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HomeMy WebLinkAbout07/26/2005, SS 1 - UTILITY BILLING ENHANCEMENT STUDY-REVIEW OF UTILITY RATE DESIGN GOALS AND OBJECTIVES council °°s° July 26,2o05` j acEnna 12E1JM Ss � CITY OF SAN LUIS OBISPO FROM: John Moss,Utilities Directo M Prepared By: Sue Baasch,Administrative yst4 SUBJECT: UTILITY BILLING ENHANCEMENT STUDY—REVIEW OF UTILITY RATE DESIGN GOALS AND OBJECTIVES CAO RECOMMENDATION - (1) Receive the initial presentation from HDR Engineering,Inc./Economic.and Engineering Services,Inc. (HDR/EES), on the City's Utility Billing system study; (2) Review the City's existing water and sewer rate structure goals and objectives; and (3) Prioritize top five goals to apply to the development of possibly revised water and sewer rate structures for San Luis Obispo. DISCUSSION On May 17, 2005 Council approved' a contract with HDR Engineering/Economic and Engineering Services, Inc., (HDR/EES) in association with Langham Consulting Services, to review the water and sewer billing processes and rate structures and make recommendations on possible enhancements the City should pursue. Specifically,,_the study is to evaluate the City's water and sewer rate policies and structures, as well as billing frequency, evaluate options for remote meter reading systems; and provide a recommendation of utility billing software systems . that will support the City's desired rate structure and' meter reading systems. This report is intended as an overview for the foundational study session that will focus on water and sewer rate structure goals and conclude with a ballot to reflect Council's priorities for the rate structures. The City's consultant will lead the detailed presentation and discussion with Council in a study/educational format. Why study this now? This comprehensive look at our rate structures and utility billing systems was prompted by the long range forecast of significant increases in both water and sewer rates, as a result of the need for additional water supplies, infrastructure improvements, and meeting new legislative requirements. What is the process? The process kicks off with today's study session, where Tom Gould,of HDR/EES will present to the Council a thorough discussion of the commonlyaccepted rate design goals and objectives and their meanings and implications to an overall rate structure. Understanding the Council's rate design goals and objectives in establishing water and sewer rates is the foundation for the rate design process. In this study session, Tom Gould will.review and discuss the City's current rate Utility Billing Enhancement Study—Study Session 1 Review of Rate Structure Goals and Objectives Page 2 structure goals. These are as follows: City of San Luis Obispo Rate Structure Goals ■ Comply with legal requirements ■ Encourage conservation ■ Ensure revenue adequacy to fully meet system operating and capital needs ■ Provide equity and fairness between classes of customers • Be easy to understand and easy to administer ■ Facilitate ongoing review to maintain rate stability Within the discussion, he will review the ten "generally accepted" rate design goals and objectives that other utilities typically consider in establishing rates. For example, other goals that could supplement or be added to the goals above are: Other Potential Goals ■ Continuity in rate philosophy Definition: the implementation of new rate structures.should be consistent with past utility rate setting philosophy and minimize customer impacts during any change in rate structure. Cost-based Definition: the rates and rate structure shall be based upon a fair allocation of total cost of service among the customer classes of service by use of a generally accepted cost of service methodology. Feasibility Definition: the rates should be structured such that it allows the City to easily bill and administer the rates (e.g. compatibility with the City's billing system). These goals may not support each other and may actually conflict with each other. For example, a rate structure that provides maximum rate stability (fixed rate) will probably not encourage. conservation rates. Therefore, a process to identify the goals, define them according to City of San Luis Obispo values, and then weight them, is both useful and necessary: This will provide an updated set of rate design goals and objectives that reflect changing community goals and legal requirements. Recent court cases regarding Proposition 218, could affect how utility rates are derived and implemented. (A brief overview of the potential implications, should Proposition 218 apply to the City water and sewer rates, is included below.) In addition, a number of communications from the community reflect a desire to see the residential sewer rates studied because they feel they are not equitable. Finally, at the end of the discussion, Council