
4.00%
20.00%
34.40%
45.15%
50.96%
57.00%
10.00%
10.00%
10.00%
7.00%
7.00%
10.00%
21.00%
33.10%
42.42%
52.39%
*Note that the current rate increase of 4% on January 2017 is replaced by these rate increases; as well as the current drought surcharge. ^Note that the cumulative rate increases account for compounding effect of the rates over time.
Wastewater Fund: Wastewater fund reserves are above the 20% required by adopted City policy; however, for the last five years, no major capital or preventative maintenance has been budgeted, creating a back log of repair, replacement and maintenance projects that cannot be funded without an increase in revenues. Wastewater fund revenues are inadequate for the utility’s long-term needs. The current adopted budget shows that revenues are not sufficient to fund major preventive maintenance and capital. The City’s current pay- as-you go approach to infrastructure places the utility at risk of not being able to provide adequate service levels. The City’s infrastructure is more than 100 years old in many areas, and the risk of failure is real. Preventive maintenance and capital replacement simply cannot continue to be left unfunded. The ten-year forecast in the wastewater fund projects that the operating reserves will be 33% at June 30, 2016. However, it drops to less than 6% if capital and preventative maintenance expenses are added back into the budget (under the
Achievable scenario). See the next page for the summary of the five-year financial forecast. Note that under this scenario, the utility is at negative cash reserves by FY 20172018. Wastewater Ten-Year Forecast with Optimal Capital and Preventative Maintenance Budget (before proposed rate increase)
(in thousands)
Proposed FY 15-16
Proposed FY 16-17
Original Revenue Projections
8,728
8,904
Total Expenses
8,451
11,892
Net Revenues
277
Beginning Fund Balance
2,616
Ending Fund Balance
2,893
% of Fund Balance to Revenue
33.10%
(2,988) 2,893
(95) -1.10%
Projected FY 17-18
Projected FY 18-19
Projected FY 19-20
Projected FY 20-21
8,905
8,905
8,905
8,905
11,219
11,528
12,843
11,173
(2,314)
(2,623)
(3,938)
(2,268)
(95)
(2,409)
(5,032)
(8,970)
(2,409)
(5,032)
(8,970)
(11,238)
-27.10%
-56.50%
-100.70%
-126.20%
Wastewater Fund models: •
•
OPTIMAL • Capital costs are $18.3 million in the next ten years (out of the identified $25 million) • Preventive maintenance is $19.2 million. • The annual average revenue shortfall is 30%, with some years as great as 47%. ACHIEVABLE • Capital costs are $11.5 million in the next ten years (out of the identified $25 million) • Preventive maintenance is $9.8 million. • The annual average revenue shortfall is 13%, but vary from 3-26% year to year.
CIP Funding Scenarios – As with the water rate analysis, City staff developed three levels of funding for capital improvement projects for consideration;
1. Optimal Funding Scenario – Funds a total of $7.2 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 16%, 12%, 9%, 7% and 5%. 2. Achievable Funding Scenario – Funds a total of $4.3 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 8%, 6%, 6%, 3% and 2%. 3. Minimal Funding Scenario – Funds a total of $2.0 million from FY 2016/17 to FY 2020/21 and results in rate increases over this period of 4%, 3%, 3%, 3% and 3%. Effective Dates
FY 2015/16
FY 2016/17
FY 2017/18
FY 2018/19
FY 2019/20
Rate Revenue Increases
16.00%
12.00%
9.00%
7.00%
5.00%
Cumulative Rate Increases^
16.00%
29.92%
41.61%
51.53%
59.10%
Rate Revenue Increases
8.00%
6.00%
6.00%
3.00%
2.00%
Cumulative Rate Increases^
8.00%
14.48%
21.35%
24.99%
27.49%
Rate Revenue Increases
4.00%
3.00%
3.00%
3.00%
3.00%
Cumulative Rate Increases^
4.00%
7.12%
10.33%
13.64%
17.05%
Optimal Funding Scenario
Achievable Funding Scenario
Minimal Funding Scenario
*Note that the current rate increase of 2% on July 2016 is replaced by these rate increases. ^Note that the cumulative rate increases account for compounding effect of the rates over time.
