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Home My WebLink About09-18-2012 ss1 water rate structure studycounci lj acenea Repor t•J C I T Y O F S A N L U I S O B I S P O FROM : Carrie Mattingly, Utilities Directo r Prepared By :Wade Horton, Deputy Director of Wate r Ron Munds, Conservation Manage r SUBJECT :WATER RATE STRUCTURE STUDY SESSIO N RECOMMENDATION Participate in the third of four water rate structure study sessions with HDR Engineering . DISCUSSIO N Backgroun d During its August 7, 2012 meeting, Council studied goals and rate objectives derived fro m Bonbright, a highly regarded economist whose conclusions about rate objectives are generall y accepted guidelines for the utility industry . Council and staff ranked its top five rate structure goal s from a list of nine . Selecting and weighting the top five goals was the initial step in evaluating an d • analyzing the appropriateness of the City's current water rate structure and any modification s needed to meet the Council's and community's highest priorities for its water rate structure ; a key communication tool . This report details the outcome of the goals and objectives ranking exercise from August 7 . Eigh t water rate structure options are summarized (five for single family residential ; three for all othe r customer classes). A glossary of terms and concepts related to water rate structures is also provided . During this study session, the Council and community will discuss the eight water rate structur e options . Council will then have the opportunity to select one or more of the options as finalists fo r further technical review at the next study session . Ranking of the Goals for the Water Rate Structur e On August 7, 2012, Council and staff ranked its top five rate structure goals from a list of nine . Prioritisation of the Rate Design Goals and Objectives by the City Council and City Staff City Council Prio r itization Rank City Staff Prioritizatio n Revenue Stabilit & Predictabili 1 Stabilit & Predictabili of Rate s Stability & Predictabilit of Rates 2 Revenue Stability & Predictabilit y Sim• le & Easy to Understand and Administer 3 Fair Allocation of Total Cost of Service Among Customer Classe s Fair Allocation of Total Cost of Servic e Amon• Customer Classes 4 Reflect All Present & Future Costs & Benefits of Providing Utility Service s Discourage Wasteful Use, While Promoting 5 . s -10 , , ,- IMeeting Dat e Sept . 18, 2012 !Item Number S S 1 • SS1-1 Water Rate Structure Study Page 2 All Justified types and Amounts • Staffs priorities were similar to the Council's with a variation in the Council's fifth goa l (discourage wasteful use) and staffs fourth goal (reflect all present and future costs and benefits o f providing utility services). HDR Engineering will address the differences in ranking in it s presentation and clarify how the variances can be reconciled . Rate Structure Terms and Concept s Understanding the terminology and how those terms relate to water rate structure concepts i s helpful . Though HDR Engineering will be elaborating on the various terms and concepts during it s presentation, the following definitions will assist the public and Council to better understand th e information provided during the presentation and the concepts in the rate structure options . Rate Structure Terms anti Concept s Fixed Charge An amount assessed to a customer class, or classes, regardless of use . Fixed o r "flat" charges relate to the fact that a good portion of a utility provider's charge s are fixed and do not vary according to use (examples : reading meters and billing , repairing and maintaining infrastructure, implementing programs and meetin g legislative requirements, paying debt service). Variable Charge An amount assessed to a particular customer based on that particular customer's use . Variable charges relate to paying for those expenses that change according t o the amount of water treated (examples : treatment chemicals, electricity fo r pumping ) Structure vs . Level Rate structure is how the customer is charged ; rate level is how much revenue is collected . Block Rates Also referred to as tiered rates, different rates for higher levels of wate r consumption ; provides for conservation . Uniform Rates The volumetric rate is constant regardless of