will be asked -to prioritize their top five rate structure goals for further development. This will be accomplished via. a ballot approach whereby each Council member will be asked to prioritize their "Top 5" rate design goals and objectives. A similar prioritization of Utilities and Finance staff's rate structure goals will be completed.; While this approach is different than our usual process of"staff recommendation; Council action," the intent is to see how the City's policy objectives square with more �-Z Utility Billing Enhancement Study—Study Session 1 Review of Rate Structure Goals and Objectives Page 3 administrative and analytic considerations =- do they match,up or are they in conflict with one another, and if so, how can we reconcile these differences? At every step in the process, of course, the Council will be asked to provide the final direction. At the follow-up Council study session on August 23`d, the results of the Council and staff balloting for the weighting of recommended rate structure goals will be presented and discussed. At that time, conceptual water and sewer rate designs will be presented that are intended to meet the prioritized rate design goals and objectives of the City. A third Council meeting in September or October (date not yet set) will present the recommended rate structures to support those goals and financial policies. The full report presenting all the recommendations for.all four areas of the study is expected by the end of the year. PROPOSITION 218–An Update City of San Luis Obispo water and sewer rates are billed based on use by the customer, not as a result of property ownership. As-such, along with virtually all other utility providers that based their billings on use–and billed to the customer, not property owner—staff had concluded that the fee provisions of Proposition 218 did not apply to the City. Recently, however; there have been at least two court cases, one in Fresno and one in Los Angeles, regarding the application of Proposition 218 to water fees. The outcome of the Fresno case and the outcome of the Los Angeles case are in conflict. The California Supreme Court has elected not to rule on this issue,. so for now, nothing has been decided that would necessarily affect the City of San Luis Obispo. However, should that change, the City would need to consider using a different noticing process whereby all property owners would be notified of recommended rate increases, and which would be subject to majority protest. Also; the City of San Luis Obispo's low income assistance program would have to be discontinued, as this type of program is not allowed to be funded by water rates under Proposition 218. While staff does not believe that our water and sewer rates, and rate structures, are necessarily subject to the requirements of Proposition 218, discussion of rate structure changes should not be absent consideration of the spirit of Proposition 218, i.e., proportionality, cost of service-basis, nexus between costs and rates, and public notice of any proposed changes. FISCAL IMPACT There is no fiscal impact associated with the recommended action. Subsequent actions of the Council based on the results of this study session may alter the City's rate structure and rates as applied to the different customer classes within the City; however, it is important to keep separate the issues of rate structure and revenue adequacy. Any rate structure options considered by the Council at subsequent meetings will be presented as.revenue neutral. City of San Luis Obispo Review of the Utility Rate design Goals and Objectives July 26,2005 man Presented by: Tom Gould,Vice President meas HDR/EES tleliwue,Washington wwwfiddncxan Overview of the Presentation ■ Introductions ■ Overview of the City's Study Overview of the Project Team Overview of the Proposed Study and Scope of Services ■ Overview of the Rate Setting Process ■ Review of the City's Current Rate Design Goals and Objectives ■ City Council Policy Direction Needed — Prioritization of Rate Design Goals and Objectives ■ Next Steps h-R I emcees 2 Overview of the Project Team and the Project r3 1 y \1 h-R I gees Project Team Overview ■ HDR Engineering,Inc./EES Prolect Manager Tom Gould,EES > Prime Consultant > Experts in utility rate suing and AMR Rata Structure Evaluation > Located in Bellevue,Washington Task Leader.Tom Gould ■ Langham Consulting Services,Inc. =LLeader g > Subc:onsultant tD HDR/EES > Experts in evaluating customer information and billing systems > Located in Henderson, NV Billing System Evaluation Task Leader:Tim Almond I� I lieu 4 Overview of the Project ■ Major Tasks of the Study Evaluation of Water and Sewer Rate Structures _ Automated Meter Reading System(AMR)Evaluation > Utility Billing System Evaluation ■ Recognition of the diverse areas of expertise needed for this study ■ Three separate and