Water Meter Replacement: In 2015, the City responded to a Solano County Grand Jury report about unaccounted water. The report showed that 25-30% of the City’s water leaves the plant and is not reported as billed consumption. The industry expectation for unaccounted water is between 10-15%. After a year of managing infrastructure leaks, the City estimates that 12-15% of unaccounted water is assumed to come from underperforming, aging water meters. The City Council approved a contract to design a citywide water meter replacement project. Based on other agencies costs, the City estimates the project will cost $5.5 million dollars for the design, installation, and technology of advanced metering infrastructure (AMI) and new meters. This replacement program is expected to have a positive impact on revenue from volumetric rates (i.e., previously unrecorded water will now be billed to customers).
Below is the calculation assumption for AMI. These fees will be adjusted to match the actual costs of the project. $5.5 million at 5% for 10 years divided by 10 years divided by total number of water meters estimated per bill amount for 5/8 or 3/4 meters estimated per bill amount for meters larger than 5/8 or 3/4
$ 7,122,751.62 $ 712,275.16 $ 75.56 $ 12.00 $ 14.00
2. Cost of Service Analysis: A second component of a rate study is the requirements to allocate revenue requirements to customer classes in a “fair and equitable" manner that complies with industry standards and legal requirements. The current water rate study incorporated the guidelines of the San Juan Capistrano case, which requires that the rates and tiers demonstrate the actual cost basis for each tier. These costs were developed in the ten- year forecast and represent both historical expenses and projected costs. Another fundamental components in rate design is the relationship between fixed and variable costs, and the vast majority of rate structures contain a fixed charge in combination with a volumetric charge. Water Fund: The analysis concluded that the majority of the utility costs were fixed costs in the Water Fund. Fixed costs typically do not vary with the amount of water consumed; debt service and personnel are examples of a fixed cost. In contrast, variable costs tend to change with the quantity of water sold, such as the cost of purchased water, chemicals, and electricity. However, in the City’s case, purchased water is primarily a fixed cost, because City’s water purchases are typically not based upon volume purchased. Rather, the City pays the same regardless of the quantity used. Wastewater Fund: The updated rates considered the net revenue requirements, number of customer accounts, number of equivalent dwelling units (EDUs), water consumption, and the estimated amount and strength of the effluent. The cost of service was divided among three customer classes; Residential (including single-family, multi-family and mobile home residential properties), Commercial/Industrial, and Municipal. For the purpose of allocating costs to customer classes, the sewer revenue requirements were “functionalized” into four categories: (1) flow (volume) related costs; (2) strength costs related to biochemical oxygen demand (BOD); (3) strength costs related to total suspended solids (TSS); and (4) customer service related costs. The effluent strength factors were derived from the State Water Resources Control Board guidelines. These cost allocation factors have different implications for the costs of
serving customers. For example, effluent from customers with higher levels of BOD and TSS is more costly to treat at the sewer treatment plant and, therefore, those customers should be allocated a greater proportion of treatment costs compared to residential customers, who have lower-strength effluent. 3. Rate Design Analysis: NBS developed multiple water and wastewater rate alternatives over the course of this study; all of them were developed using industry standards and cost-of-service principles and were “revenue neutral” (i.e., they all generated the same amount of rate revenue). These rate alternatives also reflect the input from City staff and direction from the City Council, and the decision for selecting the alternative implemented ultimately lies with the City Council. Water Fund: The City decided that two rate structure alternatives should be evaluated as part of this rate study. Both are revenue neutral (i.e., they collect the same amount of revenue from individual customer classes): Alternative #1 – collects 70 percent of revenue from volumetric charges and 30 percent of revenue from fixed charges, and Alternative #2 – collects 30 percent of revenue from volumetric charges and 70 percent of revenue from fixed charges. Rate Design: The two primary components of rate design involve (1) the percentages collected from fixed vs. variable charges, and (2) the number of tiers used in collecting volumetric charges.
Fixed vs. Variable Costs – The cost of service analysis indicated that approximately 77% of the City’s costs are fixed and 23% are variable. Although state regulatory agencies, such as the California Urban Water Conservation Council, recommend water utilities collect at least 70% of rate revenue from volumetric rates, many utilities prefer to collect less than 70% from volumetric rates, because it offers greater revenue stability. NBS developed two fixed/variable alternatives: one collects 70% of revenue from fixed charges and 30% of revenue from volumetric charges, while the other alternative collects 30% of revenue from fixed charges and 70% of revenue from volumetric charges and more in line with their actual fixed/variable cost basis.