the quantity of water consumed . Block Thresholds The level at which different rates apply ; currently the City's rate structure ha s three tiers or thresholds for single family residential and two tiers for all othe r customers . Customer Classes As used in this report, there are three distinct utility customer classes in the Cit y of San Luis Obispo : residential (single family and individually metered condos); multi-family (duplex, apartments); and non-residential (offices, commercial , industrial, landscape, government and non-profit organizations). SS1-2 • Water Rate Structure Study Page 3 • Water Rate Structure Option s Using Council's prioritized goals and objectives ; HDR Engineering ha s developed five rate structure options for single family residentia l customers and three for the remaining customer classes . The options ar e meant to provide the Council with the array of water rate structur e design choices available which meet the majority of its goals and objectives . It is also important to understand that all the options bein g presented are conceptual in nature and can be modified to meet th e community's needs as the Council sees fit . The following is a brie f summary of the rate structure concepts and how they do or don't alig n with Council prioritized goals and objectives from the August 7, 201 2 study session. More information on each option can be found in th e HDR Engineering presentation attached to this report . 1 . Single Family Residential Water Rate Structure Option s The five single family water rate structure options are variations of th e block rate structure concept referenced in the Rate Structure Terms an d Concepts table and are similar to the current rate structure . All but the current rate structure optio n have a fixed charge component as part of the rate design . A brief summary of each single famil y water rate structure option is presented here . • Option 1 - Current Rate Structur e The current rate structure is a block rate structure and i s 100% volumetric with no fixed charge . Option 2 — Current Rate Structure plus Minimum Bil l This option has a fixed charge component plus a Optio n minimum bill which would include a set amount of units . Example : a customer would be charged an $18 .7 5 minimum bill for up to 3 units of water . If less than 3 units were used, they would still be charged $18 .75 . Customers using more than the minimum bill would b e charged the rates per the rate structure using the inverted block rate pricing . Option 3 — Current Rate Structure plus Fixed Charg e Option 3 would be the same as the current block rat e structure with an added a fixed charge . Option 4 — Current Rate Structure plus Fixed Charg e and Revised Pricin g This option is similar to option 3 but would increase th e • cost of the first block and decrease the cost of the thir d block . SS1-3 Council Goals & Objective s 1.Revenue Stability & Predictability 2.Stability & Predictability o f Rate s 3.Simple & Easy t o Understand and Administer 4.Fair Allocation o f Total Cos t 5.Discourage Wastefu l Us e 1 Option Supporting Goals no t Goals Supported 3,4,5 1,2 2 Supporting Goals no t Goals Supporte d 1,2,4,5 3 4 Option Supporting Goals no t Goals Supporte d 1,2,3,4,5 Water Rate Structure Study Page 4 Option 5 — Current Rate Structure plus Fixed Charg e and Revised Pricing and Threshold s Option 5 is similar to option 4 by potentially increasin g the cost of the first block and decreasing the cost of th e third block . It would also adjust the threshold between th e first and second block . This threshold could be increase d or decreased and the rates adjusted accordingly to reflec t the goals and objectives . During the study session, HDR Engineering will explain the general implications of each option o n the water customer and the effects on revenue generation . Options 2 through 5 were developed to better align with the Council's goals and in particular meet the number one goal to have a rat e structure that would provide revenue stability and predictability . The intent of the slight variation s between each option is to demonstrate the different nuances the Council can consider when makin g a final decision. 