HomeMy WebLinkAbout10/04/2005, BUS 4 - WATER AND SEWER RATE STRUCTURE REVIEW AND RECOMMENDATIONS r Ir
counat Dp
October 4, 2005
aGEnoa REpont B LLS It
CITYOF SAN LUIS O B I S P O
FROM: John Moss,Utilities Director
Prepared By: Sue Baasch, Administrative Analyst%
SUBJECT: WATER AND SEWER RATE STRUCTURE REVIEW AND
RECOMMENDATIONS
CAO RECOMMENDATION
(1) Review the information in this staff report and HDR's Volume 1 Utility Rate Structure
Evaluation and provide direction to staff as to Council's preferred rate structure concepts;
and
(2) Approve the recommended implementation plan, including a community outreach
program.
REPORT IN BRIEF
Over the last several years, the Council has supported master plans for the water and sewer
resources and infrastructure necessary to serve the community of San Luis Obispo as it grows to
meet its general plan goals. In doing so, it has also been the Council's desire to ensure that
community is best-served in the way it is charged for these services. The ten year forecast for
water and sewer rates suggests that charges for water and sewer services will increase annually in
the range of eight to ten percent, so customers will desire, and have a right to expect, an
appropriate billing system.
The opportunities for enhancing the City's utility billing services are being studied by HDR
Engineering, Inc. The first step of the study was to evaluate the current water and sewer rate
structures based on Council's priority goals for same. This step has been, completed and the
results of the ranking, the evaluation of the current rate structures and recommendations for
modifications are contained in this staff report and more fully described in HDR's Volume 1
Utility Rate Structure Evaluation (provided to Council under separate cover and available for
public review in the City Clerk's office and the Utilities office at 819 Morro).
Utilities and Finance staff have reviewed all the information and have narrowed the focus to a
review of a recommended water rate structure and alternative, and a recommended sewer rate
structure and.alternative. The water rate structure is very similar to the current one. The sewer
rate structure is quite different, and reflects both trends in industry thinking and community
comments received to date.
Staff is seeking Council direction on the recommended rate structures concepts, as well as the
proposed implementation ideas,which include a community outreach program.
Looking at both rate structures is the first step of this process. Other utility billing enhancements
being studied are moving to monthly utility billing and automated meter reading. Once all of
LI
Water and Sewer Rate Structure Review and Recommendations
Page 2 .
these have been evaluated and a course selected, the final .step of this process is to identify a
utility billing program that will support the recommendations and provide the kind and amount of
information our customers need. In addition to this project, the Utilities and Finance and
Information Technology Departments are working on offering online utility bill payment, which
is likely to be launched in the next couple of months. Our goal in all of this is to enhance and
ensure customer satisfaction with our water and sewer services.
DISCUSSION
At the conclusion of their July 26th study session on utility rate objectives and goals, the Council
ranked their top five rate structure,goals from a list of ten. The ten goals they reviewed and
ranked were derived from the writings of an economist, Bonbright, whose conclusions about rate
objectives have become a generally accepted guideline for the utility industry. Selecting and
weighting the top five goals was the initial step in evaluating and analyzing the appropriateness
of the City of San Luis Obispo's current water and sewer rate structures in meeting the Council's
and community's highest priorities for their water and sewer utility billing services.
This report provides more detail about the outcome of the ranking, what changes might be
necessary to more closely align the water and sewer rate structures with the Council's and
community's goals, and a look into how this component fits into the entire utility billing services
enhancement project undertaken by staff with the assistance of the project consultant, HDR
Engineering,Incorporated ("HDR").
Organization of this Report and the Attachments
Section SubJect
1 Priority Goals for Utility rate structures-Council and staff ranking results
2 Rate Structure Components(defining the terms and concepts of rate structures)
3 The City of SLO's current water and sewer rate structures
4 Water and sewer rate structure options and recommendations
5 Implementation Ideas/Community outreach
6 Perspective: history and description of broader Utility billing enhancement
project
7 Summary — description of implementation ideas, including community outreach
program
Attachment 1 Illustrations of sample bills(using recommended and alternative rate structures)
Separate_ Cover Volume.l —Draft Final Report Utility Rate Structure Evaluation—HDR
Provided to Council Under Separate Cover and Available to Public.through.the City
Clerk's O ce and Utilities tce at 879 Morro
Water and Sewer Rate Structure Review and Recommendations
Page 3
Section 1. Priority Goals for Utility Rate Structures for the City of SLO
Results of Council and staff ranking
DesignPriontization of the Rate Objectives
By The City Council and City Staff
City Council Prioritization Rank City Staff Prioritization
Yields Total Revenue Requirements 1 Yields Total Revenue Requirements
Conservation Oriented-Discourage 2 Conservation Oriented-Discourage
Wasteful Use Wasteful Use
Easy to Understand and Administer 3 Easy to Understand and Administer
Stability and Predictability 4 Fair Allocation of Costs to Attain Equity
Fair Allocation of Costs to Attain Equity 5 Freedom from Controversy as to Interpretation
As indicated in the above table, Council ranked yielding total revenue required by the water and
sewer funds as their highest goal for the City's water and sewer rate structures. That was
followed by promoting conservation (discouraging wasteful use) as the second most important
goal. The third goal was to make the rate structures easy to understand and administer. Fourth
was stability and predictability (trying to ensure rate increases of less than ten percent for any
customer); and fifth was to try to achieve a fair allocation of costs among the customers.
Staff's ranking was very similar to the Council's with a variation in the fourth and fifth goals.
Section 2. Rate Structure Components
Defining the terms and concepts of rate structures
An amount assessed toa or all customer class(es), regardless of use. Fixed or
Fixed or "Flat" "flat" charges relate to the fact that a good portion of a utility provider's charges
Charge are fixed and do not vary according to use (examples: reading meters and billing,
repairing and maintaining infrastructure, implementing programs and meeting
legislative requirements,paying debt service.) '
An amount assessed to a particular customer based on that particular customer's
Variable Charge use. Variable charges relate to paying for those expenses that change according
to the amount of water and wastewater treated (examplest. treatment chemicals,
_
electricity for pumping)'
Seasonal/Peak Seasonal charges can vary reflecting increased costs to provide utility service at
Charge certain times of the day or year, or to provide a financial cue to customers to
_ promote use at certain times of the day or year.
A customized allocation of water resources (and related charges) based on the
Water Budget unique customer characteristics (example' size of yard, household size, meter
size).
As used in this report, a residential cap is an upper limit or ceiling placed on
Residential Cap residential commodity charge for sewer billing purposes. This recognizes that it
is not possible to.accurately separate single family indoor and outdoor water use.
y 3
Water and Sewer Rate Structure Review and Recommendations
Page_4
Since it is only indoor use that will enter into the wastewater collection and
treatment system; a residential cap sets an appropriate limit on what residential.
customers must pay for wastewater services.
A cap is a concept used only for residential customers as multi-family and non-
_ residential customers are allowed to haveseparate irrigation meters.
As used in this report, there are three distinct utility customer classes in the City
Customer of San Luis Obispo: residential (single family and condos); multi-family(duplex,
Classes apartments); and non-residential (offices, commercial, industrial; landscape,
government and non- rofit or anizations).
' Fixed or Variable Charges can be set to recover the total cost of service, as, for example, the City of San Luis
Obispo does through its totally variable water rate structure
Section 1 The City of San Luis Obispo's Current Water and Sewer Rate Structures
Summary of the City's Current Wateir and Sewer Rates,
Rate Class/Schedule 2005/06 Rates
WATER UTILITY
Fixed Charges No Fixed Charges
Volumetric Charges/month
1 —5 CCF' $2.93 /CCF
Over 5 CCF $3.67/CCF
SEWER UTILITY
Single Family $32.33 /Month
Multi-Family Dwelling $25.46/Month/Unit
Mobile Home or Trailer Park $19.22/Month/Unit
Public,Private or Parochial School $4.02/Month/Student
All Other Accounts
Minimum Charge $32.33/Month
Water Usage in Excess of 5 CCF $3.90/CCF
' Note: a"CCF"is a hundred cubic feet. A CCF is equal to 748 gallons.
HDR's Volume 1 Report explains that high percentage of rate structures are some combination
of variable and fixed charges. The weighting of goals helps define the appropriate relationship
between variable and fixed charges,by customer classes. Chapter Three of the report looks at the
City's current rate structures and evaluates the current relationship of variable and fixed charges
in each of the rate structures.
Current Water Rate Structure—100% Variable Inverted Block Rate Structure/Two Tier
The City's current water rate structure is a 100% variable inverted block rate structure with no
Water and Sewer Rate Structure Review and Recommendations
Page 5
differentiation between classes of customers. This rate structure is very effective in sending a
rate signal to our customers to encourage conservation. It is easy to understand and administer,
and everyone pays the same per unit price.
Typically, this type of rate structure is not viewed as necessarily stable or predictable. Revenues
can vary due to changing water use patterns from drought response and or extended rainy
seasons. If revenues (sales) fall short of projections, rates may need to be increased to offset the
shortfall. However, it must be noted that the City has not yet experienced difficulty in meeting
water revenue projections and a fully-commodity-based water rate structure has been in place for
over ten years. Water sales and revenues have been relatively stable. Staff carefully examines
the water use patterns over multi-years and sets new consumption and revenue targets each year
as part of the annual fund analysis. HDR offers a strategy for addressing revenue stability by
establishing a rate stabilization fund within the water and sewer revenue requirements. This type
of policy is becoming more and more common in the water and wastewater industry.
Current Sewer Rate Structure — A Mix of Fixed and Variable Charges, Depending on
Customer Class
The City's current sewer rate structure design is a combination of variable and fixed charges, the
relationship of which is different depending on the customer class. The current sewer rate
structure design applies a 100% fixed rate to single family residential and multi-family
customers, and a fixed plus variable rate to all non-residential customers. The variable
component is based on metered water use. Charging residential customers a fixed rate is a
traditional way of charging for sewer services, as it is considered very stable in meeting revenue
requirements. It also recognizes the difficulty in accurately measuring wastewater generation
versus outdoor water use in single metered residential situations. This said, HDR explains in
their report, utilities across the country are increasingly using some form of variable rate structure
based on metered water use to charge for sewer services.
Assessing Community Satisfaction with the Current Rate Structures
Based on comments received by Utilities and Utility billing staff, the community is satisfied with
the water rate structure because there is the ability for a customer to manage the way they use
water, therefore being able to control the water charge on their bill. However, this cannot be said
of the City's current residential sewer rate structure; indeed, viewed side by side with the water
charges, customers feel that the sewer charges are not "fair". From a customer's point of view,
"fairness" relates to their demand and use of the system. From a utilities' point of view,
"fairness"can relate to customer demand on the system; it can also relate to how the utility incurs
expense, which is often unrelated to variable demand. Having distinctly different "fairness"
definitions in our water and sewer rate structures is leading to complaints from some City
customers.
One of the more common complaints received by our utility billing staff is the situation of a
single person living in a single family home paying the exact same sewer charge as the household
of six living in a single family home. Customers feel they have away to moderate their water
charges through conservation but have no such choice or control over their sewer charges. The
L
Water and Sewer Rate Structure Review and Recommendations
Page 6
perception is underscored by our use of two significantly different approaches for residential
users on the same bill: all variable for water and all fixed for sewer.
Section 4, Options and Recommendations for City Water and Sewer Rate Structures
HDR's Volume 1 Report analyzes a number of possible rate structures for both water and sewer:
As explained earlier, all rate structures could have a fixed base component along with a variable
portion. This fixed component could be simply based on:
1. The cost of an easily-segmented non-variable cost such as meter reading and billing (a
fairly small portion of the overall rate); or
2. The larger cost of those portions of water and sewer operations that do not change with
changes in customer use such as treatment and collection/distribution (a large portion of
expenses and therefore, charges); or
3. Some intermediary point between the first two..
Water Rate Structure Options and Recommendation
Possible water rate structure designs reviewed for consistency with Council's rate structure goals
are detailed in the consultant's report in Chapter 3. There are numerous variations on just a few .
simple themes: variable rate structures with tiers set for "average" customers; variations on the
number of tiers and their derivation based on individual water consumption; and water rates
based on developing water budgets for each customers or class of customer. With each proposed
variation Council's number one goal is assumed and the second goal—conservation—is strongly
supported. The various options seem more to trade emphasis between ease of administration and
fairness or equity. This analysis of the various options is intended to guide the City in its
development of a rate structure which reflects the needs, demographics, and circumstances of
San Luis Obispo.
The following conclusions (in no particular order) reflect some of the discussions and analysis by
staff of the various proposed water rate structure designs:
1. The current water rate structure has been successful at encouraging conservation
and can be strengthened by adding a third tier to residential accounts only that
would represent what would be considered wasteful use of water.
2. The current water rate structure is easy to understand and administer.
3. The City has over ten years of water rate history with the current structure and has
found it to be stable and predictable (if reviewed annually).
4. A variable- based structure where everyone pays the same per unit is perceived to be
fair and equitable.
S. A water rate structure based on individual use patterns would be difficult and costly
to develop and maintain given the amount and frequency of turnover of residential
customers associated with our student population.
6. A rate structure based on water budgets for individual customers would also be
Water and Sewer Rate Structure Review and Recommendations
Page 7
difficult and costly to develop and maintain.
7. Water budgets for large landscape water customers are currently being developed as
a service of the Utilities Conservation Office.
8.. Water rate structure design should take into account and reflect the demographics
and circumstances of this community.
For the purpose of this staff report, staff will focus on the two alternatives (Chapter 4 of the'HDR
Report) that seemed to emerge from the consultant's evaluation and staff's discussion of
community demographics and values.
Recommended Water Rate Structure
100'Yo VAIZIA13LE CIIARGES ASSESSED ACCORDING TO WATER USE,
Residential—Single Family
Tier one set at average residential customer indoor water use,
Tier two set to cover average customer summertime outdoor water use; and
Tier three set at above 25 units er month to send message about wasteful water use.
Multi-Family and Non-residential
Two tiers,as in current-structure.
Note: This is the same as our current water rate structure, with. the addition of a third tier for residential
customers.
This recommendation is the City's current rate structure modified to include a third tier to
strongly encourage the efficient use of water. Staff estimates that there are currently about 400
single family residential customers that would be affected by the third tier. These customers
have all been contacted numerous times offering assistance in reducing their water use and have
either failed to respond or continue to use water in excess of reasonable indoor use and irrigation
water demands. A third tier may draw these customers into our conservation efforts and
encourage them to take advantage of our water conservation services(see Attachment 1).
Water Rate Structure Alternative
Alternative Recommendation:
Residential—Single Family - -
51.50 per month to account for metering and billing services.
Tier one set at average residential customer indoor water use,
Tier two set to cover average customer summertime outdoor water use; and
Tier three set at above 25 units per month to send message about wasteful water use.
Multi-Family and Non-residential
$1.50 per month to account for metering and billing services.
Two tiers,as-in current.structure.
Adding a fixed component to the water and sewer bills will ensure that those customers who
Water and Sewer Rate Structure Review and Recommendations
Page 8
record no use in a given month would still at least pay for the cost to read their meter and prepare
and mail the bill. This would also mean a slight increase in the very low water using customer's
bills—$1.50 per month(reflecting some of the fixed costs not being charged currently). It should
be noted that adding the fixed fee results in a slight decrease of the commodity rate because of
the revenue .generated by the fee, and the intent to have the rate structure change be revenue
neutral. (Note: It costs $3.00 per account per month for utility billing for water and sewer
service. The recommendation is to divide this equally between water and sewer: $1.50 each.)
Sewer Rate Structure.Options and Recommendation
The City's current sewer rate structure is a fixed charge for residential customers and fixed plus a
variable charge for non-residential customers based on their water consumption. Chapter 3 of the
HDR Report reviews options for sewer rate structure designs that would be consistent with
Council's prioritized rate structure goals. The report explains that the City's current rate
structure for non-residential customers is fairly typical of the industry, while our single family
component is less typical. Therefore, the options reviewed in the report focus on single family
modifications which ranged from setting a fixed monthly rate based on average winter water use
to a 100%variable charge with a cap set to reflect reasonable indoor versus outdoor water use.
The concept of winter water use to estimate wastewater gen_ eration and set sewer rates is not new
to the industry and is intended to remove the variable water use associated with irrigation
demand. However, establishing a fixed sewer rate per customer based on their prior years winter
water use may be difficult to achieve in San Luis Obispo and may not truly be representative of a
customers' wastewater generation. The transient nature of the student population in San Luis
Obispo leads to a large number of accounts changing each year. Also; establishing a `winter
period" for use may be complicated by our mild climate. San Luis Obispo often has years where
significant outdoor water use is required in January and February due to a lack of rainfall., It is
for these reasons that staff recommends that we avoid a sewer rate structure, fixed or variable,
based on winter water use per individualcustomer.
As with the water rate structures, the sewer rate structures included in the analysis are intended to
guide the City in its development of a rate structure which reflects the needs, demographics, and
circumstances of San Luis Obispo. They provide a basis of information to help us decide if a
particular rate design will move us toward or away from our rate structure goals. The rate
structure the City chooses could be one of the specific structures analyzed in this report, or a
variation based upon additional staff analysis and community input.
The following conclusions(in no particular order) reflect some of the discussions and analysis by
staff of the various proposed sewer rate structure designs:
1. Our most frequent customer concern or complaint is that there is no variable charge
with the residential sewer bill. Customers who do a great job of conserving water or
who are a single person household pay the same amount for sewer as all other
residential customers.