distinct ` V tasks- but they must be coordinated I I Ines 5 Overview of the Proposed Scope of Services ■ Task 1 — Initial Kick-Off Meeting (Project Meeting) ■ Task 2 — Data Collection ■ Task 3 — Evaluation of Water and Sewer Rate Structures 3.1—Review of the City's Current Rate Design Goats and Objectives 3.2—Review of the City's Current Rate Structures 3.3—Conceptual Review of the Potential Rate Structure Alternatives 3.4—Detailed Analysis and Evaluation of the Rate Structure Alternatives 3.5—Review of the Philosophy and Rate Structure fon Recycled Water Iz'R I dams Overview of the Proposed Scope of Services (continued) ■ Task 4— Review of Customer Billing Frequency ■ Task 5 —Automated Meter Reading (AMR) System Evaluation 5.1 —Review Existing Information 5.2—Evaluate Options for AMR 5.3—Provide Recommendations ■ Task 6 — Utility Billing System Evaluation ■ Task 7—Written Reports ■ Task 8 — Public Meetings/Presentations (3) mem 7 Overview of the Rate Setting Process M i I- emcees 8 Typical Objectives When Setting Rates ■ Revenue Stability and ■ Simplicity Sufficiency (Administrative and ■ Continuity in Rate Customer Philosophy Understanding) ■ Fairness and Equity ■ Feasibility ■ Cost-Ba ■ Legal and Regulatory ■ Ability to Pay Constraints ■ Conservation—Efficient ■ Legally Defendable Usage IR I mees e Technical Analyses Used to Review Rates Compares Me revenues of the utility to Revenue'Requirement Its expenses to determine the overall level of rate adjustment Equitably allocates the revenue 7 Cost of Service requirements between the various customer classes of service AndnLupi-&MOW Design rates for each class of service to 7 Rate Design meet the revenue needs of the WNW, along with any other rate design goals and objectives Z I laces 10 Overview of the Revenue Requirement Analysis ■ Compares the utility's "sources of funds"with its "applications of funds" / ■ Provides a measure of the adequacy of the utility's existing rates(revenue generation);,,jr ■ Utilizes prudent financial planning criteria ; ■ Allows for planning over a `J- longer time horizon HR I mees „ Other Considerations in Developing Revenue Requirements ■ Financial Planning Considerations Debt service coverage (DSC) ratios Adequacy of reserves Financing of capital projects - levels and methods ■ Adequate Funding of Renewal and Replacement Capital Projects (Existing Facilities) ■ Establishing Financial/Rate Setting Policies to Aid the Process IR I mees 12 Overview of the Cost of Service Analysis ■ Method to Equitably Allocate Costs Between Customer Groups (e.g. residential, commercial, etc.) ■ Considers the Reason that Costs Are Incurred ■ Utilizes a Generally Accepted Approach to Allocate costs ■ Provides Unit Cost Information h-R I aem 13 Why Cost of Service? — _— -—� ■ Generally accepted as"fair and equitable" ■ Avoids subsidies ■ Revenues track costs ■ Can provide an accurate "price signal'to customers I Z mem 14 Key Information That A Cost of Service Study Provides ■ Relative measure of the cost to serve a customer class of service Allocated costs compared to present rates ■ Average unit costs Cost-based rates Fixed vs.variable charges HR mees ,g Goals of Rate Design ■ Easy to Understand ■ Easy to Administer • ■ Continuity in Rate Setting Philosophy ■ Equitable and Non- Discriminating (Cost-Based) ■ Provide Revenue Stability ■ Promote Efficient Allocation of Resources FM I sees 16 Key Issues With Rate Design ■ Level vs. Structure ■ Price elasticity (price sensitivity) ■ In theory, all rate design options should collect the i same level of revenue ■ Customer bill comparisons —customer impacts Mees ,7 Review of the City's Rate Design Goals and Objectives I I mees ,e Purpose of Reviewing the City's Rate Design Goals and Objectives ■ Provides the perspective of how today's water and sewer rates were developed ■ Understanding what other water and sewer utilities consider/think about ■ Problem of competing goals and objectives ■ What is important—what should the City cant'forward in any new rate structures? I I mees s Overview of the Approach Used ■ Reviewed historical documents and discussed rate structure history with the City's project team ■ Review of the attributes of a sound rate design — i.e. "generally accepted" goals and objectives ■ Comparison between the attributes of a sound rate design and the City's current rate structure I I mem History,of the City's Rates ■ Water Rates Rates have been relatively stable over the last 10 years Major structure change in 1993 Eliminated minimum water charges—based solely on volumetric consumption Adopted a two-tier inverted block rate structure — 0 to 5 ccf and over 5 ccf** Staff noted difficulty given that goals may conflict ■ Sewer Rates Rates have increased over the last ten years, but no change In structure Residential rates—foxed charge Non-residential—primarily volumetric(water use) **Notme.