Volumetric Tiers – The City’s current rate structure includes three tiers for single-family customers and two tiers for non-residential customers. After reviewing the costs that would be recovered from different tiers, NBS recommended a uniform (single-tier) rate for all customer classes
under both fixed/variable alternatives. Collecting 70% of the rate revenue from fixed charges provides the benefit of greater revenue stability, since revenue will change less with a higher amount collected from fixed charges. In contrast, collecting 70% of rate revenue from volumetric rates offers a higher incentive for conservation. The City carefully considered the relative benefits of revenue stability vs. conservation incentives in selecting a rate design alternative. By shifting the rates so that a higher proportion of revenue was collected from the volumetric charges, the rate design encourages water conservation by emphasizing customer usage (consumption) and by making customers’ water behavior a more prominent calculation on their bills. This alternative can be supported with the costs analysis that was completed. By switching to a higher volumetric formula of 30% fixed and 70% consumption, customers who use more water will pay a much higher bill than low water users. The chart on the next page shows the customer bill impacts of the proposed water rates as compared to the current rates. As described above, high consumption customers experience the largest impacts under Rate design #1 rate structure of 30% fixed and 70% volume. To show contrasting rate design, Rate design #2 rate structure of 70% fixed and 30% volume is similar to the current rate design of 68% fixed and 32% volumetric charges. Next, under the rate proposed, “low volume” users see a lower water bills until 14 units of water. Using the average summer bill as an example (25 hcf), the single tier customers pay more for water usage under the proposed rate structure, capturing the impacts of multi-tiered. The average customer at the summer average (25 units) will see approximately a $10 bimonthly ($5 per month) bill increase based on funding the Optimal preventative maintenance and capital.
In addition, the bill comparison shown includes the drought surcharge fee already included in current rates, which can be removed from the customer’s bill upon adoption of the new rates. Under the proposed water rates, the current consumption levels were factored into the development of the rates. This is approximately 30% below the 2013 consumption levels and meets the current mandated conservation levels. However, with the higher dependency on volumetric, a rate stabilization fee is meant to offset the revenue loss from additional conservation mandates. This rate stabilization fee is tied to the City’s drought ordinance. If the City moves to Stage 4 drought conditions, the volumetric rate per hcf goes up to 10% and at Stage 5, the volumetric rate per hcf goes up to 20%. This stabilizes rate revenue despite lower consumption so that the utility remains fiscally healthy even during an increase in droughtrelated conservation. The rate design also considered a low income discount. The current rates adopted in 2012 introduced a Senior Low Income rate and began to phase out the prior “senior” discount rate. The phase out was to conclude in June 2016. The City has been subsidizing the program through a $300,000 transfer annually from the General Fund. The proposed rates offer a low income discount that is broader to allow any households on the PG&E care program to also qualify for the low income discount. At this time, it is unknown the number of households
that may qualify. However, as the prior “senior” program expires, this proposal assumes that the General Fund transfer will remain unchanged or potentially decrease. Wastewater Fund: The proposed rates for wastewater are also subject to the cost analysis requirements of San Juan Capistrano court decision. However, the application of multi-tiers has not been common practice in sewer rates, and therefore, is rarely associated with wastewater rates. The commercial rates have always had a portion of their rate design attributed to water consumption and a portion to customer class. Specifically, prior rates classified commercial/industrial customers based on the type of wastewater discharge they produced. (Users with higher or lower strength characteristics as measured by concentration of BOD and TSS are charged different rates.) The proposed rate design simplifies the standards into three commercial/industrial classes to reflect effluent strength categories of high-, medium-, and low-use customers. This better meets industry practices. Residential customers (including multi-family residential) proposed rate design includes a mix of volumetric and flat fees. Like the proposed water rate design, the wastewater rate design proposes to differentiate between “low volume” users from “average volume” user. For this reason, the residential rate design has a fixed charge with a volume charge that is capped at the average winter consumption level; whereas, the existing rate design is a flat charge for all residential customers. The proposed volumetric charge has a bi-monthly cap of 18 hcf for residential (or 9 hcf/month). This number represents indoor use and the cap is set to exclude water use assumed to reflect outdoor use (landscaping or pool). The cap is 18 hcf which calculates out to a household indoor use of 224 gallons a day for a family of three. Households who use more than the 18 hcf bi-monthly would essentially pay the same as other customers who use 18 hcf. This benefits the “low volume” users by lowering their current utility bill. Customers under 18 units will see a lower bills. The average residential customer will see approximately $22 per bill (or $11 per month) increase. See table below for first year rate proposals.