2. With rising water and sewer rates, an important factor to consider in our sewer rate
structure is the need to provide some feeling of customer control or choice. A flat or U
Water and Sewer Rate Structure Review and Recommendations
Page 9
fixed rate does not do this.
3. Revenue stability and predictability have historically been .a key factor in
maintaining a fixed sewer charge for residential, combined with the difficulty of
distinguishing between water use versus wastewater discharge..
4. Commercial sewer accounts have had a significant variable component in their rate
structure for years and there is no indication of revenue instability.
5. The water rate structure is 100% variable and there is'a good history to demonstrate
that water revenues have been stable under a variable rate structure. This led staff
to conclude that sewer revenues would be just as stable as water revenues if based
on the water meter reads.
6. Basing sewer charges on winter water use would likely be confusing and difficult to
establish in San Luis Obispo for a variety of reasons (stated previously).
7. Questions about equity between customer classes (residential vs. non-residential)
would be eliminated with a variable sewer rate structure as everyone, regardless of
customer class, would pay the same per unit cost for the service.
8. There is sufficient variability in residential outdoor water use to justify attempting to
account for outdoor use in a variable sewer rate structure for single family
customers.
The discussion of the various sewer rate structure designs has led the staff to the recommended
sewer rate structure modifications:
Recommended Sewer Rate Structure
ACCORDING1001% VARIABLE CHARGES ASSESSED
Residential—Single Family
100%variable charges, assessed according to metered water use, with a cap on charges exceeding
15 units of water monthly to account or indoor use only.
Multi-Family and Non-residential
100%variable charges, assessed according-to metered water use.
This recommendation is a dramatic change from the current sewer fixed fee for residential and .
multi-family customers. The recommended variable rate structure would be perceived by many
customers as equitable, as they would pay per unit of use consistent with all other customers and
customer classes. Setting a cap on.residential charges for use higher than 15 units per month
addresses the issue of landscape water use vs. sewer use for residential properties. This rate
structure will also provide an additional price signal to our customers to further encourage
conservation.
Moving to a volume based sewer rate structure, however, means that some residential customers
could see dramatic swings in their bills (see Attachment 1). Very low water using customers will
see a significant decrease in their bill while the higher water using customers will see an increase
in their monthly bills. "Average" customers will see little or no change to their bills. When
considering these impacts to the residential customers, we should be careful to not only consider
the percent change but more appropriately consider the actual amount.to be billed for the level of
service and determine if it is indeed appropriate - or out of line with other utilities such as
/ r I
Water and Sewer Rate Structure Review and Recommendations
Page 10
electricity, cable TV, gas, and telephone). A key value of a volume based structure is that
customers have the ability to exercise some control of their bill through their water use. For
those customers seeing,an increase in their bill, they will have the-opportunity to reduce that bill.
Under our current. flat or fixed rate. system, residential customers do not have a choice or
opportunity for control. A common thread to customer satisfaction is the ability to exercise
choice and control: This also may eliminate any cross subsidies between customer classes that
may be occurring in the current rate structure.
Non-residential customers will be far less 'affected by a move to a completely volume based
sewer rate as our non-residential sewer rate structure currently has a significant volume based
component. Examples of the rate structure changes for customers at varying levels of
service are provided in Attachment 1.
Sewer Rate Structure Alternative
Alternative Recommendation:
SNIALL FIXED CHARGE VARIABLE CHARGES ASSESSED ACCORDING TO
Residential—Single Family
$1.50 per month to account for metering and billing services.
100%variable charges, assessed according to metered water use, with a cap on charges exceeding
15 units ofwatermonthly to account or indoor use only.
Multi-Family and Non-residential
$1.50 per month to account for metering and billing services.
100%variable charges, assessed according to metered water use.
As with the water rate structure, this alternative includes a small fixed component to the rate to
cover the cost of meter reading and billing.
Purpose of Rate
Section 5. Implementation Ideas/Community Outreach Structures
Staff asked HDR to provide a preliminary rate design and analysis Rate structures tell us
for the recommended and alternative rate structures for water and "who pays".. Under any
sewer shown above. revenue neutral rate
structure option,the
The basic guidelines the City has maintained when evaluating "average"customer
should be unaffected. On
proposed rate design changes are:
the other hand,rate
structures tell us how the
1. They should be revenue neutral; and "non-average"customer
2. The average customer should be relatively unaffected by is affected. For example,
rate structure changes. The proposed rate structures and do low using customers
alternatives can be easily designed to be revenue neutral, pay more or less per unit
and the average customers should see little change in billing. of water than the average
one? And how is the
Water Rate Structure high-using customer
The recommended water rate structure will have little effect on affected?
y-�o
Water and Sewer Rate Structure Review and Recommendations
Page 11
most customers in all customer classes; however, it will result in increased rates to high water
using single family customers with the addition of the third tier. The rate structure is designed to
facilitate our conservation efforts and the hope would be that these customers will take advantage
of our many conservation services and lower their water use to fall below the third tier.. As such,
the revenue derived from this third tier should not be included (counted on) in our rate structure
revenue analysis.
Sewer Rate Structure
The recommended sewer rate structure and alternative will have a significant impact on
residential customers on either side of the average user. Given the significant philosophical or
policy change reflected.in moving from a fixed rate to a volume based rate for residential sewer
billing, a carefully thought-out transition or implementation plan should be developed. There are
a number of options for implementation of this change that could range from moving directly to.a
pure volume based rate, to starting more slowly with a large fixed component and a small
variable component, and gradually reversing that.relationship overtime. Staff is seeking Council
input at this time, and will seek additional community input on the approach to implementation
should Council conceptually approve moving to a volume-based sewer rate.
Key components to consider for an implementation strategy for moving to a volume based rate
structure for sewer include billing frequency (moving to monthly billing) and implementing the
new structure in winter. The monthly billing is important in that customers will need more
timely use information in order to exercise the control over their use and hence billing,which is a
key value of volume based rates. Making the move to a volume based sewer rate in winter will
have the least immediate impact on customers as their outdoor water use will be at a minimum.
.In addition, on-line services recently established for bill payment and customer use information
will aid in the transition to volume based rates for sewer.
Prior to adoption of modified rate structures, staff will seek additional community input on the
proposed rate structures as approved in concept by the Council. Staff will provide additional
information to, and solicit feedback from, representatives of both residential and non-residential
customers. At this time, staff is proposing a community meeting be held in early November to
discuss the proposed rate structures and will offer to meet with any interested organizations in
order to facilitate understanding and feedback. Public outreach to promote the community
meetings will include mailers to all water account customers, press releases and notices in the
local newspapers.
After receiving feedback from the community, staff will prepare a final recommendation to
Council incorporating community input where appropriate. The proposed rate structure
modifications will be considered at a hearing before the Council, likely in December or January.
In addition, recommendations on the other components of this Utility Billing Enhancements
Study -- automated meter reading, billing frequency, and utility billing software requirements =-
will be presented to the Council for consideration at that same meeting.
Section 6. Perspective on the history and scope of the this project
On May 17, 2005, the Council approved an agreement with HDR Engineering, Inc. for financial
L( =l
Water and Sewer Rate Structure Review and Recommendations
Page 12
and engineering services to evaluate the City's water and sewer rate policies and structures,
options for remote meter reading systems and utility billing support software. For nearly a year
prior to this action, staff from the Utilities and Finance and Information Technology Departments
had investigated options for improving customer service, and cost and service efficiencies in our
water and sewer billing practices and policies. This investigation was prompted by the
recognition that water rate structures had not had a comprehensive review since the early 1990's
and sewer had only received a limited review in the mid-90's. Increasing water and sewer rates
associated with developing new water supplies and maintaining and upgrading existing
infrastructure has highlighted the need to ensure that the City's billing and customer services
practices were as efficient as possible and that the rate structures were consistent with the
priorities and goals of the City Council and the community.
There are four main areas of study being performed under this contract:
1. Water and sewer rate structure analysis.
2. Automated meter reading systems analysis;
3. Utility billing system software analysis_; and,
4. Billing frequency analysis.
The City Council meeting on October 4`h will conclude the water and sewer rate analysis phase of
this project, unless Council directs further a more detailed rate analysis of one of the
recommended rate structures. HDR has indicated a willingness to provide this analysis, should
be necessary, at a cost to be determined.
Staff has met with the team performing the automated meter reading (AMR) systems analysis,
and they have prepared an initial summary of the City's current system, as well as the City's
expectations for what would be required before the City would feel that moving to the AMR
technology would be worth the time and expense. Staff has been reluctant to move to a system
that is not proven in its reliability; however; we have heard that the City of Santa Cruz is pleased
with their recent AMR installation. HDR did perform a rate study for the City of Santa Cruz and
have been able to give us contact information, so that.we can pursue this matter further.
The team working on the evaluation of our current utility billing system,and the requirements we
should expect and hope for, is almost complete, pending.the outcome of the rate structure
recommendations,AMR study, and the recommendation for billing frequency.
As stated previously, the final report should be available to Council within a couple of months,
depending on the community outreach program timing which must be completed before the
report can be finalized.
Water and Sewer Rate Structure Review and Recommendations
Page 13
Section 7. Summary.
Thisproject began with the recognition that City water and sewer bills will be increasing steadily
over the next ten years, and that it was important to find ways to enhance customer service and
satisfaction at the outset. Staff recommends:
1:. Moving to a rate structure for both water and sewer that more closely aligns with Council
and community goals;
2. Implementing a community outreach program and adoption of an implementation strategy
that could include a transition to the new rates during the winter months and/or a multi-
year phasing.
FISCAL IMPACT
There are no fiscal impacts related to the recommendations.' If Council directs staff to proceed
with a community outreach program for a certain rate structure modification, any rate structure
and implementation program adoption would be a part of the approval of the final HDR report:
Rate structures are intentionally designed to be revenue neutral, but some customers will pay
more and some will pay less, depending on the changes to the rate structure.
ALTERNATIVES
In addition to the alternative recommendations provided in the body of the report; Council could
direct staff to maintain the current rate structures for both water and sewer. The current rate
structures work well from the perspective of meeting revenue requirements, our "number one"
rate structure objective, and our current water rate structure provides a strong water conservation
incentive to our customers. Issues of equity would remain with the sewer rate structure and
should Council decide to retain a fixed rate structure for sewer, staff would recommend
proceeding with a more comprehensive analysis of that rate structure to identify and correct any
unintended inequities or subsidies.
ATTACHMENTS
I.A. Comparison of Water Charges Using_ Existing, Recommended and Alternative Rate
Structures
1.B. Comparison of Sewer Charges Using Existing, Recommended and Alternative Rate
Structures
Provided to Council under separate cover and available at the Office of the City Clerk and
Utilities Office at 879 Morro for Public Review
HDR=Volume 1 —Utility Rate Structure Evaluation, September 2005
� -13
ATTACHMENT 1.A.
0 0 0 0 0 0 0 0 0 0 0
0 0 0 0 0
C to c0 Co N N
C
co
a 0
® Coao Lo o 7 0 0 O
(m Lo ao m o M M Cl) o CO
> Coh o 6 6 C7 6
_ Co m E
CO Co rn
U
C 0 .. m
(!? E9 Cfl 619 H9 CA tR 69 t9 H9 E9 (O w y
Q U O m
fp O O O c o o O O O O O m m •O
> j P Co Un ti U? to O to O o o N Nm
N CA h CV N0 M O CO CD CO .0L m
N � CO eQ
C W r O r N Co Ir o
H • i E r r N M r� It LO
COi w C V U
V V a r r Co U U O O
6H (!3 f!9 V> E9 69 69 E9 69 Efl 69 FR Ffl 69 2 E9 3 O 0 0 CD O
V >' 0 0 N M
` N M O NOM O O O O
m N >n 69
r+ •�, C� M M qD Co M M Cl) E E
CA (O r r r O r M r CO ..0. E
m r N O r N M ti n CD M m
01 69 r H! fA 69 r N M CO CO 7 m �- U V •� w r-
111 ., U t9 E9 to 69 60, ( U C 1 i N + 7 In
0 Q (A r CO N rL r CO
>
Q �r
++ m o 0 0 0 0 0 0 0 0 0 0
L • � O O O d• 000 O O O O O
C4 c
LU
V a U
Q c
c COO
N mC r 69
m U ER 69 EA c» i c� V9.m G EN O N m 0 O Co O O O
Q G M M O N Cn C'7 CD M Ch M jp
0 U r CT r r r r O 1 r I M r (O ++
U) u C) C r N r N Co r- N co CMO COO_
J • m E r M 0
> E m
r
Q � C U
N i Q' Uww p . U
K • U E9 (9 f9 E9 EA E9 EA E9 CH 60).C!1 CA f9 603,69 f_�7 ` = z LL
O) 1n
W A CA h Wco
G N M O N CA LO O Cp O O O Cv U� °l N M
` C 1� M v 1� m M w V) Cl) Ch ME
rr C r 6 CO r r r tT r M CD
CA m r N O r N to N M CMO CO U.
C O r M • U U U 'j
UCo Uco + = o
C�0O 69 60 Efl Efl E9 Efl f!9 Ef3 E9 6!J E!3 fA 6A E9 E9 CA CD N Lr CO
L
a E
CE
U0 O C O O
U U E E v E E
•C •C •E U w
w D U V
U L U U C U) � Cp C
L 4) O _ � � 7 LO O
Z m o N M N d m 0 cc .r. y
c c0 CN ° coo o w x m y
U x Cm tox 04 0x W aaa cmi L) 0 m a) CD q
3m CO Cm m m a CL a o "m Eca 0 � �
N x » > F F
Q U U
(� • Q r CO
Icy
ATTACHMENT I.B.
0 0 0 0 ( 0 0 0 0 0 0
m
CD � � 0 (D 04
0 r O N N
r
V
a U
r Cw
M � n co q 'a N N N CO M CO t0
O r r W co N ti N f` Cn L
co v ui m n Ti 6 co of ao CD E
W CCO .r.. N Cr) v ... M co C) 'O
L Q L m
+�+ 69 6R f-03. 6A 6fl 69 6A m 6A N9 6A [Q
X
Q C=7 0 0 O
CD U
d O OM O O O O O O O O O ca m p y
> In to In to In In In M to to m O p 07
6- r ?1: Qi r r r r r r y
W r M (D r NCO O O O O O ■ O ({�
N M ei O O Lo 0 U
Cn m N 4 6A 3 U
V Q 69 6fl 6fl 69 CA 60 69 6A60. 6A Efl L .y. fA M
m V
V • M co MtO CO m N N N N r E Cn
7 «. M M M � a � r- N r I• 0 O E
w CV N N to M In I,. U) N N rl "y �O N
(� M M co N N N O O O m r 3 y m
(ss eA 6A &3. 691 V> to � 1 cr V U
y t9 69
LU W
Q > a o 0 0 0 o a o 0 0
C 0 o C a o o a C1 0
(0 "' C m O 6D M N r r N V M
C` ' V � r m M
w Q
a. c)
3
w c
C4 M Lo P CSD N 0 N co CO co M
a) O I(1
r O N O r*- N N N M
0V
0 CO �! N C1 ("i CM N N W
co
C D v r
m
ED G CD £ �" � 69 69 6i} Hi 619 6H EA 6H 6H 6H 64
O EO O O O O O O O
Cn O O O
In V I.— M O In
U)
0 O O O
CD5 0: D m CD .= m � 0 0 p
ad r tri a
C r M CO r N CD O O r M O U co
a co E
m coo
O
LU V 69 (a961% (� 69 6a(s69 6s (n Q9 61% W
Lf)
C M M M CO co CO N N N N r— `D r
H C M M M d; 7 �T P N n co E O
N N N ui ui u � ui N N �' 0 co
(� m M M M N N N N C0� d0' (D Of y m
t
C U r M U a'
Vtf! fA 6A 69 6%69 E9 603. 619 603. Es 60 ■ Q CLL
co
Q. 0
E E
0
v --
� ,n E E i ;E E
O
II II II C C O C c E
C C C U V O U V
coo
w : U CD
O) m O O M C O p N 'T .t..
U U U Lo � m 0 O m M E
Z m R O fA M CU fU fU m v_ v O E
`� 333 U ca m
O 0 Q 00 0 O 0 o O D 2 ai
_V = y = y = a) a. a a U U y T 0 0
V7 J L 2 » > F- F- F- F- m w m N 64
CA
• ■ 01!' C N v
J • 3 0 M t
(� m2z6-k0
1 �I
Page 1 of 1
I
SLO Cityaouncil -sewer,rate
FRECEfV�ED
.am: Mary Salter<msguy@pacbell.net>
To: <slodtyoounal@sloaty.org> p 2 C LJO5
Date. 9/29/2005 9:34 AM
Subject: sewer rate CITY CLERK
Dear council,
I have a problem seeing why myself as a single person living in a condo in
slo should,be paying as much or more for sewer bill as a family with 8 kids
or more, r than someone living in an apartment house or duplex...this
just isn't fair at all:.
I would suggest that the sewer rate be applied by the water usage rate to
determine it as I realize there is no way of telling how many people are
living at a residence.... RED FILE
Please consider this
Sincerely MEETING AGENDA
MarVa Sen Blas lter
SLO DATE/0 OS ITEM ##��
-
We C-OUNCIL CDD DIR
-f Cr;O ,Z FIN DIR
R ACAO r FIRE CHIEF
ii F�F-ATT 09NEY E PW DIR
Cr: CLERK'ORIG POLICE CHF
❑ DEPT -EADS T R=C DIR
_Ply, f UTIL DIR
[-d _7J_81 t4f YHRDIR
file://C:\Documents%20and%2OSettings\slouser\Local%2OSettings\Temp\GW}000O1.HTM 0/29/2005
CITY CLERK"S OFFICE COPY
Draft Final Report 1,9/q I o s—
City of San Luis Obispo /
Financial and Engineering Services:
Utility Billing System Enhancements:
Water and Sewer Rate Structures, Automated
Meter Reading and Billing Systems
Volume 9 - Utility (tate Structure Evaluation
September 2005
� A
jo
Prepared by:
HDR Engineering, Inc.