2 . Multi-family and Non-residential Water Rate Structure Option s The following is a brief summary of the multi-family and non-residential rate structure concepts an d how they do or don't align with the goals and objectives Council identified at its August 7, 201 2 study session . More information on each option can be found in the presentation attached to thi s report and will be discussed in detail during the meeting . Option 1 — Current Rate Structur e The current rate structure is a block rate structure and i s 100% volumetric with no fixed charge . Option 2 — Current Rate Structure with Fixed Charge This option would be the same as the current block rat e structure but with an added fixed charge . Option 3 — Fixed Charge plus a Uniform Rate Structur e Option 3 would include the fixed charge but would no t use a block rate structure as with the other options . Instead all water consumption would be charged a uniform rate regardless of how much is used . Both options 2 and 3 align best with the Council's goals with each offering a minor variation i n approach : Next Step s There is one more study session planned in October, and one business item that will be schedule d before the end of the year during which the Council will be asked to make a final decision on a rat e structure design . SS1-4 Option Supporting Goals not Goals Supporte d 3,4,5 1,21 • • • Water Rate Structure Study Page 5 Remaining Water Rate Structure Topic s Study Session 4 . Technical Review of Rate Structures — October 16 th (tentative).This study session will present the "road test" of the final selected conceptual rate structures which will suppor t the prioritized goals and financial policies . Actual rates and bill comparisons will be used to revie w customer impacts . Although there will be numbers associated with the "road test", it is not a n exercise in setting the actual rates . A recommendation on the rates will be presented to the Counci l as part of the 2013-2015 financial planning process . Meeting 5 . Selection of the Final Rate Structure — TBD .After completion of the study sessions , HDR will provide the Council with a report summarizing the steps taken to review the rat e structure, an overview of the rate structures reviewed during the study, recommendations of th e analysis HDR will undertake, and a recommended final proposed rate structure . FISCAL IMPAC T There is no fiscal impact associated with participating in the water rate structure study sessions . •ATTACHMEN T HDR Engineering Study Session 3 presentation docT :\Coundl Agenda Reports \2012\2012-09-18\Water Rate Saud.Stu (MaIdng Horton ) Session Topic Outcome Technical Review of Rate Structures Review the final selected conceptual rate structure s 5 Selection of a Water Rate Structure Receive a report with a final recommended rate structur e • SS1-5 city o f san tws oBisp o Presented by : Shawn Koorn Associate Vice Presiden t HDR Engineering, Inc . •S SS1-6 Ma• Overview of the Presentation Attachment 1 v .r ew .of the a Proces ;Le Rvi r Review the City Council and staff's prioritization of goal s Review rate structure component s Discuss rate design option s •Single Famil y •All Other s Determine rate structures for "Road Test" SS1-7 ~-.`2 Select "Conceptual"* Rate Structure fo r Further Revie w Rate Structure Evaluation Process ' Review of th e Current Water Rat e Structure Prioritize Goals an d Objective s Review Curren t Industry Thinkin g and Trends Prioritization of Attributes By Councii Attaa en,dByStaff Revenue Stability & Predictabilit y Stability & Predictability of Rate s Simple and Easy to Understand and Administe r Fair Allocation of Total Cost of Service Amon g Customer Classes 1 Stability & Predictability of Rate s 2 Revenue Stability & Predictabilit y 3 Fair Allocation of Total Cost of Service Amon g Customer Classe s 4 Reflect All Present and Future Costs & Benefits of Providing Utility Service s Discourage Wasteful Use, While Promoting Al l Justified Types and Amounts Simple and Easy to Understand and Administe r SS1-9 hja 4 Overview of the Current Rate Structur e 1to5units 6 to 25 units 26+ unit s A I Other Gas 1 to 5 units 6+ units $6 .25/Uni t $7 .82/Uni t $9 .80/Uni t 1 [rt~t =10 0 Cubic Feet .~.