The rate design for proposed wastewater commercial/industrial accounts combines a fixed charge reflecting the system capacity requirements and a volumetric rate based on their effluent strength (that is, low-, medium-, or highstrength). This streamlines bill calculations to a flat fixed fee and volumetric fee per hcf of water use based upon customer class. Because of the changes resulting from the cost-of-service adjustments, customers will see different increases in their monthly bill depending on their water consumption level and strength class. Similar to the rate design on water, low-strength with low water consumption will see a small reduction on their bill and the medium-strength would have a moderate increase. The high-strength, high consumption users have the greatest correlation to higher service demands, and therefore, will see a larger increase. This new methodology is simpler and easier to understand and administer. The City’s commercial classes were based upon the State Revenue Program Guidelines which can be found in Appendix G.
The commercial class average strengths factors included in the wastewater rate design are:
Similar to the proposed water rates, the proposed wastewater rates also have a rate stabilization fee. With the proposed wastewater rates, the utility’s revenue has a higher dependency on the volumetric component. A rate stabilization fee is meant to offset the revenue loss from additional conservation. This rate stabilization fee is tied to the City’s drought ordinance (the City is currently in Stage 3). If the City moves to Stage 4 drought conditions, the volumetric fee goes up to 8% and at Stage 5, the volumetric fee goes up to 16%. This stabilizes the rates despite the lower consumption so that the utility remains fiscally healthy even during a drought. Water Meter Replacement: the rate proposal will include a flat fee for the water meter replacement project. The full costs and proposal are under development. Staff has estimated that the full costs are approximately $5.5 million and an assumed loan rate of 5% for 10 years. To repay the loan, this alternative proposes to charge a flat charge on every bill dedicated to the repayment of the loan. The average customer bill will be impacted by $12 per bill ($6 a month). The fee would be reduced should the City secure more favorable loan terms upon the finalization of the project and the financing agreement. 4. Results of Rate Study: The proposed rates were developed to meet the operations, debt, preventative maintenance, and capital needs of the water and wastewater utilities. Staff presented two alternatives for preventive maintenance and capital to provide the City Council to consider. In addition, the City Council has two alternatives for rate design on the water utility. Finally, staff is recommending a separate flat fee for all customers to replace the water meters throughout the City. Below is
the average residential per bill increase for the first year at the summer average consumption (25 units) based on funding the Optimal preventative maintenance and capital. . Water: approximately a $10 bimonthly ($5 per month) bill increase based on funding the Optimal preventative maintenance and capital. Wastewater approximately $22 per bi-monthly bill ($11 per month) increase. AMI water meter replacement project: The average customer bill will be impacted $12 per bi-monthly bill for the water meter replacement project ($6 per month). However, the fee would be reduced to match actual rate terms. Expected total increase in bimonthly bill for a customer using 25 hcf of water. Water Wastewater AMI meter replacement Total for 25 hcf (bi-monthly)
$ $ $ $
10 22 12 44