/n Association with: longhorn
Consulting
Langham Consulting Services, Inc. S°n^cas•
ONE •
September 22, 2005
Ms. Sue Baasch
Administrative Analyst
City of San Luis Obispo
990 Palm Street
San Luis Obispo, CA 93401
Dear Ms.Baasch:
HDR Engineering, Inc. (HDR),in association with Langham Consulting Services,Inc.
(Langham),was retained by the City of San Luis Obispo to provide a comprehensive evaluation
of the City's water and sewer rate structures. This volume of our reports provides our findings,
conclusions and recommendations concerning the City's water and sewer rate structures. The
objective of this report is to explore different rate structures that may.better meet the City's rate
design goals and objectives. It is riot a rate study with the expressed purpose of developing water-
and,sewer rates for adoption and implementation. Should the City desire to change their water or
sewer rate structure as a result of this study, HDR would recommend that the City verify that the
rates to be implemented are set at a sufficient level to meet the City's financial and revenue
requirement needs for the time period in which they will be implemented.
This report was,prepared using the City's data and information. This included budgeting,
accounting,billing and customer information, engineering reports and planning documents. At
the same time,we have worked with the City Council and City staff and management to gain an
understanding of the City's utilities:
We appreciate your contributions and assistance, along with that of city's management team and
the City Council in the development of this report. Thank you for the opportunity to'provide this
technical assistance.
Sincerely yours,
HDR Engineering, Inc.
Tom Gould
Vice President
Contents
Executive Summary
Introduction.........................................................................................................ES-1
Summary Findings and Conclusions ..................................................................ES-1
Current Industry Thinking and Trends................................................................ES-2
Overview of the Evaluation Process ...................................................................ES-2
City's Rate Design Goals and Objectives...........................................................ES-3
The City's Existing Water and Sewer Rate Structure.........................................ES-3
Development of the Conceptual Rate Structures ................................................ES-4
Technical Review of Specific Water and Sewer Rate Structures........................ES-5
Summary Conclusions and Recommendations...................................................ES-7
1 Introduction and Overview
1.1 Introduction.............................................................................................................1
1.2 Key Objectives and Issues for Conducting the Study............................................. 1
1.3 Overview of the Volume 1 Report..........................................................................1
1.4 Summary .................................................................................................................2
2 Review of Rate Structure Terminology and Current Industry
Practices
2.1 Introduction..............................................................................................................3
2.2 Rate Structure Terminology.....................................................................................3
2.3 Current Industry Thinking and Trends ....................................................................7
2.4 Summary................................................................................................................10
3 Evaluation of the City's Water and Sewer Rate Structures
3.1 Introduction............................................................................................................11
3.2 Overview of the Evaluation Process......................................................................11
3.3 Review of the City's Rate Design Goals and Objectives ......................................11
3.4 Prioritization of the Rate Design Goals and Objectives........................................14
3.5 Review of the City's Current Water and Sewer Rate Structures...........................15
3.6 Review of the Conceptual Water Rate Structures....................................:.............18
3.7 Evaluation of the Conceptual Water Rate Structures ............:...............................23
3.8 Review of the Conceptual Sewer Rate Structures.................................................25
3.9 Evaluation of the Conceptual Sewer Rate Structures............................................29
3.10 Summary................................................................................................................30
T Tl.!l� City of San Luis Obispo i
1F—if Volume 1 -Review of Water and Sewer Rate Structures
4 Technical Analysis of the City's Water and Sewer Rate Structures
4.1 Introduction............................................................................................................31
4.2 City's Selection of Rate Structures for Technical Review....................................31
4.3 Overview of the Technical Analysis......................................................................32
4.4 Review of the Single-Family Residential Water Rate Structures..........................32
4.5 Review of the Non-Residential Water Rate Structures..........................................38
4.6 Review of the Single-Family Residential Sewer Rate Structures..........................41
4.7 Review of the Non-Residential Sewer Rate Structures.........................................45
4.8 Summary................................................................................................................48
5 Rate Structure Study Conclusions and Recommendations
5.1 Introduction.......................................................................... ................................49
5.2 Rate Structure Study Conclusions.........................................................................49
5.3 Rate Structure Study Recommendations...............................................................49
5.4 Implementation/Rate Transition Issues..................................................................49
City San Obispo ii
j�"Ll Volumm '1 e -RevReview of Water and Sower Rate Structures
r\j��'yj�'!1�1�(l/�..•�/1��y1�.V.�/n/��'jV IV-.-1,.1..'`a.R1..L1 - t.. o. ' <
p
- introduction ,
HDR Engineering, Inc. (HDR) and Langham Consulting Services, Inc. (Langham) was retained
by the City of San Luis Obispo (City) to provide a comprehensive evaluation of the city's water
and sewer rate structures, automated meter reading systems and utility billing systems. This
report will review the findings, conclusions and recommendations concerning the review of the
City's water and sewer rate structures.
Summary of Findings and Conclusions
A comprehensive review was undertaken of the City's water and sewer rates. In summary, HDR
found that the City's current water and sewer rates have met the major objectives that they were
designed to achieve. However, with some modification they may better meet the City's rate
design goals and objectives and in the case of the City's residential sewer rates, appear more
equitable to the City's customers.
WATER UTILITY - At the present time, the City's water rate structure is 100% volume-based
with two consumption blocks. For the most part, this rate structure serves the City well. It is a
conservation-based rate that is generally in-keeping with current industry standards/thinking for _.
water rates. This report has reviewed in detail a number of different rate structures. Based upon.
that review, it. was recommended that minor adjustments be made to the City's existing water
rate structure. The recommended adjustment to the City's existing water rate structure is the
addition of a third pricing block for single-family residential customers to better reflect or
penalize "inefficient or wasteful" outdoor water consumption. Finally, the addition of a fixed
charge was explored for all water rates to better reflect the costs associated with meter reading,
customer accounting, billing and customer service. In our opinion, these proposed alternatives
represent only minor modifications from the City's current water rate structure.
SEWER UTILITY —At the present time, the City's sewer rates vary by customer class of service.
For residential customers, the rate is 100% fixed in nature. For all other customers, there is a
fixed charge and a volumetric charge for usage over a threshold. One of key issues associated
with this study was the perception by residential customers that a sewer rate that is 100% fixed in
nature is inequitable. Given that concern, this report explored.a 100% volumetric rate for sewer,
with billings based upon a customer's water consumption. For residential customers, there
would be a volumetric "cap" on billings to more fairly consider only indoor water consumption
that is eventually contributed to wastewater flows. The other alternative sewer rate structure
explored had a fixed charge with a volumetric charge. In our opinion, movement towards.a
100% volumetric rate for single-family residential sewer customers is a`major change in.rate
structure and would pose some implementation issues that would need to be explored in more
detail.
Based upon the technical analyses performed for the rate structures reviewed, HDR did not find
City of San Luis Obispo ES-1
�-`� Volume 1 -Review of Water and Sewer Rate Structures
any technical, administrative or customer.billing system;obstacles to possible implementation of
these alternative water and sewer rate structures.
Current Industry Thinking and Trends
As with any industry, the thinking and practices have changed over time. This is particularly
true with water and sewer utility rate structures. As total costs (and customer bills) have
increased and resources/capacities have become more constrained, the industry philosophy and
thinking concerning rate structures has changed and evolved. Today, water conservation is more
important due to constrained water resources in the west. In addition, as the cost of wastewater
treatment has increased, many utilities have moved away from flat charges for residential sewer
customers and have focused more on volumetric sewer rate structures, out of"fairness or equity"
concerns on customer bills.
The State of California Urban Water Conservation Council (Water Council) was created to
promote and increase efficient water use across California. The Water Council's goal is to
integrate urban water conservation Best Management Practices (BMP's) into the planning and
management of California's water agencies/utilities. The pricing of water to achieve
conservation and efficient use have been at the forefront of the Water Council's thinking for
many years. The Water Council's draft polices do provide a definition of a conservation-based
rate structure. In summary forrn,it is as follows:
"A conservation rate structure encourages efficient water use and discourages waste by
ensuring that customer bills communicate the full cost of providing water services,
including the cost of new water supplies. . . . In evaluating conservation rate structure
options, water agencies should consider the feasibility of incorporating a peak season or
excess-use surcharge to encourage appropriate use throughout the year . . .
Conservation rates shall be designed to recover the cost of providing service . . . A
conservation rate structure shall also be fair and equitable across customer classes
/sectors."
The Water Council recommends that utilities adopt a water rate structure.that helps to advance
its water conservation program and serves the needs of its customers.
At the present time, HDR is not aware of any specific federal or state requirements pertaining to
sewer rate structures. The Water Council does recommend the use of a volume-based rate
structures for sewer utilities as a means of encouraging water conservation. The vast majority of
sewer utilities follow the guiding principle of establishing cost-based rates that meet the utility's
O&M and capital infrastructure requirements.
Overview of the Evaluation Process
The process of reviewing the City's water and sewer rate designs begins by determining the
City's rate design goals and objectives. By understanding and prioritizing the City's rate design
goals and objectives, rate structures can be evaluated that meet these goals and objectives. Given
an understanding of the City's rate design goals and objectives, a review of conceptual rate
designs is undertaken to consider the range of possibilities, but more importantly, to narrow
down the number of rate structures to be analyzed. The final step of the rate structure evaluation
City of San Luis Obispo `2
Volume 9 -Review of Water and Sewer Rate Structures
process is to analyze the final rate structures. This technical evaluation considers the various rate
structure attributes and provides side-by-side comparisons of their attributes. From the rate
structures analyzed, a final recommendations on water and sewer rate structures were developed.
City's Rate Design Goals and Objectives
A starting point for reviewing alternative water and sewer rate structures is to consider the City's
rate design goals and objectives. The attributes of"sound rate structures have been documented
in a number of rate setting manuals. However, the foundation for evaluating rate structures is
generally credited to James C. Bonbright in the Principles of Public Utility Rates.' Bonbright
recognized the challenge of establishing rates and suggested that a set of attributes should be
used as a reminder of the many possible considerations in the rate design process..
Using Bonbright's list of the attributes of a sound rate structure (Le. rate design goals and
objectives), the City Council and City staff were asked to provide a prioritization of those rate
design goals and objectives. Provided below in Table ES-1 is a summary of the "Top 5" rate
design goals and objectives for the City.
Table ES-I
Prioritization of the Rate Design GoalsObjectives
By The City Council and City Staff
City Council Prioritization Rank City Staff Prioritization
Yields Total Revenue Requirements 1 Yields Total Revenue Requirements
Conservation Oriented-Discourage 2 Conservation Oriented-Discourage
Wasteful Use Wasteful Use
Easy to Understand and Administer 3 Easy to Understand and Administer
Stability and Predictability 4 Fair Allocation of Costs to Attain Equity
Fair Allocation of Costs to Attain Equity 5 Freedom from Controversy as to Interpretation
Given a prioritization of rate design goals and objectives, the focus can shift to evaluating
alternative rate structures which may better match or meet the City's goals and objectives. The
first step of that process was to gain a better understanding of the City's existing water and sewer
rate structures.
The City's Existing Water and Sewer Rate Structures
The City's existing water and sewer rates are very simple to understand and administer.
Summarized below in Table ES-2 are the City's current water and sewer rates.
1 James C. Bonbright;Albert L. Danielsen and'David R. Kamerschen;Principles of Public Utility Rates;(Arlington,
VA: Public Utilities ReportInc. Second Edition, 1988),p.383-384.
falCity of San Luis Obispo ES-3
Voiume 1 -Review of Water and Sewer Rate Structures
Table
Summary of t he,,Cityl Current Water and,Sewer Rates-
Rate Class/Schedule 2005/06 Rates
WATER UTILITY
Fined Charges- No Fixed Charges
Volumetric Charges—
1 —5 CCF $2.93/CCF
Over 5 CCF $3.67/CCF
SEWER UTE ITY
Single Family Dwelling $32.33/Month
Multi-Famfly Dwelling $25.46/Month/Unit
Mobile Home or Trailer Park $19.22LMonth/Unit
Public,Private or.Parochial School $4.02/Month/Student
All Other Accounts
Minimum Charge $32.33/Month
Water Usage in Excess of 5 CCF $3.90/CCF
Note:A"CCF'is a hundred cubic feet. A,CCF is equal to M gallons
The City's water rate structure is a volumetric rate that has two blocks of consumption charges..
The rate does not include a fixed charge. Historically, the City has focused on a conservation-
based water rate structure. .In contrast to this, the City's existing sewer rate relies heavily on
fixed charges. For single-family residential sewer customers;the existing sewer rate is entirely a
fixed charge. For commercial customers, there is a fixed charge and a volume charge for usage
over a certain threshold. One of the customer criticisms of the single-family sewer rate is that it
is entirely a fixed charge and may not fairly reflect the amount of wastewater contributed to the
treatment plant.
A simple comparison was undertaken of the City's existing water and sewer rate structures to the
City Council's prioritized rate design goals and objectives. The existing water rate structure
appears to generally meet the City's prioritized rate design goals and objectives. That is not to
say that there are not components or areas of the existing.water rate structure that could not be
improved to better meet the City Council's goals and objectives. For the sewer rates, the use of a
fixed (flat) charge approach has certain positive attributes (stability, predictability, ease of
understanding, etc.). However the trade-off appears to be the issue of fairness and the perception
of customer equity. At the same time, the flat sewer rate does not create any synergy with water
conservation that a volumetric-based sewer rate might provide.
Development of Conceptual Rate Structures
Given an understanding of the City Council's prioritized rate design goals and objectives, along
with an understanding of the City's existing water and sewer rate structures; the next step of the
evaluation process tvas to consider conceptual rate structures. Conceptual rate structures
consider only the structure or attributes of the rate design and not the level, price or customer
impacts attached to that structure.
--- -----
My of San Luis Obispo E
� Volume 1 =Review of Water and Sewer Rate Stniatures
For the water utility, seven different conceptual rate structures,were reviewed. In summary
form, the conceptual water rate structures were as follows:
■ City's Current Rate.Structure (2 blocks)
® City's Current Rate Structure with Modified (Defined) Block Sizes(3 blocks)
s Modified Current Rate Structure with Individually Tailored Block Sizes (3 blocks)
■ Seasonal Rate Structure with Defined Block Sizes(1 block winter, 3 blocks summer)
a Seasonal Rate Structure Using Average Water Consumption (AWC)to Define Blocks (1
block winter, 3 blocks summer)
® Water Budget Using AWC for First Block Size and Lot Size/ET for Block 2(4 blocks)
® Water Budget w/Fixed Threshold for 15`Block Size and Assumed Lot Size for 2°d Block(4
blocks)
The above conceptual water rate structures were compared to the City Council's rate design
goals and objectives. In summary form, the City's existing rate structure scored well, compared
to the City Council's rate design goals and objectives. The more complex water rate structures
seemed too complex and scored lower. The potential of adding a fixed charge and a third tier for
"wasteful"or inefficient use scored well.
For the sewer utility, six different conceptual rate structures were reviewed. In summary form,
the conceptual sewer rate structures were as follows:
• City's Current Rate Structure(Fixed Charge)
■ Modified Current Rate.Structure With Fixed Charge Based Upon Customer's AWWU
• Fixed Charge, Plus Volume Charge Based Upon Metered Water Use
■ Volumetric Rate Structure Based Upon Metered Water Use, With a "Cap" for Residential
Billed Volumes
■ Fixed Charge, Plus Volume Charge Based Upon Metered Water Use — Capped at Class
Average
■ Fixed Charge, Plus Volume Charge Based Upon Metered Water Use — Capped at Customer
AWWU
Thesix conceptual sewer rate structures were compared and scored against the City's rate design
goals and objectives. Similafto the results of the water rate structure review, the more complex
sewer rate structures did not score as well as the more simplified approach that included some
form of a volumetric charge. The inclusion of the volumetric charge was perceived as creating
rates(customer bills)that would be more fair and equitable.
Technical Review of Specific Water and Sewer Rate
Structures
A technical review was undertaken of specific water and sewer rate structures. Based upon the
information developed above, the City's project team selected two water and two sewer rate
structures for the technical review portion of the study. The objective ofthe technical review is.
to determine if there are any technical, administrative, implementation or utility billing system
issues associated with the rate structure. This technical evaluation considers the various rate
structure attributes and provides side-by-side comparisons of their attributes.
- �] City of San Luis Obispo --- ES-5
Volume 1 Review of Water and Sewer Rate Structures
For the water utility, the following rate structures were selected for further technical review:
■ Maintain existing water rate structure, but add a 3`d block tier for residential
■ Fixed Charge +maintain existing water rate structure, but add a 3rd block tier for residential
The City's project team believed that the City's existing rate structure was effective. However,
there was a desire to consider adding a 3rd tier for residential use that was targeted at.inefficient
or wasteful outdoor water use. The second alternative water rate structure is the same as the first
alternative, but adds a small fixed charge, to,reflect the City's cost of meter reading, billing,
accounting and customer service.
