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HomeMy WebLinkAboutREDmattinglybishopb4RECEIVE D JUN 01201 0 SLO CITY CLERK RED FIL E S=TING ACS DATE(11 0 HEM Ca_ PB council memonanaum L. June 1, 201 0 TO:City Counci l VIA :Katie Lichtig, City Manager FROM :Carrie Mattingly, Utilities Direct o Prepared by: Kathe Bishop, Senior Administrative Analys t SUBJECT : Water and Sewer Fund Reviews — Council Meeting June 1, 2010 COD DI R FEIN CI A aFIi~E CHIE F bI RtitioudEIdALitt blti H7 D R CH — Er Ct.ga t' The following information is in response to Vice Mayor Andrew Carter's questions regarding th e water and sewer fund reviews that are on the Council Agenda for June 1, 2010 . WATER FUND 1) How much recycled water is currently being used? As I recall the capacity is 1000 acre fee t year (AFY), but we're well below that in use. While we do maintain separate data on the operationa l demand associated with recycled water, for example : staff time, electrical utility service, chemical costs, laborator y analysis, operating materials and supplies, syste m maintenance and repair, system expansion, etc ., recycle d water deliveries began in November 2006, so the program is relatively new . Utilities staff ha s not yet completed a comprehensive evaluation of all recycled water program costs, to determin e ongoing program and operating costs versus costs that are directly associated with start-up or are one-time in nature, in order to calculate the "true" delivered cost of recycle water . With a new source of water supply, and specifically recycled wate :, there are significant start-up costs . The costs associated with the Water Reuse project, including construction at the Wate r Reclamation Facility and the backbone system are financed at a low interest rate of 2 .5% over a 20-year period . In addition state grant funds in the amount of $2 .6 million partially funded th e project. The customer pays 90% of the potable water rate for recycled water, which takes int o consideration : (1) water quality and the additional application of water for leaching purposes , and; (2) for philosophical reasons to encourage the use of recycled water . Recycled water deliveries for the most recent 12 month perio d total over 150 acre feet . Monthly detail is displayed in th e table, reflecting changes in demand based on seasona l irrigation periods . 2)What is the true delivered cost of recycled water? B y "true," I'm wondering if we keep separate "books" fo r . recycled vs. potable. Month Acre FeetlYea r (AFY) May 2010 13 .94 April 2010 7 .2 1 March 2010 0 .57 February 2010 0 .52 January 2010 8 .35 D3cember 2009 8 .67 N )vember 2009 8 .5 1 O ~tober 2009 22 .1 2 September 2009 19 .1 5 August 2009 23.1 4 July 2009 21 .86 June 2009 17.6 4 Total 151 .68 AFY Council Memorandum -Response to Council Questions on Water and Sewer Funds page 2 3)What portion of the proposed 11% rate increase is due to Nacimiento and what portion i s due to regular operations ? The approved 11% water rate increase results in an additional $1 .4 million in projected revenue s in 2010-11 . The Nacimiento expenses are incorporated into the water source of supply operatin g expenses, along with the Whale Rock and Salinas reservoirs and recycled water supply . Costs to . operate Nacimiento are about 22% ($4 .2 million) of the fund's total $19 .5 million expenditure requirements in 2010-11 . Because of the many factors that influence the approved water rate increase, Utilities staff is unable to provide a precise empirical answer by tonight specific to wha t portion of the 11% rate change is due to Nacimiento operating costs . As part of the long-term financial planning for water services, expenditures and projecte d revenue requirements are forecast for multiple years into the future . Revenues from the 2010-1 1 rate increase and forecasted rate changes are to prepare the Water Fund to meet future tota l expenditures and working capital requirements of the Water Fund, a portion of which is the ful l Nacimiento expense of $6 .5 million annually, beginning in 2011-12 .' In the 2010 Analysis the Water Fund is ready for Nacimiento expenses which begin in 2010-11 , and the fund is fully positioned for the ongoing annual $6 .5 million Nacimiento expenses i n 2013-14 . Thereafter, the water rate forecast returns to an inflationary level . 