Water: The table below summarizes the sources and uses of funds, net revenue requirements, and the recommended annual percent increases in total rate revenue for the next 5 years. As this figure shows, the water utility runs at a deficit through FY 2017/18 after rate increases, with surpluses in subsequent years. These surpluses are used to build up reserves, with the intent of meeting target reservefund balances at some point in the future. Summary of Water Revenue Requirements Summary of Sources and Uses of Funds and Budget Projected FY 2015/16 FY 2016/17 FY 2017/18 FY 2018/19 Net Revenue Requirements Sources of Water Funds Rate Revenue Under Prevailing Rates $ 6,638,819 $ 5,996,319 $ 5,996,319 $ 5,996,319 Non-Rate Revenues 1,410,685 1,116,685 1,117,921 1,117,921 5,555 8,411 7,546 9,717 Interest Earnings Total Sources of Funds $ 8,055,059 $ 7,121,415 $ 7,121,786 $ 7,123,957 Uses of Water Funds Operating Expenses $ 6,911,127 $ 6,854,831 $ 7,372,981 $ 8,366,593 Debt Service 1,685,462 1,669,707 1,656,908 747,497 Rate-Funded Capital Expenses 475,957 482,548 832,877 Total Use of Funds $ 8,596,589 $ 9,000,496 $ 9,512,437 $ 9,946,966 Surplus (Deficiency) before Rate Increase $ (541,531) $ (1,879,080) $ (2,390,651) $ (2,823,009) Additional Revenue from Rate Increases 1,199,264 2,350,557 3,185,245 Surplus (Deficiency) after Rate Increase $ (541,531) $ (679,816) $ (40,094) $ 362,235 Projected Annual Rate Increase 0.00% 20.00% 16.00% 10.00% Debt Coverage After Rate Increase 0.68 0.88 1.27 2.60 Net Revenue Requirement1 $ 7,180,350 $ 7,875,399 $ 8,386,970 $ 8,819,328 1. Total Use of Funds less non-rate revenues and interest earnings. This is the annual amount needed from water rates.
FY 2019/20 $
$ $
$ $ $
$
FY 2020/21
5,996,319 1,117,921 16,768 7,131,008
$ 5,996,319 1,117,921 36,500 $ 7,150,740
7,712,781 747,666 405,746 8,866,193 (1,735,185) 3,460,692 1,725,507 3.00% 3.85 7,731,504
$ 7,889,696 747,841 1,390,474 $ 10,028,011 $ (2,877,271) 3,744,402 $ 867,131 3.00% 4.02 $ 8,873,590
The table below summarizes the projected reserve fund balances and reserve targets, for the next 5 years. These tables include revenue requirements, reserve funds, revenue source and proposed rate increases for the 10-year period as
presented to the City Council at the August 25, 2015 meeting. Summary of Water Reserve Funds Beginning Reserve Fund Balances and Recommended Reserve Targets Operating Reserve Recommended Minimum Target Capital Rehabilitation & Replacement Reserve Recommended Minimum Target Rate Stabilization Fund Reserve Recommended Minimum Target Debt Reserve Recommended Minimum Target Total Ending Balance Total Recommended Minimum Target
Budget FY 2015/16 $ 1,166,491 1,420,000 $ 515,763 708,200 $ 576,000 $ 749,001 749,001 $ 2,431,255 $ 3,453,201
FY 2016/17 $ 490,420 1,409,000 $ 515,763 700,800 $ 571,000 $ 749,001 749,001 $ 1,755,184 $ 3,429,801
FY 2017/18 $ 455,943 1,515,000 $ 515,763 693,900 $ 614,000 $ 749,001 749,001 $ 1,720,707 $ 3,571,901
Projected FY 2018/19 $ 825,669 1,719,000 $ 515,763 697,300 $ 697,000 $ 749,001 749,001 $ 2,090,433 $ 3,862,301
FY 2019/20 1,745,101 1,585,000 $ 688,200 688,200 $ 643,000 643,000 $ 749,001 749,001 $ 3,825,302 $ 3,665,201 $
FY 2020/21 $ 2,589,667 1,621,000 $ 708,000 708,000 $ 657,000 657,000 $ 749,001 749,001 $ 4,703,668 $ 3,735,001
*Note at the end of the 5 year rate period that the water reserve funds exceed the recommended minimum target. The reserve balance is $1 million over the minimum target; however, this is to meet the large capital costs coming in FY 2021/2022 of $3.7 million (MIEX System project). After funding this project, the reserves drop below the target reserves by $2.7 million in the Water Fund. Water Reserve Funds: Operating Reserve is intended to promote financial viability in the event of any short-term fluctuation in revenues and/or expenditures. Fluctuations might be caused by weather