For the sewer utility,the following rate structures were selected for further technical review:
■ 100%volumetric rate structure witha"cap"on volumetric billing for residential
■ Fixed Charge + 100% volumetric rate structure with a "cap" on volumetric billing for
residential
As noted previously, one of the customer criticisms of the existing residential sewer rate
structure is that it is 100% fixed: Given that, the City's project team wanted to explore a sewer
rate structure that is 1000/ovolume based. For the residential customers,the volume billed would.
be"capped"at a specified amount to help eliminate sewer billing on outdoor water consumption.
The second alternative sewer rate structure is the same as the first,'but adds a small fixed charge
to reflect the City's cost of meter reading,billing, accounting and customer service.
As a part of the technical review, actual"rates"were developed and.bill comparisons established
between the City's existing rates and the rate being reviewed. Provided below in Table ES-3 is a
summary of the water and sewer rates reviewed as a part of this technical analysis.
Table ES-3
Summary of the Water and Sewer Rate Structures Reviewed
WATER RATE_ STRUCTURE OPTIONS
Siny—I&Family Residential Non-Residential
Option 1 Option 2 Option 1 Option 2
Fixed Charge $0.00/Mth $1.50/Mth Fixed Charge $0.00/Mth $1.50/Mth
Consumption Charge Consumption Charge
First 5 CCF $2.93/CCF $2.80/CCFr First 5 CCF $2.93/CCF $2.80/CCF
Next 20 CCF $3.67/CCF $3.50/CCF All Excess Use $3.67/CCF $3.50/CCF
All Excess Use $4.59/CCF $4.40/CCF
SEWER RATE STRUCTURE OPTIONS
Sinele-Family Residential. Non-Residential
Option 1 Option 2 Option 1 Option 2
Fixed Charge $0.00/Mth $1.50/Mth Fixed Charge $Q.00/Mth $1-.50/Mth
Consumption Charge Consumption Charge
Capped at 15 CCF $4.10/CCF $4.00/CCF All Usage $4.10/CCF $4.00/CCF
city of San Luis Obispo ES-6
'C` Volume 1 -Review of Water and Sewer Rate Structures
Summary Conclusions and Recommendations.
Based upon the technical review of the two water and sewer rate design options, HDR did not
discover any technical, administrative or utility billing system.issues that would suggest that the
rate structures reviewed did not have any major hurdles in their use or implementation. The
issue of how they are implemented and rate transition maybe another issue, particularly for the
sewer'utility.
In the opinion of HDR, each of the water Arid sewer rate structures reviewed in the technical
analysis portion of this study would be acceptable for adoption. The 100% volumetric rate
would demonstrate a strong commitment to conservation and efficient use. However, in the
opinion of HDR, the rate structures that contain both a fixed charge and a variable (consumption)
charge are technically the most appropriate. In summary form,.these would be all of the Option
2 rate structures that were reviewed.
In terms of implementation, HDR believes that the water rate structures.could be implemented
With little or no issues: In contrast to this, the sewer rate structures, particularly for the single-
family residential customers, will require the development of an implementation or rate
transition plan. This is recommended since going from a 100% fixed rate approach to a 100%
volumetric rate approach will produce major changes in customer bills. As a result of that, the
City should slowly transition out of the fixed charge approach to the volumetric approach.
City of San Luis Obispo -7
Volume 1 -Review of Water and Sewer Rate Structures
Section
• • e . •
1.1 introduction
HDR Engineering, Inc. (HDR) and Langham Consulting Services, Inc. (Langham) was retained
by the City of San Luis Obispo (City) to provide a comprehensive evaluation of the city's water
and sewer rate structures,automated meter reading systems and utility billing systems. These are
three distinct areas of study, yet they are each interrelated: A two volume report has been
developed which review these topic areas. This report, Volume 1, will review the findings,
conclusions and recommendations concerning the review of the City's.water and sewer rate
structures.
1.2 Key Objectives/Issues for Conducting the Study
In conducting this study, the City had a number of water and sewer rate design issues which had
been reviewed and discussed for a number of years by the City Council and City management
and staff. These issues or objectives included the following-
■ Review and evaluate the city's water and sewer rate structures in the context of"generally
accepted"rate setting techniques
■ Review and evaluate alternative water and sewer rate structures that may better support the
City's programmatic goals, along with their rate design goals and objectives
■ Review the issue of fixed and variable charges for City's water and sewer rate structures and
their appropriateness for each utility
0 Consider rate structure enhancements that will lead to increased customer satisfaction, ensure
that programmatic goals are being met,and increase operational efficiencies and cost
recovery
Each of these issues or objectives was taken into consideration when the various rate structures
were reviewed.
1.3 Overview of the Volume 1 Report
This report is designed to document the approach used to evaluate the various rate structures. In
addition, other materials and discussions have been included within this report to provide a
complete and comprehensive documentation of our findings, conclusions and recommendations.
Section 2 of this report provides a background discussion of the terminology of water and sewer
rate design. In addition, there is a brief discussion of the current industry•practices as they relate
to water and sewer rate designs. With this background discussion, the next step of the study
process was to determine the City's rate design goals and objectives. Section 3 provides a
discussion of common or typical rate design goals and objectives and then discusses the City of
City of San Luis Obispo 1
g~fl/�
Volume 1 -Review of Water and Sewer Rate Structures
i
,San Luis'Obispo's goals and objectives in designing and setting their water and sewer rate
structures. Section 3 concludes with a review of a number of"conceptual" water and sewer, rate
structures. From these conceptual date structures, the City can determine the water and.sewer
rate structures that they would like to analyze in more detail. From the conceptual rate
structures, Section 4 of this report provides a summary of the detailed analysis undertakers of the
final water and sewer rate structure alternatives. Finally, Section 5 provides a summary of
HDR's findings, conclusions and recommendations, along with any perceived implementation
issues with the rate structures.
1.4 Summary
This section of the report has provided a brief overview of the Volume 1 report prepared for the
City which reviews the City's current water and sewer rate structures,and evaluates alternative
water and sewer-rate structures,- The next section of the report will discuss common rate design
terminology and current industry trends as it relates to water and sewer rags.
City of San Luis ObiSO 0- 2
Volume 1 Review of Water and Sewer Rate Structures
Section
Review of o- logy,znd
industryCurrent ,
2.1 Introduction
Before reviewing the City's current water and sewer rate structures, it is important to have an
understanding of rate structure terminology, along with the current industry thinking as it relates
to contemporary and cost-based rates. This section of the report will review this aspect of the
rate setting process.
2.2 Rate Structure Terminology
Prior to reviewing the City's present .rate structures, it is helpful to understand some basic
terminology that is related to rate structures and rate designs. A review of the rate structures
from other water and sewer utilities across the U.S. reveals a wide variety of structures and
approaches in use today.. While it may seem that there are an endless number of different rate
structures to be found,the reality is that they are all based upon
a few basic.rate design concepts. It is how these basic concepts "While it may seem that
are applied,.modified and combined that creates what appear to there is an endless
be endless possibilities. Provided below is a brief discussion of number of different rate
these basic rate design concepts. structures to be found,the a
reality is that they are all
The initial starting point in considering a rate structure is the based upon-afew basic
relationship between fixed costs and variable costs. Fixed costs rate design concepts."
do not vary with the production or flow of water or treatment of
wastewater. Debt service is an example of a fixed cost: In contrast, variable costs tend to
change with the quantity of water produced or wastewater treated. Examples of variable costs
are the cost of chemicals and electricity. Most rate structures contain a fixed or minimum
charge,and a volumetric consumption(commodity) charge:
Fixed Charges — Fixed charges can take many forms. These may be labeled or called base
charges, minimum charges, customer charges, meter charges, etc. Regardless of the label used,
their purpose is to collect a. portion of the fixed costs associated with serving a customer,.
regardless of the customer's level of consumption. _ Fixed charges are typically a significant
component of the utility's overall cost structure (i.e. fixed vs. variable costs). Rarely do utilities
collect 100% of their fixed costs via fixed charges. Customers typically prefer to be charged on
a volumetric basis, as opposed to a fixed charge basis.
The vast majority of water and wastewater utilities have some form of fixed or minimum charge.
This is bome out by the 2004 Water and Wastewater Rate Survey conducted by the American
T T1�
City m San LulsRev Obispo
3
Volume 1 -Review of Water and Sewer Rate Structures
Water Works Association.Z In this national rate survey, 96% of the water utilities and 93% of
the sewer utilities had some level of charge for zero (0) consumption. Of the surveyed utilities,
the average fixed charge for the water utilities was $6.37/month, and for the sewer utilities, the
average fixed charge was $7.25/month.3 At a minimum, most utilities have fixed charges to
reflect the cost associated with,meter reading, billing/accounting and collection costs.
Fixed costs are generally collected as a fixed charge on a monthly or bi=monthly basis (e.g. $5.00
per month/meter).. As previously discussed, this charge may be called by various names (e.g.
customer charge, meter charge, etc.), but in all cases, it is intended to collect the fixed costs that
the utility incurs, regardless of the customer's level of consumption. The most basic form of a
fixed customer charge is a meter.charge. While the charge is a fixed amount regardless of
consumption, for a water utility it typically vanes (increases) by meter size. The rate at which
the meter charge increases is typically a function of either meter investment (cost) or meter
capacity. Provided in Table 2-1 is the "generally,accepted" approach used to establish fixed
meter charges based upon the safe operating capacity of the meter for a 98"x3/4" meter through
a 6"meter: In this example,it assumes a$5.00/month charge for a 5/8"x 3/4"meter.
Table 2-1
Example of the Development of Fixed Meter Charges Based Upon
Safe Maximum Oiler. Equivalent Meter Charges at
Meter Size Capacity GPM [ll Meter Ratio Equivalent Ratios
5/8"x 3/4" 20 1.00 $5.00/month -
3/4" 30 1.50 7:50
1" 50 2.50 12.50
1-1/2" 100 5.00 25.00
2" 160 8.00 40.00
3" 300 15.00 75.00
4" 500 25.00 125.00
6" 1,000 . 50.00 . 250.00
[1] AWWA C-700=77 Cold Water Meters-Displacement Type
As Table 2-1 indicates, the fixed meter charge increases in relationship to the safe operating
capacity of the various meter sizes. Meter capacity is an important concept, especially for a
water utility, in that a customer that has a 2"meter is regarded from a capacity perspective as the
equivalent of eight (8)-5/8"0/4" customers. Another way of saying this is.the water customer
with a 2" meter is, from a capacity perspective, the equivalent of eight (8) customers with
5/8"x3/4" meters. Knowing that a large portion of a typical utility's costs are related to meeting
capacity requirements, one can see the importance of taking into account capacity in establishing
rates for customers.
For sewer utilities, there is not a prevalent method of charging for fixed charges. Water meter
capacity is not particularly relevant for a wastewater utility. However, water meter capacity,is
2 American Water Works Association and Raftelis Financial Consultants, Inc:;2004 Water and Wastewater Rate
Survey,(Denver: AWWA,2004).
3 Ibid. P.24 and 53.
- - _ _ - -- - - 4
_ \
City of San Luis Obispo
Volume 1 -Revlew of Water and Sewer Rate Structures
also commonly used as a method to establish fixed charges for commercial sewer customers.
Variable Charges - While it was noted that there are-different approaches that can be used to
collect fixed charges, the same can be said for variable or volumetric charges. For a Water
utility, volumetric consumption- charges are generally based upon metered consumption and
charged on a $/unit cost. Althqugh the unit of measurement may vary, (e.g. thousands of
gallons, hundreds of,cubic feet, etc.) tffis is not a critical element in the development of the rates.
This is because the charge per unit is simply ly adjusted to reflect the units of measurement being
ing
mp
used. For sewer utilities,lities, most voltimetric sewer charges are based upon water consumption.
Water consumption being a surrogate for wastewater contribution (Le:. 10 gallons of water
consumed equals 8 gallons of wastewater contributed).
There are four basic rate structures for variable charges; aP-M-Horin charge, a declining block
charge, inverted (increasing) block charge and seasonal. Figure 2-1 pr6vides an overview of
each of these variable charae rate structures.
Figure 24
Overview of the Various Variable Charge Rate Structures
Per UNIFORM RATE STRUCTURE
Unit The cost per unit of consumption under a uniform-rate
Cost structure does not increase or decrease with additional
units of consumption
'Usage
Per DECLINING BLOCK RATE StRIJCTURE
Unit The:cost pe-runit ofconsumption under a declining block
Cost rate structure decreases with additional units Of
consumption
Usage
Per 1N,-VIF.RTFD BLOCK RATE STRUCTURE
Unit The cost per unit of consumption under an inverted block
Cost rate structure increases with additional un-its of
consumption
Usage
Per SEASONAL PLATE STRUCTURE
Unit Peak Season
The cost per unit of consumption under a seasonal rate
Cost structure ehangeswilh time periods. The peak season is
Non-Peak the most expensive time period.
Usage
Figure 2-1 illustrates that the basic philosophy of each of these variable charge rate structures
City of San Luis Obispo
Volume 7 -Ra,!law of Water and Sewer Rate Structures
varies significantly. Under a uniform rate structure, the cost per unit does not change with
consumption. The.uniform structure is .a simple and straightforward approach from the
perspective of customer understanding and rate administration/billing. In contrast, the declining.
block rate structure is a bit more complex. The number of blocks (e.g. 3 stepped blocks) and size
of the blocks (e.g. 0 — 10,000 gallons) may vary. However, the number of bloc& should be
reasonable (i.e. 2 —5 blocks) for reasons of simplicity and administration. Declining block rates
may imply that there are certain economies of scale with additional consumption, or improved
capacity use, and not necessarily a "volume discount" Depending upon the utility, this may or
-may not be a true statement An inverted (increasing or tiered) block rate structure attempts to
send a price signal to consumers that their consumption costs more,,as more water is consumed
or sewage is contributed. This may or may not be the proper price signal regarding the utility's
water resource costs or treatment plant capacity. Finally, a seasonal rate structure is a form of a
time-differentiated rate structure. Seasonal rates are typically not used for sewer utilities. Under
a seasonal rate structure, water consumed.in the summer is priced at a higher level than winter
water consumption. This rate structure attempts to reflect the difference in costs associated with
consumption during a peak period when water supply resources may be constrained.
The rate structure concepts noted above may be combined and used to form various different rate
structures. As an example, a seasonal inverted block rate structure is developed by combining
the seasonal.rate structure concept with the inverted block rate structure.
Given an understanding of these basic rate structure concepts, the obvious question is which rate
structure is most commonly used. Provided below in Figure 2-2 is a comparison of the
volumetric rate structures,as surveyed by the AWWA 2004 Water and Wastewater Rate Survey,
Figure 2-2
Summary of the AWWA Rate Survey of
Volumetric Water and Wastewater Rate Stru6tures
Volumetric Water Rate Structures Volumetric Wastewater bate
Structures
o °
36% - 25/0 1°/14/0 18% 0Ral
-a- O Declining Block - –
form 8% 0 Declining Black
�^
O Uniform
O IncresingBlock p Increasing
g Block
C
39/0 59% ■soar
In reviewing the survey results above, it should be noted that the survey did not identify or break
°"Blocks"or"Consumption.Blocks"is used in a declining block or inverted block rate structure and refers to the
amount of consumption allowed before the price changes to a succeeding price block. The initial block refers to the
first price block(e:g. 0 to 5,000 gallons). The tail block refers to the last price block(e.g.all usage over 5,000
gallons). -
City of San Luis Obispo - - 6
Volume 1 -Review of Water and Sewer Rate structures
out seasonal water rate structures as_a category. In addition, a "flat" wastewater bill is simply a
"flat" amount of a total monthly bill (e.g. $30.00/month). In that respect, a flat rate structure is
not a volumetric wastewater rate structure.
Water Budget Rate Structures = One of the rate forms that the City has shown some interest in
is the "water budget" rate structure. Simply stated, a water budget rate structure is a form of an
inverted block rate structure. The main difference between the water budget rate structure and a
"typical" inverted block rate structure is how the size of the blocks is determined within the
Water budget rate structure. Most inverted block rate structures have fixed thresholds for block
sizes (e.g. 0—5,000 gallons, 5,001 gallons_ 100,000 gallons, and all consumption over 100,000
gallons), which may be determined using various criteria. Some of these criteria include
essential (lifeline) needs, 'average customer class usage (base usage), etc. In the water budget
rate structure,the block sizes are uniquely established for each individual customer and they may
be established using a number of different criteria and methods (e.g. average winter water use,
number of people in the home, lot size,type of outdoor plantings, evapotranspiration (ET), etc.).
The water budget rate structure attempts to establish a rational basis for individually tailored
"indoor" and `-`outdoor" consumption budgets (i.e. block sizes). In addition, water budgets may
reward customers for beating their budget goal, or penalize them for going over their water
budget.
Given this brief overview of rate design terminology,the focus shifts to the current thinking and
practices of the utility industry.
2.3 Current Industry Thinking and Trends
As with any industry, the thinking and practices,have changed over time. This is particularly
true with water and sewer utility rate structures. As total costs (and customer bills) have
increased and resources/capacities have become more constrained, the industry philosophy and
thinking concerning rate structures has changed and evolved.
It was not that long ago that declining block rates were
"As the cost of wastewater used to encourage sales of water. At the same time, a
treatment has increased, many flat charge for residential sewer services was generally
utilities have moved away from common. In addition, the typical residential customer
flat charges for residential : bill for water was often greater than the sewer bill.
sewer customers and have Today, water conservation is more important due to
focused More on volumetric constrained water resources in the west. As the cost of
sewer rate structures, out of wastewater treatment has increased, many utilities have
"fairness or equity"concerns moved away from flat charges for residential sewer
on customer bills." customers and have focused more-on volumetric sewer
rate structures, out of "fairness or equity" concerns on
customer bills. Finally, in many areas, the typical residential sewer bill is now greater than the
water bill.