4) How far along are we in the planned increases needed to pay for Nacimiento? Could yo u provide the annual rates going back to the year befor e we started these increases ? After four years of no water rate increases (2000-01 t o 2003-04), which followed a 10% rate decrease in 1999-00, the City embarked on a multi-year rate increase strategy i n 2004-05 to accommodate Nacimiento plus other key wate r improvement projects . Knowing that higher costs were in our future, but not righ t away, the City purposely set out to incrementally raise rate s over a number of years to meet our revenue requirements for the future . This included Nacimiento as well as othe r important projects such as water line replacements, water reuse, the Bishop Tank replacement, the Alrita Pump Station replacement, water treatment plant improvement s and the telemetry system upgrade. Many of these project s are now completed . The City's share of Nacimiento (operating, capital reserve s and debt service requirements) is included in the Wate r Fund :as an operating expense . While the debt servic e requirements are fixed, the operating budget fo r Nacimiento is based on reasonable assumptions which are Fiscal Year I Rate Chang e Forecast 2015-16 3 % 2014-15 5 % 2013-14 8 % 2012-13 9% 2011-12 10% Actual 2010-11 11 % 2009-10 12 % 2008-09 13% 2007-08 13% 2006-07 12% 2005-06 8% 2004-05 8 % 2003-04 0 % 2002-03 0% 2001-02 0 % 2000-01 0 % 1999-00 -10% Council Memorandum -Response to Council Questions on Water and Sewer Funds page3 on the conservative side. After the first year with Nacimiento supply in service, staff will the n have an operational cost basis from which future budgets will be developed . The 2010 Fund Analysis includes a working capital minimum balance of 20% of total operating program costs . The water rates as forecast for 2011-13 in the 2010 Water Fund Review remain the same a s previously forecasted in the 2009 Water Fund Review, as presented to Council on June 11, 2009 . 5)I'm interested to know the assumptions behind the assumed rate increases in 11/12, 12/13, an d 13/14 since those are higher than the assumed CPI. 9% increase between 10/11 & 11/12 i n "water service charges ." Then 8%. Then 5%.Subtract 1% growth, so the apparent anticipate d rate increases are 8%, 7%, and 4% with inflation assumed at 2 .5%. Expenditure assumptions include an inflationary rate of 2 .5% on the operating, maintenance an d supplies expenses . Capital expenses are based on the capital improvement plan . Debt servic e expenses are based on debt service obligations and coverage requirements . Working capital i s based on the policy minimum of 20% of total operating program . All Nacimiento expenses ar e recognized as operating expenses in the Water Fund, which drives the working capital polic y minimum dollar amount upward . Forecasted rate changes are necessary to meet the revenue requirements to cover expenditures , and policy decisions including working capital policy minimum as noted above . The water sale s analysis includes an examination of the past seven years of annual (fiscal year) water deliverie s in acre feet and actual population changes, to determine water per capita (gallons per custome r daily) taking into consideration a 7-year average (to smooth annual changes in rainfall). Forecasting future rates includes adding a population growth of 1% annually, multiplied by th e updated water per capita sales projection to determine projected annual water sales in acre feet . Actual revenues from water sales are also evaluated for the past seven years, to determine actua l revenues received per acre foot of water sold, which is adjusted for rate increases to-date t o determine revenues per acre foot based on current water rates . The outcome is the projected bas e total revenues from water sales . Using this water sales revenue base, the forecasted water rate s 'are applied to the rate model . A number of rate scenarios are run, including re-phasing o f expenditures to establish the rate forecast. The goal of the 2011-13 rate forecast in the 201 0 Analysis is to deliver the lowest responsible rates to meet the requirements of the Water Fund . The rate forecast is based on all known factors and the best information available at this point i n time, with the intention of returning to Council next year (June 2011) with recommended rate s for 2011-13 that are at or below the current rate forecast . Historically, this methodology, which evaluates past trends and future projections, has proven t o be an accurate and self-correcting model in forecasting water sales . 