patterns, the natural inflow and outflow of cash during billing cycles, natural variability in demand-based revenue streams (for example, variable charges), and – particularly in periods of economic distress – changes or trends in age of receivables. Typical industry practices are to maintain 90 days (or 25 percent) of the Utility’s budgeted annual operating expenses. However, current City policy is to maintain 75 days of budgeted annual revenues, which is equal to two and a half months (or 20 percent). Capital Rehabilitation and Replacement (R&R) Reserve should typically be equal to a minimum of 3 percent of net depreciable capital assets, which equates to a 33-year replacement cycle for capital assets. This target serves simply as a starting point for addressing long-term capital repair and replacement needs. Rate Stabilization Fund is designed to further promote financial stability when there are fluctuations in rate revenue. The target fund balance is set to 30 days of the Utility’s budgeted annual operating expenses, or $576,000 in FY 2016/17. Debt Reserve is the reserve requirement for the outstanding SRF loan, which is $749,001. Wastewater Fund: The table below summarizes the sources and uses of funds, including net revenue requirements, and the recommended annual percent
increases in total rate revenue for the next 5 years. As this figure shows, the sewer utility has a deficit in FY 2016/17 and FY 2017/18, followed by surpluses in subsequent years. These surpluses are used to build up reserves, with the intent of meeting future target reserve-fund balances. Summary of Wastewater Revenue Requirements Summary of Sources and Uses of Funds and Net Revenue Requirements Sources of Sewer Funds Rate Revenue Under Prevailing Rates Non-Rate Revenues Interest Earnings Total Sources of Funds Uses of Sewer Funds Operating Expenses Debt Service Rate-Funded Capital Expenses Total Use of Funds Surplus (Deficiency) before Rate Increase Additional Revenue from Rate Increases Surplus (Deficiency) after Rate Increase Projected Annual Rate Increase Net Revenue Requirement1
Projected
Budget FY 2015/16
FY 2016/17
FY 2017/18
FY 2018/19
FY 2019/20
FY 2020/21
$ 8,626,515 91,798 6,427
$ 8,626,515 91,798 13,452
$ 8,626,515 91,798 5,474
$ 8,626,515 91,798 5,505
$ 8,626,515 91,798 12,797
$ 8,626,515 91,798 12,533
$ 8,724,740
$ 8,731,765
$ 8,723,787
$ 8,723,818
$ 8,731,110
$ 8,730,846
$
6,274,572 $ 2,330,392 -
$ $
8,604,964 119,775 119,775 0.00% 8,506,740
$ $
9,241,282 $ 2,332,672 498,623
7,833,246 $ 2,334,205 1,316,736
8,096,263 $ 2,334,883 1,409,137
$ 12,072,577 $ 11,484,187 $ 11,840,283 $ (3,340,812) $ (2,760,400) $ (3,116,465) 1,380,242 2,581,053 3,589,734 $ (1,960,570) $ (179,347) $ 473,269 16.00% 12.00% 9.00% $ 11,967,327 $ 11,386,915 $ 11,742,980
8,393,258 $ 8,414,346 2,339,390 1,941,299 2,631,552 1,194,052
$ 13,364,200 $ $ (4,633,091) $ 4,444,872 $ (188,219) $ 7.00% $ 13,259,606 $
11,549,697 (2,818,852) 5,098,441 2,279,590 5.00% 11,445,367
1. Total Use of Funds less non-rate revenues and interest earnings. This is the annual amount needed from Sewer rates.
The table below summarizes the projected reserve fund balances and reserve targets, for the next 5 years. These tables include revenue requirements, reserve funds, revenue source and proposed rate increases for the 10-year period as presented to the City Council at the August 25, 2015 meeting. Summary of Wastewater Reserve Funds
*Note at the end of the 5 year rate period that the wastewater reserve funds are still below the recommended minimum target by $800,000. It should also be noted that the capital improvement budget has a wastewater project planned in FY 2021/2022 that requires $3.9 million (see Exhibit 2 in wastewater for details) that has not been sufficiently funded under this rate proposal.