5"Evapotranspiration" is defined as the loss of water from soil by evaporation and transpiration from
plants.
City m San Luis Obispo 7
1F-7L/� Volume 9 -Review of Water and Sewer Rate Structures
As these changes in utility costs have occurred, the water and sewer utility industry's rate
structure philosophy and thinking has kept pace. Provided below is a summary of the current
California water utility thinking as it relates to water rate structures.
2.3.1 State of Californtia Urban Water Council's Draft Policies on
Water Rate Structures
The State of California Urban Water Conservation Council (Water Council) was created to
increase efficient water use across California. The Water Council's goal is to integrate urban
water conservation Best Management Practices (BMP's) into the planning and management of
California's water agencies/utilities. The pricing of water to achieve conservation and efficient
use have been at the forefront of the Water Council's thinking for many years. Since the early
1990's, there has been a fairly significant amount of research on the response to water demands,
as a result of price. The Water Council noted the following "lessons learned" concerning prices
and demand in their recently drafted policy statements concerning water rate structures:
Lesson 1: Rates influence demand
Lesson2: "Price elasticity" is the percentage change in demand induced by a one percent
change in price,all other factors being constant
Lesson 3: Demand can be thought of as the sum of demand for different end-uses of water
Lesson 4: Demand for outdoor use is more price elastic than demand for indoor uses
Lesson 5: Demand for water during peak (summer) periods is greater than demand during
off-peak(winter)periods
Lesson 6: Residential water demand is relatively inelastic. The response of residential
demand to rate changes,though not zero,is relatively small
Lesson 7: Demand is more elastic in the long-run than in the short-run
Lesson 8: Demand is influenced by forces other than price — including population growth,
the economic cycle, weather fluctuations, and income growth
Lesson 9:. The response of demand is more difficult to predict for large changes in price
While many of the "lessons learned" are common knowledge; the Water Council believes these
lessons provide the basis or foundation for establishing policies related to conservation pricing.
The Water Council has recently drafted policy statements concerning water rate structures. Their
observations concerning conservation pricing are as.follows:
e Water pricing in California does not generally reflect the true cost of water, nor the next
increment of water supply
• Consumers generally pay relatively low rates for water, especially when compared to other
resources such as electricity and gas
• If an individual user or business does not feel a personal responsibility for the amount of
water used monthly or annually,there is very little motivation to conserve
• New landscape water conservation technologies, design and plant alternatives, and metering
options will not achieve their potential water savings unless the water customer is motivated
personally or economically to reduce water use
•' Utilities should consider establishing a monthly billing system that clearly communicates the
City of San Luis Obispo 8
Volume 1 -Review of Water and Sewer Rate Structures
Y.
Utility's rate structure and the customer's current and historical consumption of water, if it is
cost-effective for the utility to do so.
e . Currently, there is no benchmark to determine whether or not a water utility's existing or
proposed rate structure is conservation-oriented
The Water Council's draft policeg do provide a definition of'a conservation-based rate structure.
It is as follows:
"A conservation rate structure encourages e�cient water use and discourages waste by
ensuring that customer bills communicate the full cost of providing water services,
including the cost of new water supplies. A conservation rate structure shall. 1)provide
a price signal to customers to reduce average or peak use, or both, and financial
consequences for inefficient use; and 2) takes into account the long-term marginal cost
or the cost of adding the next unit of capacity to the system. In evaluating conservation
rate structure options, water agencies should consider the feasibility_of incorporating a
peak season or excess-use surcharge to encourage appropriate use throughout the year,
taking into account the range of climatic and other conditions in their service area.
Conservation rates shall be designed to recover the cost of providing service and billing
shall be based on metered water use. A conservation rate structure shall also be fair and
equitable across customer classes/sectors."
The Water Council also discusses the issue• of implementation of conservation-based rate
structures.
"Water suppliers should evaluate a variety of conservation rate structures consistent
with the definition;for agencies utilizing different rate structures for different classes of
service, each rate structure should be consistent with the [Water Council's] Definition
and Implementation requirements. "
The Water Council recommends that utilities adopt a rate structurethat helps to advance its
water conservation program and .serves the needs of its customers, which includes one or a
combination of the following rate structures:
1. Allocation=Based [Water Budget] Rate Structure in which the tiers are based on an
assigned water budget for the billing period for each customer account.. The water budget
allocation may be based upon, but not limited to,the following:
a. Number of occupants
b. The of customer account land use (i.e. residential, landscape, commercial);
c. Type and size of business
d. Lot size or size of landscaped area, or a portion_therein;
e. Evapotranspiration rate for the billing period
2. Tiered Rate Structure that charges a rate that increases for increasing blocks of
consumption: The tiered rate structure shall have relatively low, or no fixed charge and a
relatively high volumetric charge. The volumetric revenue from commodity rates shall
be greater than or equal to 60%of total revenue (based on an annual average).
3.. Uniform Rate Structure that provides a pricing signal to conserve water, discourages
water waste and is consistent with the [Water Council's] definition [of a conservation
rate]. The volumetric revenue from commodity rates shall be greater than or equal to
Y T�/,� City of San Luis Obispo 9
Cl—il� Volume 1 -Review of Water and Sewer Rate Structures
75% of total revenue (based on an annual average). -
Finally, the Water Council does provide additional recommendations to help achieve consumer
acceptance to facilitate implementation of conservation-based water rates. The Water Council
encourages utilities to incorporate a customer education process regarding the environmental and
resource value of pricing for cotservation and efficiency. It is also necessary to provide the
customer with education as to how the rate structure works, resolving allocation variances and in
remedying high water use. Finally, the Water Council recommends "informative billing" in the
customer's bill displays, in an easy-to-read and understand format, the customer's water
consumption(e.g. bar graph form) and the utility's rate structure:
The Water Council's draft conservation rate policies are generally consistent with, and reflect the
current water utility industry thinking and philosophy,particularly in the western U.S. However,
it should be noted that for practical purposes, water budget rate structures currently have very
limited acceptance/implementation across the U.S. HDR.believes that part of the limited
acceptance/implementation of this rate structure, at the current time, revolves around the "new-
ness" of the rate structure concept. More importantly, HDR also is of the opinion that most
utilities would find that, upon closer examination, water budgets may be overly complex for
some customers to understand. HDR has also discovered that most utility billing systems in use
today are not capable of billing a water budget rate structure. The vast majority of utilities, who
desire to implement a water budget rate structure, will require either a new utility billing system
capable of billing the rate structure, or significant re-programming of their existing billing -
system in order to support the rate structure concept.
2.3.2 Current Industry Thinking and Trends for Pricing of Sewer
Services
At the present time, there are no specific federal or state agencies or national association
requirements/regulation on sewer rate structures. The vast majority of sewer utilities follow the
guiding principle of establishing cost-based rates that meet the utility's O&M and capital
infrastructure requirements. The Environmental Protection Agency (EPA) provides pricing
guidelines for wastewater utilities, but the focus is primarily on assuring adequate funding to
maintain facilities.
The California Urban Water Conservation Council does provide guidelines encouraging the
adoption of volumetric-based sewer utilities. The Water Council and other conservation experts
believe that having volume-based sewer rates, where the billing is based upon water
consumption, may encourage water conservation. Whether the majority of consumers make the
connection between their sewer bill and their water consumption is unclear. Simply stated, most
sewer utilities do not adopt volume-based sewer rates to encourage water conservation. Rather,
most sewer utilities view volumetric-based billing as amore equitable approach to billing.
2.4 Summary
This section of the report has provided an overview of rate setting terminology, along with the -
current industry thinking concerning water and sewer rates. The next section of the report will
discuss the conceptual rate structures reviewed for the City.
City of San Luis Obispo - 10
Volume'1 -Review of Water and Sewer Rate Structures
' Section 3
Evaluation,
Ie •
.
Water Ind SeWer I
3A Introduction
This section of the report will discuss the evaluation the City's water and sewer rate structures.
In this process,the City's rate design goals and objectives will be reviewed, along with the City's
current water and sewer rates. Finally, alternative "conceptual" water and sewer rate structures
will be reviewed. The objective of evaluating the City's water and sewer rate designs is to
determine whether alternative rate structures may better meet the City's rate design goals and
objectives_
3.2 Overview of the Evaluation Process
The process of reviewing the City's water and sewer rate designs begins by determining the
City's rate design goals and objectives. By understanding and prioritizing the City's rate design
goals and objectives,rate structures can be evaluated that meet these goals and objectives. Given
an understanding of the City's rate design goals and objective's, a review of conceptual rate
designs is undertaken to consider the range of possibilities, but more importantly,to narrow
down the number of rate structures analyzed.. The final step of the rate structure evaluation
process is to analyze the final rate structures. This analytical evaluation will consider various
rate structure attributes and provide side-by-side comparisons of their attributes.
Our evaluation of the water and sewer rate structures has used
"generally accepted" rate setting techniques to develop and "In developing these
analyze each structure. In developing these conceptual rate conceptual ratestructure
structure alternatives, it is important to understand that there is no alternatives, itis
single correct rate structure for the City to implement. Each rate important to understand
structure has certain advantages and disadvantages. For example, that there is no single
a rate structure may encourage conservation, but be overly correct rate structure for
complex and difficult to administer. The purpose of this portion the City to implement"
of the study is to clearly indicate the trade-offs of each rate -
structure to provide the City Council with the information necessary to make sound.and rationale
decisions.
3.3 Review of the City's Rate Design Goals and Objectives
In establishing water and sewer rates an important starting point is understanding the City's rate
design goals and objectives. Typically, these goals and objectives may be items such as, rates
that are easy to understand and administer, and set at a level to produce sufficient revenues:
T T�� City San Luis Obispo
iF�7y�l
Volume 1 -Review of Water and Sewer Rate Structures
While determining a utility's rate design goals and objectives is an important starting point for
designing rates,unfortunately, most utilities do not clearly enunciate these goals and objectives.
In the City's case, there currently are a set of explicit (written) rate design goals and objectives.
This list of current goals and objectives were taken from past rate setting documents used by the
City and presented to the City Coixncil, The City's current rate design goals and objectives are as
follows:
■ 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
In reviewing the City's list of rate design goals and objectives, definitions of each of the goals
were not provided, nor was there any prioritization given (i.e. what is more important- ease of
understanding or encouraging conservation?).
The above list is very similar to the rate design goals and objectives cited at other utilities. It is
primarily based upon a list of the "attributes of a sound rate structure." The attributes of sound
rate structures have been documented in a number of rate setting manuals. However, the
foundation for evaluating rate structures is generally credited to James C. Bonbright in the
Principles of Public Utility Rates.6 Bonbright recognized the challenge of establishing rates and
"Bonbright recognized the suggests that the list of attributes should be used as a reminder
of the many possible considerations in the rate design process.
challenge of establishing However, he also noted that the list is "also useful in
rates and suggests that the suggesting important reasons why problems of practical rate
list of attributes should be design do not yield readily to scientific principles of optimum
used as a reminder of the „�
pricing. Finally, Bonbright recognized that his list, of
many possible attributes lacked clear definitions (e.g. how does one define
considerations in the rate «
design process." undue discrimination"), along with overlapping and
conflicting,characteristics. .
Provided below are the ten attributes to a sound rate structure as identified by Bonbright. For
each of Bonbright's .attributes, we have tried to clarify and re-state the attribute in easy to
understand terminology that may be directly applicable to the City of San Luis Obispo.
6 James C. Bonbright;Albert L.Danielsen and David R..Kamerschen,Principles of Public Utility Rates;(Arlington,
VA: Public Utilities Report,Inc.,Second Edition, 1988),p. 383-384.
7 Ibid.p.384.
City of San LuisRev Obispo 12
�r1t.J■ Volume 1 -Review of Nater and Sewer Rate Structures
Revenue-related Attributes:
® The City's rates should be designed to meet the total revenue requirement needs of the
City under the"cash needs approach.8
■ Rates should provide revenue stability and predictability, with a minimum of
unexpected changes seriously.adverse to the City's utility. Annual swings in planned
revenue should be no greater than+10% and—10%.
■ From the customer's perspective, the rates should result in customer bills that are stable
and predictable. The implementation of new rate structures should be consistent with
past utility rate setting philosophy and rr+iriimi�e customer impacts during any change in
rate structure. A typical customer, under normal conditions, and "normal" usage, should .
not have an adjustment greater than 10% on an annual basis, unless based upon cost of
service.
Cost-related Attributes: -
■ The rate structure should promote efficient use of water and sewer services and
discourage or penalize inefficient uses.
■ The rate structure.should reflect all traditional internal costs (direct and indirect) that
the city incurs, and under appropriate situations and conditions (e.g. severe drought)
may also include present and future costs and benefits (i.e. marginal cost and/or value
of water/sewer).
■ 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. The rates
and the 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 such as defined in the AWWA- M1 manual and the WEF cost allocation
manual.
■ The rates shouldbe, as practically possible, non-discriminatory, between customer
groups, and within each customer group. The rate structures should avoid interclass
subsidies whenever possible to ensure each class pays its full cost of service. [Note:
California Proposition 218 - The amount of a fee or charge imposed...shall not exceed the
proportional cost of the service attributable to the parcel.]
B The responsiveness of the rate to respond to changes in demand and supply patterns.
The rate structure should be developed such that it either responds appropriately or
8 The AWWA M-1 Manual,Principles of Water Rates.Fees and Charges,discusses two"generally-accepted"
methodologies for establishing revenue requirements. Bonbright refers to a"fair return standard"which
typically applies to the"utility/accrual"basis of establishing revenue requirements. Under this methodology,the.
utility is entitled to earn a"-fair"return on its investment. This is the methodology used by privately owned
utilities,and some public utilities. In contrast,most municipal utilities, including the City,use the"cash-basis"
methodology. Under this approach,the City sums its O&M,debt service and capital improvements funded from
rate revenues to equal its revenue requirements. Over time,both methodologies should produce roughly the
same revenue requirements.
City of San Luis Obispo _ 13
11�7Y l� Volume 1 -Review of Water and Sewer Rate Structures
alternatively, contains the flexibility to allow the utility to respond to the changing needs
as a result of supply, demand, and/or environmental concerns (e.g. drought conditions).
Practical related Attributes;
® From the customer's perspective,the rate structure should be simple to understand, such
that the customer can easily understand the bill: From the utility's perspective, the rate
structure should be easy to administer and collect. Finally, the rate structure should
have acceptance by the majority of the customers that the rate structure and resulting bills
are"fair and equitable."
■ Freedom from controversies as to the application of the rate schedule to the customer and
calculation of the customer's bill. 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.
Given clearer definitions of Bonbright's attributes of a sound.rate structure, these definitions can
be used to review and prioritize the City's rate design goals and objectives.
3A Prioritization of the Rate Design Goals and Objectives
A presentation was made to the City Council on July 26, 2005 to discuss typical rate design goals
and objectives. The rate design goals and objectives reviewed with the City Council were
defined using James C. Bonbright's Attributes of a Sound Rate Structure. These are the rate -
design goals and objectives (attributes) discussed above. For purposes of this study, the ten
goals and objectives needed to be prioritized. To accomplish this, individual members of the
City Council and utility staff were asked to list their"top 5"goals. Each individual was provided
with a written list of the ten attributes and asked to place a "1 by their top goal, a "2" by their
second goal, and so on, until they had selected their top 5 attributes. From each of the individual
tallies, a final prioritisation list was created based upon the weighted number of "votes" each
attribute received. For a goal that received a top (1s) priority, it received 5 points for each 15L
place vote. For a second place vote, the attribute received four points, and so on. The points
received for each attribute was summed and the attributes were then placed in a top to bottom
order.
Nine of the ten rate design goals received at least one vote. The goal "dynamic in its ability to
-- respond to changing supply and demand conditions" did not
"Interestingly, both City receive a single vote by either the City Council or the staff. For
Council and staff had purposes of summarizing the prioritized attributes, the results are
similar perspectives summarized between City Council and staff. Interestingly, both
concerning the most City Council and staff had similar perspectives concerning the
important rate design most.important rate design goals and objectives. Provided below
goals and objectives." is a summary of prioritized rate design goals and objectives
separated between the City Council and city staff.
Gity of San Luis Obispo 14
Volume 1 -Review of Water and Sewer Rate Strictures
Table
Pridritizatiori of the Rate DesignObjectives '
BY The City Council,and City Staff
City Council Prioritization Rank City Staff Prioritization
Yields Total Revenue Requirements 1 Yields Total Revenue Requirements
Conservation Oriented-Discourage 2 Conservation Oriented-Discourage
Wasteful Use Wasteful Use
Easy to Understand and Administer 3 Easy to Understand and Administer
Stability and Predictability 4 Fair Allocation of Costs to Attain Equity
Fair Allocation of Costs to Attain Equity 5 Freedom from Controversy as to Interpretation
It should be noted that all rate designs, when properly developed, should yield the utility's total
revenue requirements. Given that, it appears that the conceptual water rate designs should focus
on being conservation oriented (goal #2); while at the same time being fairly easy to understand
and administer (goal #3). An additional item worth noting .is that the rate design goal and
objective of"revenue stability" was the sixth-rated goal. We have highlightedthat goal since
one of the possible outcomes of an aggressive conservation oriented water rate structure is
revenue instability. Revenue instability can certainly be addressed via the use of rate
stabilization reserve funds. However, it is important to have an understanding of where revenue
stability fell as a priority.