>""C"C '":7 ".'h . Attac ent 1Current Water Rate Structure vs . Goa s Yields total revenu erequirements (Give ngoal)• Simple and easy t ounderstand Fair allocation of cost s(inter-class) ss1-1 1 6 InRevenue and Rat eStability and Predictabilit y Raise, or implement, fixed charge s •Need to consider fixed/variable cost s •Minimum bil l Adopt financial policies establishing minimum cash level s •Operating cas h •Rate stabilizatio n •Emergency reserv e Restructure to provide additional stabilit y Just a few of the tools in the toolbox Rate Structure Components Rate Structure Components -Fixed ***Average 5/8" meter charge is less than $10/month Source : AWWA & Raftelis Consultants, Inc . 2010 Water and Wastewater Rate Survey — "C" systems SS 1 14 "~ Meter Size Rate Pe r Mont h 5/8-inch $ 18.7 3 3/4-inch $ 21 .9 7 1-inch $ 28.4 6 1-1/2-inch $ 44,6 8 2-inch $ 64.1 5 3-inch $ 109.5 7 4-inch $ 174.4 6 6-inch $ 336.6 7 8-inch $ 531 .3 4 10-inch $ 758.44 Fixed Charge s various names ; meter charge,:customer charge, minimu m charge,readiness to serve,etc . • Promotes revenue stabilit y • Recovers customer relate dcosts, plus other "fixed" cost s of the syste m Rate Structure Components —Variable s " •Similar to fixed charges there are man y possibilitie s • Including combination of structure s •Change based on metered consumptio n •Preferred by customer s •Fair basic types of variable charges SS1-1 510 Variable Rate Structure s $/CC F $3 .00 10 20 30 40 50 6 0 Quantity (CCF ) $/CCF $4 .2 5 $3 .6 0 $3 .0 0 $2 .50 10 20 30 40 50 6 0 Quantity (CCF) U Typical Water Rate Structures Attachment 1 Residential Water Rat e Structure s 3% _3 % it Fla t ■Decreasin g ■Increasing/Decreasing Unifor m ■ Increasing Non-Residential Water Rat e Structure s 2% _5 % ■Fla t ■Decreasin g ■Increasing/Decreasing N Unifor m ■ Increasin g Source : AWWA & Raftelis Consultants, Inc .2010 Water and Wastewater Rate Survey SS1-1 7 12 U What is the Appropriate Level?Attachment 1 Fixed Charge s —Revenue Stabilit y —Collection of Fixed Cost s —Low Customer Acceptance Volumetric Charge s —Conservatio n —Efficient Us e —High Custome rAcceptance — Does sale s — Salaries, debt$service etc . — 80 – 95% for water utilities The majority of a utility's costs are fixed in natur e Variabl e —Variesn water sale s icals, etc . 20 tN ater utilities SS1-18 • Defining Block/Tier Size Assumptions chment l Developing a rational basis for the block size s •Indoor, outdoor, excessive, wastefu l Indoor us e •Average winter water use (system or individual customer ) •Number of occupants and gallons/capit a Outdoor us e •Irrigation watering needs (average summer use or calculated average per customer ) Excessive and wasteful ` •Based on conservation goals and objective s Applicability to customer classes of servic e Seasonal availability and cost of water SS1-1 9 14 SLO Customer Usage Characteristic s Monthly Customer Class Averages (ccf) 31 30 28 ■Annual Monthly Averag e Winter Monthly Averag e ISSummer Monthly Averag e Single Family All Other Annua l Monthl y Average (ccf) Winter Summe r Monthly Monthl y Average (ccf) Average (ccf ) Multi-Family 19 Commercial 3 5 Schools 92 4 Government 42 Industrial 17 Irrigation 36 20 19 35 35 1,027 850 39 45 16 18 22 5$1-20 Single Family Usage By Block (ea ) Single Family Winter vs . Summer Monthly Consumption By Block (ccf ) Block 1 Block 2 Block 3 Winter Percentages i 60 .6%35 .0%4 .5 % Summer Percentages 49 .8%47 .1%3 .1% SS1-21 103, 16 U Attachment 1Conceptual Rate Structure s o Be Evaluated SS1-22 Da Attachment tConceptual Rate Structure Overvie w Focus was on revenue and rate stability an d simplicit y These can be achieved through : Fixed charge s Minimum bill s Changes in pricing of consumptio n Typically not through : Rate structure (year 1 ) -Block size s Minimize rate impacts (transition) to customer s 18 SS1-23 ', Overview of the Approach Attachment 1 HDR has developed eight (8) rate structures fo r evaluation purpose s Five (5) for single famil y —Three (3) for all other s Key Assumption s —Any rate alternative can/will include a fixed charg e • Focus is on how to compare to goals vs . objective s to keep fixed and variable charges in balanc e —Endless possibilities, permutations an d combinations —the Council may discover anothe r alternative that combines the elements of th e alternatives reviewed SS1-24 S Option 1 Rate Structure Attachment 1 •May not meet revenue/rate stability goa l a Simple and easy to understan d •May not reflect present and