-07=hundred cubit feet of water or748gallons HZ I !Rees 21 City's Historical Rate Setting Goals and Objectives ■ Explicit Rate Design Goals and Objectives Comply with legal requirements Encourage conservation Ensure revenue adequacy to fully meet system operating and capital needs Provide equity and fairness between classes of customers Be easy to understand and easy to administer Facilitate ongoing review to maintain revenue stability IZ I !Rees Our Observations of the City's Rate Design Goals and Objectives ■ Over the years, and through various documents the City has considered a number of different rate design goals and objectives ■ The City has a list of goals and objectives, but not a priority for each goals Z Gees Looking Ahead - Attributes of a Sound Rate Structure is Many rate manuals have a list of the rate design goals and objectives (attributes) ■ James C. Bonbright; Principles of Public Utility Rates, provides the most detailed and often quoted attributes of a sound rate design (rate design goals and objectives) ■ List is often paraphrased Int I zees 24 The Challenge of Using Bonbright's List of Attributes ■ Bonbright recognized: List should be used as a '�.✓+��` reminder of the possible considerations The list is"also useful in f — suggesting important reasons why problems of practical rate design do not yield readily to scientific principles of optimum pricing" Conflicts between goals Lack of clear definitions—what is"undue discrimination h-R I mees 25 Moving Towards Working Definitions of Bonbright's Attributes ■ Three Step Process: 1. Start with Bonbrights list of ten (10)attributes of a sound rate structure 2. Next,clarify Bonbrights language and intent 3. Finally,develop working definitions suitable for the City's use in the review of the attributes of the CWs water and sewer rates ■ Working definitions are open for discussion and change ■ No"right'or"wrong"definitions aees 26 Bonbright's Attributes of a Sound Rate Structure ■ Revenue-Related Attributes: 1. Bonbright: Effectiveness in yielding total revenue requirements under the fair return standard without any socially undesirable expansion of the rate base or socially undesirable level of product quality or safety. Restated: The City's rates should meet the total revenue requirement needs of the City. Definition: The rate structure will be developed to cover the total casts of utility operations, under a "cash needs approach -operating, taxes/transfers, capital, debt service and reserves HR I gees n Bonbright's Attributes of a Sound Rate Structure (continued) ■ Revenue-Related Attributes: z. Bonbright: Revenue stability and predictability, with a minimum of unexpected changes seriously adverse to utility companies. Restated: Revenue stability and predictability, with a minimum of unexpected changes seriously adverse to the City's utilities. Definition: The rate structure will be developed to eliminate swings in revenue generation from year-to-year based on such factors as weather, conservation and customer usage changes Annual swings in planned revenue should be no greater than-10%and+1096. IR I gees 28 Bonbright's Attributes t of a;Sound Rate Structure (continued) r ■ Revenue-Related Attributes „ 3. Bonbriight: Stability and predictability of the rates themselves, with a.minimum of unexpected changes seriously adverse to ratepayers with a sense of historical continuity. (Compare '?he best tax is an old tax'). Restated-: From the.customer's perspective,the rates should appear to be stable and result in customer bills that are relatively predictable. There should be a continuity of philosophy in the establishment of the rates,with a minimum of unexpected changes seriously adverse to customers. Definition: The Implementation of new rate structures should be mnslslent with past utility rate setting philb-Tphy and minimize customer impacts dunny any drange In rate structure. A typical Amer, under norma/conditions, and'nonnarusage,should not have an adjustment greater than 1046 on an annual basis, unless biased upon cost OfseMce gees r i Bonbright's Attributes r' of a Sound Rate Structure (continued) r Cost-Related Attributes: a Bonbrigiht: Static efficiency of the rate classes and rate blocks in discouraging wasteful use of service while promoting ail justified types and amounts. • in the control of the total amounts of service supplied by the company a in the control of the relative uses of alternative types of service a by ratepayers (on-peak versus off-peak service or higher quality s versus lower quality of service). E Resorted: Efficiency and effectiveness of the rate classes and rate blocks in discouraging_ wasieful use of service while promoting all justified types and amounts. ' Definition: the rate structure should promote ef)➢dent use of water and sewer services and discourage or penalize ineffiodnt uses. I Z I gees 30 Bonbright's Attributes