For the conceptual sewer rate designs, conservation is not as critical. Although, certain sewer
rate designs can be.linked to water use and create a linkage to encourage water conservation. In
the City's case, it would appear that the goals for the conceptual sewer rate designs should-focus
on ease of understanding and administration and the fairness and equity of the structure (between
classes of service and within a class of service).
3.5 Review of'the City's Current Water and Sewer Rate
Structures
The City's existing water and sewer rates are very simple to understand and administer:
Summarized below in Table 3-2 are the City's current water and sewer mates.
city of San Luis Obispo is
Volume 1 -Review of Water and Sewer Rate Structures
Summary of the City's Current Water and Sewer Rates ,
Rate Class/Schedule 2005/06 Rates
WATER UTILITY
Fixed Charges— No Fixed Charges
Volumetric Charges—
1 —5 CCF lli $2.93/CCF
Over 5 CCF $3.67/CCF
SEWER UTILITY
Single Family Dwelling $32.33/Month .
Multi-Family Dwelling $25.46/Month/Unit
Mobile Home or Trailer Park $19.22/Month/Unit
Public,Private,or Parochial.School $4.02/Month/Student
All Other Accounts
Minimum Charge $32.33/Month
Water Usage in Excess of 5 CCF $3.90/CCF
lil Note:A"CCF"is a hundred cubic feet A CCF is equal to 148 gallons
City's Current Water Rate Structure—In viewing the City's current water rate structure, it was
noted that the rate structure does not differentiate by customer class of service. In other words,
the rate structure is the same for all customers (e.g. residential; commercial, etc.). Water utilities
often have rate schedules by customer classes of service so that rate structures can be designed to
meet specific goals and objectives for that customer group. For example, a residential rate
structure may encourage more efficient outdoor watering via an inverted block rate structure
while a rate structure for a large commercial/industrial may emphasize revenue stability by have
a large fixed cost.
The current water rate stricture is a two-block inverted rate structure. Based upon information
provided to HDR by the City, the selection of this "rate structure by the City Council was very
deliberate. Prior to the current water rate structure, the City did have a minimum charge and.a
price differential between commodity charges of 100%. Based upon customer feedback to the
City conceming minimum charges, the City Council decided to eliminate the minimum charge.
With the elimination of the minimum charge, and resulting loss of revenue; the City needed to
still meet their overall revenue requirements. To make up the difference on the lost minimum
charge revenue, the City Council increased the first block commodity charge and created the
current price differential of 25% between the first and second block. The change helped to
minimize impacts to customers from the elimination of the minimum charges, but it was also felt
at the time, that it created a greater conservation incentive, particularly within the first block of
consumption.
The size of the first block of consumption (0 — 5 CCF) was also a very deliberate choice on the '
City's part during the 1993 restructuring. At the time, it was presumed to be a reasonable
volume of water to meet "basic needs" for the "average household." By today's standards, this
y 1� City of San Luis Oblspo - 16
1~�!■_`\ Volunie 1 -Review of Water and Sewer Rate Structures
volume of water within the first block of consumptionwould still be considered a reasonable
amount of water for"basic needs:"
In relation to the City Council's goals and objectives, the City's current rate would be rated as
follows:
,Table 3-3
Comparison of the city . . Design GoalsObjecthies
to the City's Current Water Rates
City Council Prioritization Rank City's Current Water Rate Design
Yields Total Revenue Requirements 1 If properly designed,will meet goal
Conservation Oriented-Discourage 2 Increasing block;designed to encourage
Wastefid Use conservation. Could be more tailored to
focus on specific discretionary(outdoor)use
Easy to Understand and Administer 3 Very Easy to Understand and Administer
Stability and Predictability 4 Appears stable;lack of fired charges may
lead to some revenue instability
Fair Allocation of Costs to Attain Equity, 5 No fixed charges—fairness issue?
As can be seen from the above table, the existing water rate structure appears to generally meet
the City's prioritized goals and objectives. That is not to say that there are not components or
areas of the existing rate structure that could not be improved to better meet the City Council's
goals and objectives.
City's Current Sewer Rate The City's current sewer rate design is in sharp contrast to the
City's water rate structure. Where the City's water rate structure relies entirely on a volumetric
approach, the City's current sewer rate relies almost entirely on fixed charges. Residential
customers are billed entirely on a fixed charge basis while commercial customers are charged a
fixed charge and a volumetric charge for water consumption over 5 CCF. One of the concerns
with the City's current sewer rate is the fairness or equity
of charging a flat rate for residential customers. In "The City's current sewer rate
essence, the individual living in a home is charged the design is in sharp contrast to
same sewer amount as the family with multiple members. the City's water rate structure.
As was noted from the AWWA Rate Survey, Where the City's water rate
approximately 18% of the surveyed utilities use a flat rate structure relies entirely on a
approach to charge their residential customers. The most volumetric approach, the City's
prevalent method is to use a uniform volumetric rate to current sewer rate relies almost
charge customers. This is typically combined with some entirely on iczed chanes."
type of fixed charge to produce a sewer rate with a fixed
charge and a uniform volumetric rate. The volumetric rate may .be based upon water
consumption in the time period, water consumption in the time period capped at a specific
volume, or volume-based upon an average of winter water consumption. In the case where
consumption is capped or winter water use is used for sewer billing purposes, the objective is to
T T1� City of San Luis Obispo 17
,1--Jo1J� Volume 1 -Review of Water and Sewer Rate Structures
eliminate the outdoor water component of the customer's usage. Outdoor watering does not flow
back into the sewer system and therefore the customer should not be billed for that component of
consumption.
In comparing the City's current sewer rate design to the City Council's prioritized rate design
goals and objectives,the following observations are made.
Comparison of the City Council's . . W1 Rate Design goals and Objectives
to the City's Current Sewer Rates
City Council Prioritization Rank City's Current Sewer Rate Design
Yields Total Revenue Requirements 1 Reliance on fixed charges should always meet
revenue requirement target
Conservation Oriented-Discourage 2 Not specifically applicable to sewer.. Use of
Wasteful Use Sited charges creates no relationship to water
consumption .
Easy to Understand and Administer 3 Very Easy to Understand and Administer
Stability and Predictability 4 Fixed charge creates ultimate stability and
predictability
Fair_ Allocation of Costs to Attain Equity 5 Use of fixed rate createsissue of fairriess for
residential
As can be seen from the above, the use of a fixed (flat) charge approach has certain positive
attributes (stability,predictability,.ease of understanding, etc.). However the trade-off appears to
be the issue of fairness. At the.same time; the7 flat sewer rate does not create any synergy with
water conservation that a volumetric based sewer rate might provide.
Given this overview of the existing water and sewer rate structures, the next step of the review
process is to consider various conceptual rate structure alternatives that may better meet the City
Council's rate design goals and objectives.
3.6 Review of the Conceptual Water Rate Structures
Provided below is a listing of conceptual water rate structures. In reviewing these conceptual
rate designs, a number of items should he noted. First, as discussed above, a typical water rate
design contains both a fixed and variable charge. The focus of the review at this point is on the
structure of the rates, and not on the level of the rates; or the proportion of revenue to be
collected from the fixed versus variable charges. After the date structures are evaluated and.
reduced in number to a more manageable total, the focus will shift to consideration of the
appropriate cost-based level of the rates and specifically whether the City should have some level
of a fixed charge for water rates.
Three additional items should be noted before reviewing the descriptions below. In reviewing
T1e./l� City of San Luis Obispo 8
11— Volume 1 -Review of Water and Sewer Rate Structures
the descriptions below, no mention is made of the fixed charge portion of the overall rate
structure, but all final rate designs can easily add a fixed meter charge to the rate structure. Next,
the other important item to note is that there could be endless permutations of these rate
structures (e.g. 2 blocks, 3 blocks, 4 blocks, 5 blocks, etc.) For this evaluation process, we have
attempted to list a variety of structures that provide a reasonable array of the choices available to
the City. Finally, the rate structutes discussed below do not make any distinction between class
of service (e.g. single-family, commercial, etc.). As the conceptual rate structures are narrowed
down, the final rate structures will then be analyzed as to their applicability to the specific
customer classes of services. Provided below are the descriptions of the conceptual water rate
structures.
WATER RATE STRUCTURE 1—CURRENT RATE STRUCTURE
The current water rate structure is a two-block inverted rate structure. The first block is set at a
fixed volume,intended to reflect"essential needs"for a residential customer.
Basis for
Block Determining Block Size Pricing of the Block
Block 1 Fixed Amount Inverted Block Price
Block 2 All Usage Over Block 2 Inverted Block Price
The advantage of the current rate structure is that it is conservation-oriented and very simple and
easy to understand. The main disadvantage to this rate structure is that the basis for the block
sizes may not be clearly defined or,more specifically,relate to that portion of water consumption
that the City is attempting to target for more efficient use.
WATER RATE STRUCTURE 2—MODIFIED CURRENT RATE STRUCTURE WITH DEFINED BLOCK .
SIZES
Under this rate structure, it begins to attempt to better define the block sizes and focus on
"essential' and "discretionary" water requirements. The first block is often defined as average
residential use or average winter water use. The second block can be defined as the amount of
water required to properly irrigate a typical residential lot within the City. The tail (3`d) block is
considered"inefficient"or"wasteful'use.
Basis for
Block Determining Block Size Pricing of the Block
Block 1 Average "Indoor" Water Needs Inverted Block Price
Block 2 Average"Outdoor" Water Needs Inverted Block Price
Block 3 All Usage Over Block 2 Inverted Block Price
The advantage of this rate structure is that it has begun to attempt to clearly define the block
sizes by specific end uses (e.g. indoor, outdoor, etc.). It also has attempted to define inefficient
or wasteful use. The minor disadvantage of this rate structure is that it relies upon averages of
indoor and outdoor use. Finally, this rate structure may not be appropriate for all customer
falCity of San Luis Obispo 79
Volume 1 -Review of Water and Sewer Rate Structures
classes of service. In particular, it may not be appropriate for commercial customers. For
example, certain commercial customers may not have outdoor use. More importantly, a large
commercial consumer of water does not necessarily imply inefficient or wasteful use.
WATER RATE STRUCTURE 3 — MODIFIED CURRENT RATE STRUCTURE WITH INDIVIDUALLY
TAILORED BLOCK SIZES
Under this rate structure, it begins to attempt to "tailor" the block sizes to the individual
customer. Under this rate structure, the first block is defined by the individual customer's
average winter consumption(AWC). The second block is established as a percentage of the size
of the first block(e.g. equal to 150% of the first block).
Basis for
Block Determining Block Size Pricing of the Block
Block 1 Individual Customer AWC Inverted Block Price
Block 2 Set%of Block 1 Inverted Block Price
Block 3 All Usage Over Block 2 Inverted Block Price
The advantage of this rate structure is that it has begun to attempt to "tailor" the block sizes to
the individual customer. While this may be viewed as a better and "fairer" method to establish
the first block size, some may also view it as "unfair" (i.e. a larger family getting a larger first
block of water at the lowest price). There are a few disadvantages to this approach. First, this
rate structure is a bit more complicated in that each block size is individually tailored to each
customer. Under this structure, some customers may not understand how their block sizes are
determined. In addition, administratively, this is a more complex rate structure, but certainly not
overly complex. The other disadvantage to this rate structure is that some would argue that this
rate structure encourages individuals to consume more water in the winter in order to establish a
larger 2nd block size for outdoor/summer watering requirements.
WATER RATE STRUCTURE 4—SEASONAL RATE STRUCTURE WITH DEFINED BLOCK SIZES
Under this rate structure, the pricing is split between the winter and summer period. Pricing of
water in the wintertime is uniform, and not subject to inverted block pricing. Usage in the
summer is an inverted block rate structure, and priced based upon summer period costs. The first
block is established based upon indoor watering needs or average winter use.
Basis for
Block Determining Block Size Pricing of the Block
Winter Period-
Block 1 All consumption Uniform Price for Winter
Summer Period-
Block 1 Based on"indoor" water needs Same Price as Winter
Block 2 Based on"outdoor" water needs Inverted Block Price
Block 3 All Usage Over Block 2 Inverted Block Price
Fal� City of San Luis Obispo 20
Il--1s Volume 1 -Review or Water and Sewer Rate Structures
While this rate structure may appear to be similar to other previous conceptual rate structures, it
has added the element of seasonal pricing. The pricing assumes that winter water is primarily
indoor in nature, and not subject to "peak use pricing. The summer price is designed to better
reflect the cost of peak water resources on the City's system. The main advantage of this rate
structure is that it sends a stronger price signal concerning the City's constrained water supply in
the summer period. A disadvantage of the rate structure is that the addition of seasonal periods
has added some complexity. In addition, administratively, the City must determine the method
that will be used to bill the customer for consumption that falls into both time periods (i.e. the
customer's consumption fell into the winter and summer periods). Most billing programs allow
for prorating of the bill between the two time periods.
WATER RATE STRUCTURE S—SEASONAL RATE WITH FOUR SUMMER PERIOD BLOCKS,
USINGAWCAND A UNIFORM WINTER RATE
This rate structure is similar to previous rate structure, but has used the individually tailored
block size approach of AWC and it also Lias added a fourth block to the summer period. The
additional block is intended to provide two benefits. The first benefit is that the 3'd block
consumption (inefficient use) is penalized but not at an overly "punitive" rate. The 4t' or tail
block is intended for those users who are clearly being excessive (wasteful) and should pay a
more punitive rate. The additional block allows for a clearer and broader definition of excessive
or wasteful use. An example of how the blocks would be established is Block 2 is 200% of
Block 1, and Block 3 is 201% through 400% of Block 1; and Block 4 is all consumption over
Block 3.
Basin
Block DetenninWg Block Size Pricing of the Block
Winter Period-
Block 1 All consumption Uniform Price for Winter
Summer Period-
Block 1 Based on AWC Same Price as Winter
Block 2 Set%of Block 1 Inverted Block Price
Block 3 % Range of Block 1 Inverted Block Price
Block 4 All Usage Over Block 3 Inverted Block Price
The main advantage of this rate structure is that it individually tailored for the customer, and has
sufficient block sizes to allow for appropriate pricing at the "inefficient" and "wasteful" levels.
The major disadvantage of this rate structure is that it is fairly complicated with the individual
tailoring and would require some customer education, along with a billing system capable of
handling seasonal time periods and the calculation of the AWC.
City San Luis Obispo 21
1�-7L� Volume 1 -Review of Water and Sewer Rate Structures
WATER RATE STRUCTURE 6— WATER BUDGET RATE STRUCTURE WITHINDOOR WATER
USE BASED UPON THE INDIVID UAL's A WC, WITH OUTDOOR USE DETERMINED BASED
UPON CUSTOMER SPECIFIC LOT SIZE/IRRIGABLE AREA. SUCCEEDING BLOCKS BASED
UPON RELATIONSHIP TO OUTDOOR GOAL. 2ND BLOCK IS SHAPED FOR ET.
This rate structure is a type of"water budget" that is a highly tailored and individualized rate
structure. The indoor allocation is based upon the individual's AWC. In more complex water
budgets, the first block may be based upon the number of residents in a home. For obvious
reasons, this is often deemed too administratively complex. In this case, the use of AWC is
proposed as a means to individually tailor the first block without actually counting household
residents. The outdoor allocation(2"d block) is determined based upon customer specific lot size
and irrigable area. The irrigable area is assumed to be the highest water using type of irrigable
turf. The 2"d block size changes from month to month, based upon the amount of water required
to properly irrigate the lot. This"shaping" of the 2"d block adds a significant level of complexity
to the rate structure. Any usage over and above the customer's goal is penalized with a higher
rate. The third block is considered "inefficient" use and the fourth block is considered
"excessive or wasteful."
Basis for
Block Determining Block Size Pricing of the Block
Block 1 Individualized AWC Inverted Block Price
Block 2 Based on Specific Lot Size
and Shaped for ET Inverted Block Price
Block 3 101%to 150%of Goal Inverted Block Price
Block 4 Over 150%of Goal Inverted Block Price
The main advantage of this rate structure is that it is highly tailored to the customer. The
objective of a "water budget" rate structure is to create consumption "goals" for the customer.
The disadvantages of this rate structure are fairly numerous. First, it is a very complex rate
structure in that it is based upon customer specific lot sizes and the 2nd block of the rate structure
changes from month to month based upon irrigation requirements (evapotranspiration). Ideally,
the utility would be able to
communicate to the Evapotranspiration and Shaping of the 2nd Block
customer their consumption Evapotranpiration is the
"goals" for the billing M°°° -� " O.Mwater loss from soil
period, while at the same 20,000 05D evaporation and
15,000 �Bbck transpiration from
time providing immediate a 0.b
feedback to the customer _'0.000 "°E'° plants. c water budget
o.vo � � rate structure attempts
s,aoo o.io
concerning how well they 0 0.00 to match the 2nd block
are doing against their ,r�e�o�t�,� , .a a` size to the amount of
goals (i.e. real-time — water required, in each
consumption information). month to meet the"efficient"irrigation requirements of the area.
Administratively, it is important to note that HDR is not aware of any "off-the-shelf' billing
systems that are capable of billing this rate structure. The few utilities that have adopted this rate
T �fy�l� City of San Luis Obispo 22
j� Volume 1 -Review of Water and Sewer Rate Structures
structure have needed to make custom modifications to their billing system software to allow
them to bill customers.