future costs or changin g condition s May be addressed through pricin g •Fair allocation of costs (inter/intra class ) •Maintains conservation incentive SS1-26 FD3 Rate Structure 1 -Current Rate Structur e Single Family Customer s Consumption Charg e Block 1 Block 2 Block 3 0-5ccf 6 - 25 cc f Above 25 ccf Inverted Block Pric e Inverted Block Pric e Inverted Block Price S Option 2 Rate Structure Attachment 1 Rate Structure 2 —Current Rate Structure ; Plu s Minimum Bill ofrrthe'Block Single Family Customer s Minimum Bill Flat Charg eMinimum Consumptio n Consumption Charg e Block 1 Block 2 Block 3 Inverted Block Pric e Inverted Block Pric e Inverted Block Pric e ? -5 ccf 6 - 25 ccf Above 25 ccf •Provides additional revenue/rate stabilit y •Simple and easy to understan d •May not reflect present and future costs or changin g condition s o May be addressed through pricin g •Fair allocation of costs (inter/intra class ) •SS1-27 F1.Maintains conservation incentiv e22 Option 3 Rate Structure Attachment 1 Rate Structure 3 —Current Rate Structure ; Plu s Fixed Charg e •Provides additional revenue/rate stabilit y •Simple and easy to understan d May not reflect present and future costs or changin g condition s ■ May be addressed through pricin g •Fair allocation of costs (inter/intra class ) Maintains conservation incentive SS1-28 FM, S S Single Family Customer s Fixed Charg e Consumption Charg e Block 1 Block 2 Block 3 Customer Cost / % of FC Flat Charg e 0-5ccf 6 - 25 ccf Above 25 ccf Inverted Block Pric e Inverted Block Pric e Inverted Block Price 24 Option 4 Rate Structur e • Provides additional revenue/rate stabilit y Simple and easy to understan d May not reflect present and future costs o r changing condition s May be addressed through pricin g Fair allocation of costs (inter/intra class ) May minimize conservation incentive SS1-29 Option 5 Rate Structure Attachment 1 a •Provides additional revenue/rate stabilit y •Simple and easy to understan d •May provide additional opportunities to reflec t present and future costs or changing condition s •Fair allocation of costs (inter/intra class ) •May minimize conservation incentive SS1-3 0 Rate Structure 5 -Current Rate Structure ; Plu s Fixed Charge and Revised Pricing and Block s Bloc k Single Family Customer s Fixed Charg e Consumption Charg e Block 1 Block 2 Block 3 ..,,fm ig ofzlEhe~Bloc k Customer Cost / % of FC Flat Charg e Increase/Decrease 5 ccf Inverted Block Price t ? - 25 ccf Inverted Block Pric e Above 25 ccf Inverted Block Price j All Other Customers Rate Struc tAuh res N Option 1 Rate Structure Attachment 1 Rate Structure 1 –Current Rate Structur e ® May not meet revenue/rate stabilit y Possible intra-class inequitie s • May not adapt to changing condition s Is simple and easy to understand SS1-32 • All Other Customer s Consumption Charg e Block 1 Block 2 0-5ccf Above 5 ccf Inverted Block Pric e Inverted Block Price Option 2 Rate Structure Attachment 1 Rate Structure 2 – Current Rate Structure ; Plu s Fixed Charg e I o All Other Customers Fixed Charg e Consumption Charg e Block 1 Block 2 Pricing ofthe'Bloc k eis,fcrDeterminin g Block :Size Customer Cost / % of FC Flat Charg e 0-5ccf Above 5 ccf Inverted Block Pric e Inverted Block Pric e Provides additional revenue/rate stabilit y Simple and easy to understan d May not adapt to changing condition s Possible intra-class inequities SS 1-33 a28 Option 3 Rate Structure Attachment 1 Rate Structure 3 –Fixed Charge with a Unifor m Rate Structur e •Provides additional revenue/rate stabilit y ®Simple and easy to understan d Does not adapt to changing condition s Decreases intra-class inequities SS1-34 1D3, All Other Customer s Fixed Charg e Consumption Charg e All Consumption Customer Cost / % of F C NA iciiing of the Bloc k Flat Charg e Uniform Rate Attachment 1 Need to confirm billing system capabilitie s Application of fixed charges to custome r classe s Residential vs . All Othe r All rate structures can be revised to reflec t Council and Staff goals and objectives SS1-3 530 C Selectio .n preferre d alternatives 'it(SA'S II Attachment 1 Technical Review of l Rate Structure s Present results t o SS1-36 'Dr( Rate Design Goal s and Objective s Prioritize goals an d r objectives Present to Cit yCouncily:,......".:2.:.:....:...!. Development o f actual rates