Wastewater Reserve Funds: Operating Reserve is intended to promote financial viability in the event of any short-term fluctuation in revenues and/or expenditures. This reserve is often set to equal 90 days of the Utility’s budgeted annual operating expenses. However, the City’s policy is to hold 75 days of the budgeted annual revenues in reserve, which is equal to a two-and-a-half month (or 20 percent) cash cushion for normal operations. Capital Rehabilitation and Replacement Reserve equal to a minimum of 3 percent of net depreciable capital assets (or approximately $1,570,200 based on a total system asset value of approximately $53.9 million). This reserve provides for capital repair and replacement needs. Rate Stabilization Fund is designed to further promote financial stability when there are fluctuations in rate revenue. The target fund balance is set to 30 days of the Utility’s budgeted annual operating expenses, or $770,000 in FY 2016/17. 5. Regional Comparisons: Below is three graphs assumed consumption is 18 hcf per bimonthly bill to show how the proposed rates compare to other agencies in the region. The City’s proposed water rates are in the mean of other agencies. The range is $57.46 to $117.08 and the City Alternative #1 (30% fixed and 70% variable) is $90.78. City of Benicia- Regional Comparisons BI-Monthly Water Bill $140 Fixed $120
Variable $104.76
Fixed Proposed
Bi-Monthly Bill
$100
$75.11
$80
$67.35 $57.46
$60 $40 $20 $-
$89.28 $89.46 $89.76 $90.78
Variable Proposed $80.54 $81.75
$110.40
$114.20 $117.08
The City’s proposed wastewater rates are at the high end of the regional comparison. The range is $23.20 to $134.66. However, it should be noted that the lower some of these comparisons are for agencies that are charging for only conveyance and do not have treatment included in the costs of services.
The last three cities are probably the best comparable to Benicia with American Canyon being the smallest of the list (and smaller than Benicia) with water and sewer treatment. AGENCY: TYPE OF SERVICES Antioch: water treatment only/sewer collection only EBMUD: water and sewer treatment Fairfield: water treatment only/ sewer collection only DSRSD: water and sewer treatment Contra Costa San: sewer only Napa: no treatment, water collection only/sewer collection only Vallejo: water treatment only/sewer collection only American Canyon:water and sewer treatment Brentwood: water and sewer treatment Vacaville: water and sewer treatment
City of Benicia - Regional Comparisons Bi-Monthly Combined Bill $250 Water, Fixed
Water, Variable
Wastewater
Monthly Bill
$200
$150
$100
$50
$-
* New rates pending. ^ New rates implemented in 2015.
6. Next Steps: This report was presented to the City Council for consideration of the rate increases for the water and wastewater utility. Staff is asking for direction on the following: 1. Approval of revenue requirements a. Staff presented a 10 year forecast as the foundation of the rate study with two funding alternatives. b. The estimated average residential summer customer bill changes for Optimal is $44 per bi-monthly bill ($22 per month)
c. AMI water meter replacement project: The fee will be reduced to match actual cost of the project and final rate terms. Optimal Model: Expected total increase in bimonthly bill for a customer using 25 hcf of water. Water Wastewater AMI meter replacement Total for 25 hcf (bimonthly)
$ $ $
10 22 12
$
44
d. The estimated average residential summer customer bill changes for Achievable model is $35 per bill ($22 per month). Note that the water Achievable capital funding is only one cent difference than the Optimal capital funding rates. The wastewater capital funding rate is $9 per bi-monthly bill lower under the Achievable funding option. Achievable Model: Expected total increase in bimonthly bill for a customer using 25 hcf of water. Water Wastewater AMI meter replacement Total for 25 hcf (bimonthly)
$ $ $
10 13 12
$
35
2. Approval of rate design a. It is recommended that the City Council select the rate design of 30% fixed and 70% variable for the residential water rates. b. It is recommended that the City Council select the rate design of adding a volumetric charge to the residential wastewater rates with a cap of 18 hcf per bi-monthly bill. c. It is recommended that the City Council approve the redesign of the Commercial/Industrial customer classes into low-, medium-, and high-strength groups with their individual rate. d. It is recommended that the City Council approve a flat fee for the citywide AMI and replacement of water meters. Staff will adjust the
amount down to match the actual funding terms. e. It is recommended that the drought surcharge stop upon the adoption of the proposed water rates and be replaced with the rates stabilization rates proposed. After direction is provided, staff will return on April 5, 2016 with a finalized rate study. After the 45 day notice period, the City Council will conduct a public hearing on May 24, 2016. The adoption of new water and wastewater utility rates would go into effect on the July 2016 utility bills. Attachment: Water and Wastewater Rates Study – Draft Report