WATER RATE STRUCTURE 7— WATER BUDGET RATE STRUCTURE WITH INDOOR WATER
USE BASED UPON A FDXD THRESHOLD, WITH OUTDOOR USE DETERMINED BASED
UPONAN ASSUMED "TYPICAL fi LOT SIZE AND IRRIGATION REQUIREMENTS AND SHAPED
FOR ET. SUCCEEDINGBLOC&SBASED UPONRELATIONSHIP TO OUTDOOR GOAL
This rate structure simplifies the water budget approach to a certain extent. It sets a fixed
threshold for the indoor use and the outdoor block size (2"d block) is based upon an assumed
"typical" lot size for the type of customer (e.g. single family, etc.). In establishing the irrigation
allowance for the 2"d block, it assumes the highest water using type of irrigable turf. The 2"d
block is also"shaped"for ET.
Basis for
Block Determining Block Size Pricing of the Block
Block 1 Fixed Threshold Inverted Block Price
Block 2 Based on"Typical'Lot Size/
Typical Weather/Water Supply
and Adjusted for ET Inverted Block Price
Block 3 101%to 150%of Goal Inverted Block Price
Block 4 Over 150%of Goal Inverted Block Price
The advantage of this rate structure is that it is a water budget rate structure that is "goal based"
and it has simplified how the goal-based block sizes are established. Some utilities will allow
"appeals" to change the In or 2"d block sizes when a customer can show that their household has
a larger number of individuals than the assumption contained within the rate, or their lot size is
larger than the assumed"typical' lot size. The disadvantage of this rate structure is that the goal-
based block sizes are simply averages of a"typical' customer. The shaping of the 2nd block size
for ET does add a significant level of complexity to the rate, and may be too confusing for many
customers. It would also require a billing system capable of having different block sizes for each
billing period.
3.7 Evaluation of the Conceptual Water Rate Structures
Based upon the previously discussed City Council goals and objectives, an evaluation of the
seven conceptual rate designs was undertaken. HDR evaluated (scored) each of the rate
structures and assumed a range of scoring for evaluation. The scoring range for each goal was
from a -2 points (poor) to a +2 points (very good). A score of zero was assumed to be neutral;
not strong, but also not weak in relation to the goal. HDR recognizes that the scoring of each
conceptual rate structure is very subjective and judgmental in nature. However, it does provide a
mechanism or basis for narrowing the number of conceptual rate structures down to a more
manageable number to further analyze in more detail. Provide below in Table 3-5 is a summary
of the evaluation of the conceptual water rate structures.
T Tl./1� City of San Luis Obispo 23
1F—i� Volume 1 -Review of water and Sewer Rate Structures
Council'sTable 3-5
Evaluation of the.Conceptual Water Rate Str6ctures
to the City - .
Structure Structure Structure Structure Structure Structure. Structure
City Council Prioritization #1 #2 #3 #4 #5 #6 #7
1 Yields Rev.Requirements[]] n/a n/a. n/a n/a n/a n/a n/a
2 Conservation Oriented +1 +2 +2 +2 +2 +2 +2
3 Easy to Understand/Admin. +2 +1 +1 +1 0 —1 0
4 Stability/Predictability +1 +i +1 +1 0 0 0
5 Fair/Equitable 0 +1 +1 +2 +l 0 0
Grand Total—Points +4 +5 t5 +6 +3 +1 +2
Weighted Total 12 14 14 15 9— 5 8
Summary of the Conceptual Rate Structures
41 City's Current Rate Structure(2 blocks)
#2 City's Current Rate Structure with Modified(Defined)Block Sizes(3 blocks)
#3 Modified Current Rate Structure with Individually Tailored Block Sizes(3 blocks)
#4 Seasonal Rate Structure with Defined Block Sizes(I block winter,3 blocks summer)
#5 Seasonal Rate Structure Using AWC to Define Blocks(1 block winter,3 blocks summer)
#6 Water Budget Using AWC for First Block Size and Lot Size/ET for Block 2(4 blocks)
#7 Water Budget w/Fixed Threshold for lu Block Size and Assumed Lot Size for 2°d Block(4 blocks)
1
Evaluation Scoring
—2=Very Poor —1=Below Average 0=Neutral +1 =Good +2=Very Good
Weighted Total=Sum of Goal 1—n/a,Goal 2—4 x#of points,Goal 3—3 x#of points,etc
[I]—Note: Goal#1 excluded from scoring and w6ighting. All rate designs should yield total revenue requirements
As can be seen from the above table, all of the conceptual rate structure had positive scores, and
there does not appear to be any single rate structure that is superior or inferior to the other rate
structures. The highest or lowest score does not necessarily imply the"best"or"worst."
A brief discussion of the logic used to evaluate the rate structures and final relationship of the
scores is warranted. All of the rate structures, when properly designed, should meet the revenue
requirements of the utility. Given that,this particular goal was eliminated from the scoring. The
next goal, conservation oriented, produced similar results. The.City already has a water rate
design that is conservation oriented. and each of the rate structures had similar features. The
latter rate structures are more complicated and focus on specific types of conservation (e.g.
outdoor use, etc.). Easy to understand and- administer was one of the primary features that
differentiated the rate structures. The City's current rate structure is very easy to understand and
administer. In contrast to this; water budget rate structures are very complex, particularly when
individually tailored.. The shaping of the 2°d block for evapotranspiration is complex and
difficult to explain to customers. In addition, administratively, water budget rate structures may
require measuring individual lot sizes and modifications to the City's billing system in order to
implement the structure. Those factors accounted for the low score for water budgets in relation
T �� City San Luis Obispo 24
1l ■
Volume 1 -Review of Water and Sewer Rate Structures
to easy to understand and administer: . , In terms:,of stability and predictability, the more
conservation-oriented structures were scored lower. This was primarily because stability and
predictability relate to the customer's perception of the rates. The more conservation-oriented a
rate structure is the greater likelihood of large bills for excess (punitive) use and swings in the
size of the bill from month to month. Finally, in terms of fair and equitable rates, each of the rate
structures scored well. The highdt scoring was a seasonal rate structure. In that case, the price
charged relates well to the time of use (higher costs in the summer). In that respect, it appeared
to be very fair. In contrast, the lower scoring rate structures were water budgets. There may be
percytions by customers that they are "unfair" given that a customer may get a larger allotment
of 2 block water for lawn watering, simply because they have a larger lot than their next door
neighbor.
The point totals were summed to provide a relative
". :. it appeared that the water relationship. At the same time, the scores were
rate structures that added a third weighted to reflect the prioriti2td rate design goal and
block or considered seasonal use objectives of the City Council.. The highest (top) goal
may be the most appropriate for received the highest weighting and the lowest goal
further technical analysis At the received the lowest weighting. Based upon that
sametinte; consideration should weighting approach, it appeared that the water rate
be given to the addition of a fixed structures that added a third block or considered
charge to each of the rate seasonal.use may be the most appropriate for further
structures that are reviewed" technical analysis. At the same time, consideration
-- - should be given to the addition of a fixed charge to
each of the rate structures that are reviewed in more detail.
3.8 Review of the Conceptual Sewer Rate Structures
Provided below is a listing of conceptual sewer rate structures. In general, sewer rate structures
tend to be simpler than water rate structures. As discussed previously, the current sewer rate
structure for single-family residential customers is a fixed'charge. For commercial customers it
has a minimum (fixed) charge and.a volumetric (variable) charge. The rate structure used for
commercial customers is fairly typc_a1 of a commercial sewer rate structure. Therefore, this
conceptual review will be focused on residential/single family sewer rate structures..
In this case,the conceptual sewer rate structures will discuss whether it has.a fixed(or minimum)
charge,variable charge, or both a fixed and variable charge. Provided below are the descriptions
of the conceptual sewer rate structures.
city of San Luis Obispo 25
Volume 1 -Review of Water and Sewer Rate strictures
SEWER RATE STRUCTURE i—CURRENT RATE STRUCTURE
The currentsewer rate structure is a fixed charge. The fixed charge is established in relation to
the fixed charges of other customer classes of service:.
Type of Basis for
Charge. Determining Charge Pricing of the Charge
Fixed Per Customer Fixed Charge
The advantage of the current rate structure is that it is very simple to understand and administer.
It also has'very high revenue stability for the utility. The main disadvantage to this rate structure
is that it may not reflect the volumetric wastewater contribution of the customers. It also does
not have any connection to.water use and conservation of water. _
SEWER RATE STRUCTURE 2—MODIFIED CURRENT RATE STRUCTURE;FIXED CHARGE BASED
UPON AVERAGE WINTER WATER USE
This conceptual sewer rate design uses an approach very similar to the City's current rate design,
but it is individually tailored for each customer. The charge is a fixed charge, but it is based
upon the customer's volume of wastewater(metered water use) during the winter period (e.g.
November February). By using a winter period, the vast majority of outdoor irrigation should
be eliminated from the volume. Each customer's average winter water use (AWWU) would be
determined and multiplied by a volumetric charge to produce a fixed charge. This fixed charge
would then be billed each billing period, for a one-year period. Each year, the customer's fixed
charge would be adjusted to reflect their most recent AWWU.
Type of Basis for
Charge Determining Charge Pricing of the Charge
Fixed Individually Tailored for Each Fixed Charge
Customer Based Upon Average
Winter Water Use (AWWU)
The advantage of the modified current rate structure is that it is very similar to the City's current
rate structure,but it now has an individually tailored element to it. It should also be fairly simple
to understand and administer. It will maintain very high revenue stability for the utility. The
main disadvantage to this rate structure is that while it does reflect the volumetric wastewater
contribution of the customers, it does so on an annual basis and does not provide for immediate
savings to a customer(e.g. billings based upon each billing period's water use). It also does not
have any connection to summer water use and the encouragement of water conservation.
�\ -- t --
City of San Luis Obispo 26
Volume 7 -Review of Water and-Sewer Rate Structures
SEWER RATE STRUCTURE 3—FIXED CHARGE+VOLUMETRIC—BASED ON METERED WATER
USE
This conceptual rate structure considers a fixed charge plus a volumetric rate based upon the
customers water use. The volAetric charge would be based"upon the water consumed in that
particular billing period.
Type of Basis for
Charge Determining;Charge Pricing of the Charge
Fixed Per Customer Fixed Charge
Plus:
Variable Total Metered Water Volume Charge
The advantage of this rate structure is that it has moved to a fixed and variable approach.. The
relationship between the fixed and variable components is undefined at this time and would be
determined at the time the rates are designed. This is a more equitable approach in that it
recognizes that certain costs on the sewer system are of a fixed and variable nature. The main
disadvantage of this approach is its use of metered water. This volume of water would include
summer irrigation use, which does not typically go to the treatment plant. Therefore, customers
that have significant lawn irrigation would be penalized under this rate for their lawn watering.
i
SEWER RATE STRUCTURE 4—VOLUMETRIC CHARGE BASED ON METERED WATER USE-)WITH
A CAP ON RESIDENTIAL VOLUMETRIC BILLING
This conceptual "rate structure considers a pure volumetric rate, with a "cap" on residential
volumes. The volumetric charge would be based upon the water consumed'-in that particular
billing period. The use of a "cap" on residential volumetric billing attempts to address the issue
of summer lawn irrigation water for residential customers.. Summer lawn irrigation is water that
does not impact wastewater treatment plant volumes. This conceptual rate structure establishes a
"cap" on residential bills to help eliminate summer lawn irrigation from the metered water
amount. If the customer uses less than the "capped" amount during the period, they are billed
the lower volumetric amount.
Type of Basis for
Charge Determining Charge Pricing of the Charge
Variable Total Metered Water Volume Charge
"Capped" for Residential
The. advantage of this rate structure is that it has addressed the issue of lawn irrigation in the
volumetric metering for residential customers. This is a more equitable approach for the
residential customers..
City of San Luis Obispo 27
Volume 1 -Review of Water and Sewer Rate Structures
SEWER RATE STRUCTURE 5—FIXED CHARGE+VOLUMETRIC—BASED ON WATER USE;
CAPPED AT THE CLASS AVERAGE OF WINTER WATER USE
This rate structure is similar to the previous rate structure, but places a cap on each customer
class of service. The prior rate structure established a cap only for residential customers. The
cap is established based upon a class"average" for winter water use.
Type of Basis for
Charge Determining Charge Pricing of the Charge
Fixed Per Customer Fixed Charge
Plus:
Variable Total Metered Water Capped at Volume Charge
the Class Average Winter Use -
The advantage of this rate structure is that it has placed a cap on all customer classes of service.
The main disadvantage of this approach is that it may not be needed for all customer classes of
service and is a bit more complex and requires a billing system capable of calculating the class
average winter water use and applying that cap during the billing process.
SEWER RATE STRUCTURE G—FIXED CHARGE+VOLUMETRIC—BASED ON WATER USE;
CAPPED AT THE CUSTOMER'S AVERAGE WINTER WATER USE
This conceptual rate structure is similar to the previous rate structure, but in contrast to using the
class average to create the cap, the cap is based upon the individual customer's average winter
water use.
Type of Basis for
Charge Determining Charge Pricing of the Charge
Fixed Per Customer Fixed Charge
Plus:
Variable Total Metered Water Capped at Volume Charge
Customer's Average Winter Use
The advantage of this rate structure is that it should help to better reflect the number of members
within a household. That is, a larger family should have a larger cap, that may be greater than
the class average,and a household with a smaller number of members, will have a lower cap that
may be below the class average. The main disadvantage of this approach is that it is a bit more
complex and requires a billing system capable of calculating the customer's average winter water
use and billing based upon that individually tailored cap amount. Administratively, there are
also issues of new customers coming onto the system with no history, etc . Typically, these
customers are given an "average" cap for the first year until their consumption history can be
determined.
FalCity of San Luis Obispo 28
Volume 1 -Review of Water and Sewer Rate Structures
3:9 Evaluation of the Conceptual Sewer Rate Structures
Based upon the previously discussed City Council.goals and objectives, an evaluatiori of the six
conceptual sewer rate designs was undertaken. Similar to the water rate structures, HDR
evaluated (scored) each of the sewer rate structures and assumed a range of scoring for
evaluation. Provide below in Table 3.-6 is a summary of the evaluation of the conceptual sewer
rate structures..
DesignEvaluation of the Conceptual S e-wee Rate Structures
to the City Council's-Rate .
Structure structure. Structure Structure Structure Structure
City Council Prioritization. #1 #2 43 #4 #5 #6
1 Yields Rev.Requirements n/a n/a n/a n/a n/a n/a
2 Conservation Oriented 0 0 +2 +2 +l 0
3 Easy to Understand/Admin. +2 +1 +1 +l +1 0
4 Stability/Predictability +2 +2 —1 +1 +1 +1
5 Fair/Equitable —1 +1 =1 +2 +1 +2
Grand Total-Points +3 +4 +1 +6 +4 +3.
Weighted Total 9 8 8 15 10 4
Summary of the Conceptual Rate Structures
# I City's Current Rate Structure(Fixed Charge)
#2 Modified Current Rate Structure With Fixed Charge Based Upon Custom_er's AWWU
#3 Fixed Charge,Plus Volume Charge Based Upon Metered Water Use
#4 100%Volumetric Charge Based Upon_Metered Water Consumption,with Cap for Residential Volume
#5 Fixed Charge,Plus.Volume Charge Based Upon Metered Water Use—Capped at Class Average
#6 Fixed Charge,Plus Volume Charge Based Upon Metered Water Use—Capped at Customer AWWU
Evaluation Scoring
—2=Very Poor —1=Below Average 0=Neutral +1 =Good +2=Very Good
Weighted Total=Sum of Goal 1 —n/a,Goal 2—4 x#of points,Goal 3—3 x#of points,etc
[1]—Note:. Goal#1 excluded from scoring and weighting. All rate designs should yield total revenue requirements
As can be seen from the above table, all of the conceptual rate structure had positive scores, and
there does not appear to be any single rate structure that is clearly superior or inferior to the other
rate structures.
A brief discussion of the logic used to evaluate the sewer rate structures and the final relationship
of the scores is warranted. All of the sewer rate structures, when properly designed, should meet.
the revenue requirements of the utility. Therefore,,this goal was eliminated from scoring. The
next goal, conservation oriented, does not seem to apply to the sewer rate structures, with the
exception of the rate structure that is based upon metered water consumption. It is unclear how
well people would understand the connection between water use and sewer bills, even in the
summer period. The next goal, easy to understand and administer had some differentiation.
city of San Luis Obispo _ 29
_`` Volume 1 -Review of Water and Sewer Rate Structures
Obviously,the easiest to understand and administer are the fixed rate type.structures. As the rate
structures move towards a volumetric approach, and those with some form of capping of the
billed volume, the complexity increases. -The next -- -
goal, stability and predictability, once again leans "The City's current sewer rate
heavily towards fixed charges. If the customer's structure was considered somewhat
bill is the same each billing period; then that is the inequitable since it charges the same
most stabile and predictable. Finally, fair and amount to each residential customer,
equitable is a goal that differentiates the rate regardless of family size or wastewater
structures, but is not a high priority. The City's contributions. Wftile there certainly
current sewer rate structure was considered are arguments that can be made that
somewhat inequitable since it charges the same this may be `fair and equitable"there ;
amount_ to each residential customer, regardless of appears to be a perception in the
family size or wastewater contributions. While community" that this rate structure is
there certainly are arguments that can be made that not "fair and equitable."
this may be "fair and equitable"there appears to.be `
a perception in the community that this rate structure is not `-`fair and equitable." Those rate
structures that use a fixed and variable charge were considered to be more fair and equitable.
Furthermore, those rate structures that placed a "cap" on the volumetric bill were considered to
be the most fair in that they tried to relate back to the actual wastewater contribution of the
customer.
The point totals were summed to provide a relative relationship. At the same time, the scores
were weighted to reflect the prioritized rate design goal and objectives of the City Council.