of a Sound Rate Structure (continued) ■ Cost-Related Attributes: s. Bonbright: Reflection of all of the present and future private and social costs and benefits occasioned by a service's provision. (i.e.,all intemalities and externalities). Restated: The rate should reflect all of the utility's present and future internal costs,along with the external private and social costs/benefits. Definition: fie rate structure should reflect all baditlonal Intemal costs(direct and indirect)that the City Incurs,and, under appropriate situations and conditions(eg.severe drought)may also Indude extemaliifes ofprasent and future casts and benefits (Le, marg/nal cost and/or value of water). HR I zees 71 Bonbright's Attributes of a Sound Rate Structure (continued) ■ Cost-Related Attributes: 5 Bonbright: Fairness of the specific rates in apportionment of total costs of service among the different ratepayers so as to avoid arbitrariness and capriciousness and to attain equity in three dimensions: (1) horizontal (i.e., equals treated equally); (2) vertical (i.e., unequal treated unequally); and (3) anonymous (i.e. no ratepayer's demands can be diverted away uneconomically from an incumbent by a potential entrant). Restated: Fairness of the rates in the allocation of total costs of service among the different ratepayers so as to avoid arbitrariness,capriciousness and to attain equity. Definition: The rates and the fate structure shall be based upon a fair allocation of total cost ofserwfce among the customer dasses ofs&wce by use of a 'generally aaxpted'cost of service methodologies(i.e. AWWA-MI rate manual). I I sees 32 Bonbright's Attributes of a Bound Rate Structure (continued) ■ Cost-Related Attributes: 7. Bonbright: Avoidance of undue discrimination in rate relationships so as to be, if possible, compensatory (i.e. subsidy free with no inter-customer burdens). Restated: The rates should be, as practically possible, non- discriminatory, between customer groups, and within each customer group. Definition: The rate structures should avoid interdass subsidies whenever possible to ensure each dass pays their full cost ofserwce. [Prop 118- The amount of fee or d�arge imposed...shall not exceed the proportional cost of the service attributable to the parcel I- Z I mees Bonbright's Attributes of a Sound Rate Structure (continued) ■ Cost-Related Attributes: s. Bonbright: Dynamic efficiency in promoting innovation and responding economically to changing demand and supply patterns. Restated: The ability and efficiency of the rate to respond to changing demand and supply patterns. Definition: The rate structure should be developed such that It either responds appropriately and directly to changes in supply, demand, etc, or altemabvely, contains the flexibility to allow the utility to respond to the changing needs as a result of supply, demand, and/or environmental concerns(eg. drought conditions, lack of treatment capacity, etc.). I I dffws 34 Bonbright's Attributes of a Sound Rate Structure (continued) ■ Practical-Related Attributes: 9. Bonbright The related, practical attributes of simplicity, certainty, convenience of payment, economy in collection, understandability, public acceptability and feasibility of application. Restated: The attributes of simplicity,certainty, convenience of payment,economy in collection, understandability, public acceptability and feasibility of administration. Definition: from the customer's perspective, the rate structure should be simple to understand,such that a customer can easily determine their bill from bhe utility's perspective, the rate .structure should be easy to administer and collect: Finally, the rate structure should have acceptance by the majority of Me aistomers that the rate structure and resulting bills are Yair and equitable.' I I >�rees 35 Bonbright's Attributes of a Sound Rate Structure (continued) ■ Practical-Related Attributes: so. Bonbright: Freedom from controversies as to proper interpretation. Restated: Freedom from controversies as to the application of the rate schedule to the customer and calculation of the customer's bill. Definition: The rate structure should not be ambiguous in its tarminology and structure. It should be simple to explain and understand by the average customer to minimize any misinterpretation regarding the customer's bill and the overall goals that the rate structure has been developed to meet. I-R I frees 36 Moving forward -Hex t Steps 3 a Today-Gain an understanding of the City Council's and staffs perspective on the goals and objectives—what is most important? - ■ Select your"top 5"goals and objectives out of the 10 goals and objectives (1 = highest, 2 = next highest; etc.) s� ■ Next step/meeting-compare the a fix, It prioritized goals/objectives to the City's current.rates and consider other"conceptual"water and sewer rate structures j h !Kees n.