6)For Meter Boxes & Lids (B4-4), what are comparison prices for "stock" colored product ? Meter boxes and lids in the adobe color for mission style sidewalks are currently priced at abou t 40% greater (37% to 42% based on individual items) than the standard polymer concrete colore d products . Council Memorandum -Response to Council Questions on Water and Sewer Funds page4 SEWER FUN D 1)Refresh my memory as to what portion of the $44M in Master Plan Improvements is due t o decisions by the Water Quality Control Board . Current planning estimates show roughly $24 million will be required to upgrade the Wate r Reclamation Facility (WRF) to meet the State's requirements for nutrient and disinfection by- products removal . These requirements stem from the Regional Water Quality Control Board's (Board) beneficial use designation for San Luis Obispo creek as a drinking water supply source . All costs are from a planning level and more precise estimates will be developed as the WR F Master Plan is completed and other preliminary design and regulatory information become savailable. Several deadlines loom, and City staff have been meeting frequently with Board staff with th e goal of having some resolution of these issues in the near future . Staff will be bringing Council a regulatory update to provide more in-depth information on these issues before the end of th e year. 2)As with water, I'm interested in the assumptions regarding sewer rate increases above CPI i n the out years. Expenditure assumptions include an inflationary rate of 2 .5% on the operating, maintenance an dsupplies expenses . Capital expenses are based on the capital improvement plan . Debt servic e expenses are based on debt service obligations and coverage requirements, and projected futur e debt service needs for capital projects in the forecast . Working capital is based on the polic y minimum of 20% of total operating program . However, in the Sewer Fund we are building a larger working capital balance to position the fund to be able to secure favorable financing fo r master plan infrastructure projects . Forecasted rate changes are necessary to meet the revenue requirements to cover expenditures , policy decisions, regulatory decisions, and to build a stronger working capital balance as note d 'above. Assumptions include fewer sewer billable units in general and a lower "sewer cap" on residential sewer bills . As a result, the basis on which the sewer rate is applied is lower . Forecasted sewer rates above CPI in the out years take into consideration : (1) additional deb t service requirements for Buckley and Los Verdes lift stations ; (2) conservatively assume th e level of usage or billable units and a lower sewer cap of 6-units for residential, and; (3 ) maintaining a greater working capital balance to leverage future financing opportunities . Th e sewer revenue plan and forecast will be reviewed by financing agencies over the next year a s staff works to secure favorable financing sources for significant upcoming master plan projects . 3)In looking at the Service Charges line of the Changes in Financial Position worksheet, fo r both water and sewer it appears to be increasing by the rate increase only and not by the rat e increase plus the customer growth . I wonder if there is a mistake here . On the water side refer to answer #5 above, on the sewer side refer to answer #2 above . In both funds, based on the most recent 12-months of consumption/usage there is a decrease in billabl eunits. On the water side, the decrease in billable units offsets the 1% population growth . On the sewer side, with the lower residential sewer cap, assumptions are conservative . Council Memorandum -Response to Council Questions on Water and Sewer Funds page5 4)For both water and sewer, have electric rates been truly increasing by 5-11% per year?I wasn't aware of that. Electrical service rate changes vary based on customer class and usage during peak deman d periods . For example, current assumptions include up to :5% for small commercial accounts , 9% for medium commercial accounts, and 11% for large commercial accounts . Assumptions take into consideration PG&E forecasted needs to improve infrastructure and telemetr y equipment for outage restoration . To minimize or off-set electrical expenses, the Utilities Department participated in a PG&E California demand response program, administered by EnerNoc, Inc . by helping to reduce peak demand and to keep the electrical grid running when it is most vulnerable to blackouts (Jun e through September). Efforts by Utilities staff at the Water Treatment Plant resulted in capacit y payments of $9,400 in 2008 and $18,600 in 2009 awarded to the City for the amount of electrica l capacity that Utilities committed to reduce from the electrical grid during demand respons e events . The $18,600 awarded in 2009 is about 5% of the total electrical budget at the Wate r Treatment Plant. In closing, Utilities staff appreciates the thorough review and clarifying questions that have bee n raised and, in particular, having the opportunity to respond in advance of the fund presentations .