While no single rate structure appeared to be superior over the others, the City has noted, based
upon customer comments and concerns, the desire to consider volume-based sewer rates.
Therefore, the sewer rate structures to be reviewed in more detail should be those that use a
volumetric approach.
3.10 Summary
This section of the report has reviewed the conceptual water and sewer rate structures for the
City of San Luis Obispo. At the same time, each rate structure has been evaluated and scored
against the City Council's rate design goals .and objectives. Given that evaluation, the
conceptual rate structures have been narrowed down to two water and two sewer rate structures
that will be compared respectively to the City's current water and.sewer rate structures.
City San Luis Obispo - 30
Volume
e 1 -Review of Water and Sewer Rate Structures
Section
Technical Analysis of
Water • Sewer -Rate Structures
4.1 Introduction
In the previous section of the report, the City's conceptual rate structures were reviewed. From
those conceptual rate structures, City staff reviewed the range of alternatives-available for more
technical review and selected two water rate structures and two sewer rate structures for closer
technical examination. This section will review the technical analyses undertaken of the water
and sewer rate structures.
4.2City's Selection of Rate Structures for Technical Review
The City's project team reviewed the various water and sewer conceptual rate structures, Based
upon that review, while at the same time considering.the City's overall rate design goals and
objectives,two rate structures each were selected for the water and sewer utilities.
For the water utility,the following rate structures were selected for further technical review:
® Maintain existing water rate structure,but add a P block tier for residential
■ Fixed Charge+maintain existing water rate structure,but add a 3`d block tier for residential
The City's project tearn believed that the City's existing rate structure was effective. However,
there was a desire to consider adding a 3`d tier for residential use that was targeted at inefficient
or wasteful outdoor water use. The second alternative water rate structure is the same as the first
alternative, but adds a small fixed charge to reflect the City's cost of meter reading, billing,
accounting and customer service. The inclusion of a fixed charge within water rate structures is
very common. The City's project team also viewed the .inclusion of a fixed charge as a
movement toward consistency between the water and sewer utility rate structures..
For the sewer utility, the following rate structures were selected for further technical review:.
■ 100%volumetric rate structure with a"cap"on volumetric billing for residential
e Fixed Charge + 100% volumetric rate structure with a "cap" on volumetric billing for
residential
As noted previously, one of the customer criticisms of the existing residential sewer rate
structure is that it is 100% fixed'. Given that, the City's project team wanted to explore a sewer
rate structure that is 100%volume based. For the residential customers, the volume billed would
be"capped" at a specified amount to help eliminate sewer billing on outdoor water consumption.
The second alternative sewer rate structure is the same as the fust, but adds a small fixed charge
to reflect the City's cost of meter reading;billing,accounting and customer service.
City San Lues Obispo 31
Volume 1 -Review of Water and Sewer Rate Structures
4.3 Overview of the Technical Analysis
For each of the selected water and sewer.rate structures,.a technical analysis was undertaken to
better understand what the potential rate structure may actually look like if the City wanted to
adopt and implement the rate structure. In order to do that, HDR selected customer consumption
history for a "normal".year (2002) arld attempted to develop "revenue neutral" rate designs for
each alterative. "Revenue neutral" is defined as attempting to collect the same overall (total)
level of revenue as the City's existing rates. That does not imply that each customer class of
service (i.e. residential, multi-family, commercial, etc.) will necessarily pay the same total
revenue. Rather, in total the utility will theoretically collect the same total amount of revenue.
It should also be noted that this technical analysis is not considered to be a"rate study" by HDR
and the rates developed herein should not be implemented without further technical analysis to
assure that the rates developed match to the target revenue requirement to be collected and the
amount of consumption assumed within the rate design matches to the time period over which
the rates will be charged.
In developing the technical analysis of each rate structure, a general process was used to analyze
each rate structure. This general process was as follows:
■ Identification and description of the rate structure including consumption blocks sizes and
prices
■ Analysis of consumption occurring in each block and number of customers ending in each
block
■ Development of a bill comparison at various levels of consumption to understand range of
impacts to customers
■ Review of the perceived strengths and weaknesses of the rate structure
■ Review of any administrative or implementation considerations associated with the rate
structure
■ Revenue stability as a result of a"wet"or`-`dry"year.
■ Compatibility of the rate structure to the City's existing utility billing software
The above technical analysis should provide the City with a greater understanding of each rate
structure, along with its strengths and weaknesses.
The rates reviewed in this technical analysis are not being proposed for implementation.
Implementation and rate transition are issues best addressed in a comprehensive rate study.
Therefore, if the City Council likes a particular rate structure from a philosophical standpoint;
the immediate implementation of it may or may not be feasible. The rate structure may need to
be slowly implemented over time to minimize impacts to customers.
4.4 Review of the Single-Family Water Residential (tate
Structures
The first water customer class of service reviewed is the single-family rate structures. As
discussed above,two water rate structures are reviewed. Provided below is the detailed technical
review of each of the rate structures.
City of San Luis Obispo 32
� Volume 1 -Review of Water and Sewer Rate Structures
Single-Family Residential Water Rate Structure 1
The first single-family residential rate structure reviewed is an inverted block rate structure. It
was determined that the first two blocks would collect the revenue requirements for the City,
while the third block, "inefficient or wasteful" outdoor usage, would not be used to meet the
utility's revenue requirement. Father, any funds collected within this usage block could be
targeted for conservation programs or other water utility needs. This approach is consistent with
the policy recommendations of the California Urban Water Conservation Council. Provided
below is a summary of the single-family residential rate structure 1.
SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 1 - INVERTED BLOCK RATE STRUCTURE
WITH THREE BLOCKS. BLOCK 1 AND 2 COLLECT THE FULL REVENUE REQUIREMENTS WHILE
BLOCK 3 REPRESENTS WASTEFUL/INEFFICIENT USE AND COLLECTS CONSERVATION FUNDS.
Consumption Charges-
Block I -First 5 CCF/month $2.93/CCF
Block 2 -Next 20 CCF/month $3.67/CCF
Block 3 -All Usage Over 25 CCF/month $4.59/CCF
This rate has structured and priced the lst
Consumption and Customers by Block and grid blocks of consumption using the
120.0% City's existing approach. That is, the first
100.0% 78.2% block of consumption is intended to reflect
80.0% -- a typical or average residential customer's
60.0%
49.7% a7.s OConsumpbon indoor water use. The 2°d block is
40.0% ■Customers designed to reflect outdoor water usage.
20.4% The price for the 1St and 2nd block is
20.0% 2.8%1.4% predicated upon meeting the total revenue
0.0% Block 1 Block 2 Block 3 requirements of the utility, but contains a
25% price differential between the blocks.
This is consistent with the City's current rate/pricing philosophy. The addition of the 3`d block is
intended to target "inefficient or wasteful"
outdoor water use. The pricing of the 3`d Bill Comparison at Various usage Lx is
block was based upon a 25% differential
szzs.00
over and above the 2°d block. HDR
considered pricing the 3`d block at the $15o.00 -
marginal cost of the next unit of water 57600
source of supply, but it was felt that was FIN
too punitive. 60.00 s is u so
ID�Present Bill■Proposed Bill
As can be seen in the accompanying graph
of consumption by block, roughly 3% of Monthly Present Proposed $
all consumption would be billed in the Yd
Usage $0.00 $0.00 Difference0
block in a "normal" water/weather year. 5 $14.65 $14.65 $0.00
In a "normal" year, the vast majority of 15 $51.35 $51.35 $0.00
25 $88.05 $88.05 $0.00
consumption is projected to fall within the 1 so $179.80 $202.80 $23.00
falCity of San Luis Obispo 33
Volume 1 -Review of Water and Sewer Rate Structures
first two blocks, with approximately 49% of the consumption falling into the first block, and
48%in the second block.
The bill comparison for this rate option indicates that on a monthly basis,customers_ with average
or below average consumption will not see a change in their bill. Customers who have usage in
the third block would see an increase which would vary by the level of consumption over 25
CCF per month.
PERCEIVED STRENGTHS OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 1 - There are
four (4) perceived-major strengths associated with this rate structure. These strengths are as
follows:
B Conseivation:incentive
■ Ease of administration
■ Ease of customer understanding _
■ Continuity in philosophy
This rate structure has developed block sizes that bear a strong relationship to the indoor and
outdoor water requirements of the typical single-family residential customer. In addition to that,
this rate provides a conservation incentive to those customers that use excessive water. This is
also an easy rate design to implemerit as there are very few administrative issues associated with
it. Finally, this rate design is not overly complex, such that customers should be able to easily
understand. the City's approach and philosophy concerning the allocation and pricing.of the
water as it closely follows the City's current water rate structure.
PERCEIVED WEAKNESSES OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 1 - There are
two (2) perceived weaknesses associated with this rate structure. These weaknesses are as
follows:
M Rates are not necessarily ``cosi-based" as the full revenue requirements are collected in the
first two blocks
E Block sizes may not reflect actual customer outdoor consumption requirements
The first perceived weakness of this rate structure is in how the revenue requirements of the
water utility are collected. Based upon recent California conservation policies, this rate structure
has assumed to collect the water utility revenue requirements through the first two blocks. This
approach does not follow "generally accepted" rate setting methodology. Under generally-
accepted rate setting principles, the revenue requirements would be collected through all three
blocks, not just in the first two blocks. However, in this particular case, it appears that only a
minimum amount of revenue would be collected in this 3`d block. The second perceived
weakness is that the blocks were not set based around the actual usage needs of the City's
customers. Rather a.detenmination of"typical"water requirements was made and used to set the
blocks.
ADMINISTRATIVE CONSIDERATIONS OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 1 -
In terms of rate administrative, this particular rate structure does not have any significant
implementation costs or ongoing administrative costs associated with it. The City's current
billing system would be capable of handling a third block for conservation consumption. In .
FalCity of San Luis Obispo - - -- - -__ 34
Volume 1 -Review of Water and Sewer Rate Structures
summary, it appears that there would be no significant implementation costs associated with this
rate structure, and no significant on-going costs associated with this rate structure.
REVENUE STABILITY OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 1 —In reviewing this
rate structure, the potential revenue volatility of a wet year or drought year was examined. For
this particular rate design,during a wet year the impact to the rates would be seen in the final two
(2) blocks of the structure. In particular, the third conservation block would have reduced
consumption. The impact of a wet year would decrease the level of revenues collected by the
City, but should not .significantly impact the ability of the City to recover its revenue
requirement. The impacts of a dry year for this rate structure would appear to be the exact
opposite. Under the dry year scenario, the City would see increased consumption in the last two
(2) blocks, particularly the conservation (P) block, which.would increase the overall level of
revenues collected by the City.
COMPATIBILITY OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 1 TO THE CITY'S
EXISTING SOFTWARE BILLING SYSTEM — This particular rate design is compatible with the
City's existing billing software.
Single-Family Residential Water Rate Structure 2
The second single-family rate structure reviewed is similar to the previous rate structure,but this
alternative has included a fixed monthly charge to account for the meter reading, billing,
customer accounting and customer service costs,. The size of the blocks for this rate structure are
the same as those in the previous single-family rate structure. This rate structure also includes
the assumption that all revenue requirements will be collected through the fixed charge and the
first two blocks of consumption. Block 3 revenue will be used to supplement the City's.
conservation efforts. Provided below is a summary of this rate design.
SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 2 — INVERTED BLOCK RATE STRUCTURE
WITH THREE BLOCKS. BLOCK 1 AND 2 COLLECT THE FULL REVENUE REQUIREMENTS WHILE
BLOCK 3 REPRESENTS INEFFICIENT/WASTEFUL USE AND COLLECTS CONSERVATION FUNDS.
THIS RATE STRUCTURE ALSO INCLUDES A FIXED MONTHLY CHARGE FOR ACCOUNTING AND
BILLING EXPENSES.
Fixed Charges- $1.50/Month
Consumption Charges-
Block 1 - First 5 CCF/month $2.80/CCF
Block 2 -Next 20 CCF/month $3.50/CCF
Block 3 -All Usage Over 25 CCF/month $4.40/CCF
As noted previously, this rate structure is very similar to the previous single-family residential
water rate structure, with the exception of the addition of a fixed charge: The City wanted to
view the addition of a fixed charge given that the vast majority of utilities have a fixed charge
- . with their water rates, along with the City's desire for consistency in basic rate structure
philosophy between the water and sewer utilities.
Valu Sari Rev Obispo as
1--iJ■
Volume 1 -Repiew of Water and Sewer Rate Structures
Consumption and Customers by Block The development of the fixed charge was
120.0% based on a review of the City's current cost
I to provide the customer billing and
100.0% 78.2%
accounting staff. In this rate structure, the
80.0% fixed charge is not differentiated by meter
49.7% 412.8%
80.0% o carsamp6ar size or type of customer served. All
� ■Customers
40.0% customers would pay the same fixed
2o.a% charge. The ricin philosophy used to
z0.o% g • pricing PY
1.4%
0.0% establish the consumption charges is
Block 1 Block 2 Block 3 similar to the previous single-family
residential water rate structure. That is, it
is assumed that the full revenue requirements will be collected through the first two blocks. All
revenues collected in the third block are assumed to fund future conservation efforts or other
water utility needs. The consumption charges are slightly reduced from-the prior single-family
residential rate structure alternative since a portion of the revenue requirements are collected
from the fixed charges. A key assumption
of this rate structure is that the inclusion of
a fixed charge and slight reduction in the BIB comparison at Variaus usage t.evets
consumption charges will not have an SX0.00
impact upon consumption. The vast $150.00
majority of the City's consumption in the $100.00
first two blocks is typically considered to $5000
be not very responsive to changes in price
$0.00
(i.e.price inelastic). s 15 25 s0
opmem an taP.aoasaa a�n
The bill comparison developed for this
articular rate structure indicates results Monthly Present Proposed $
P Usage Bill Bill Difference
very similar to rate structure 1 in that there o $0.00 $1.50 $1.50
are no significant acts to the City's 5 $14.85 $10.50 $0.8
gnl impacts tY� 15 $51.35 $50.50 ($0.85)
customers until a customer reaches the 3 25 $88.05- $85.50 ($2.55)
block of consumption. Under this rate so $179.80 $195.50 $15.70
structure, single-family customers with below average or average consumption may see a slight
decrease in their monthly bill, while those with higher than average consumption will see a slight
increase due to the conservation block. In looking at the impacts during various times of the
year, the winter period should see minimal changes in the bills. It is the summer or irrigation
season when those customers irrigating more than needed will see the larger impacts on their bill.
PERCEIVED STRENGTHS OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 2 — There are
five perceived strengths associated with this rate structure. These strengths are as follows:
■ More consistent with"generally accepted"rate structures
■ Conservation incentive
■ Ease of administration
■ Ease of customer understanding
■ Continuity in philosophy
City San Luis Obispo 36
Volume 7 -Review of Water and Sewer Rate Structures
The addition of a fixed charge has,made the City's.rate.structure more consistent with the rate
structure approach used by the vast majority of utilities in the U.S. In addition, this rate
structure, similar to rate structure 1, has a strong conservation price signal and the block sizes
have been developed around the assumed consumption patterns of the City's customers. Even
with the addition of the fixed charge, this rate,structure is still fairly simple in its structure and
should be easy to implement as there are no major administrative issues associated with it
Finally, this rate design is not overly complex, such that customers should be able to understand
the City's approach and philosophy concerning the allocation and pricing of the water as it
closely follows the City's,current rate structure.
PERCEIVED WEAKNESSES OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 2 — There are
two perceived weaknesses associated with this rate structure. These weaknesses are as follows:
■ Rates are not necessarily cost-based as the full revenue requirements are collected in the first
two blocks
IN Block sizes may not reflect actual customer outdoor consumption regiurements
The perceived weaknesses of this rate structure are very similar to those discussed under the
previous single-family residential rate structure that was reviewed.
ADMINISTRATIVE CONSIDERATIONS OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 2 —
In terms of administrative issues, this particular rate structure does not have any significant
implementation costs or ongoing administrative costs associated with it. The. City's current
billing system would be capable of handling a third block.for conservation consumption and a
monthly fixed base or service charge. In summary, it appears that there would be no significant
implementation costs associated with this rate structure, and no significant on-going
administrative costs associated with this rate structure:
REVENUE STABILITY OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 2—In reviewing this
rate structure, the potential revenue volatility of a wet year or drought year was examined. The .
impacts to this rate structure would be roughly same as those for the single-family rate structure
1. However; the addition of the fixed charge has removed a small portion of the City's revenue
requirement from a 100% consumption-based approach. However, given the small fixed charge
associated with this rate structure, along with the minor amount of consumption associated with
the 3rd block of consumption, it is anticipated that in a wet year or dry year the revenue impacts
would be very similar to the first single-family rate structure reviewed.
COMPATIBILITY OF SINGLE-FAMILY RESIDENTIAL RATE STRUCTURE 2 TO THE CITY'S
EXISTING SOFTWARE BILLING SYSTEM — This rate design is also compatible with the City's
existing billing software.
fy T� City of San Luis Obispo 37
a.Jl Volume 1 -Review of Water and Sewer Rate Structures
4.5 Review of the Ikon-Residential Water Rate Structures
The rate structures reviewed for the single-family customers considered the addition of a 3rd
block of consumption. It is the intent of the City that the 3`d block would apply only to single-
family residential customers.. However, the remainder of the two single-family rate structures
would still apply to all other City customers. Given that, the next class of service reviewed was
the non-residential rate structures. For purposes of this discussion, the non-residential class of
service is considered to include both multi-family and commercial customers.. Similar to the
single-family water rate structure review, two rate structures were recommended for review and
analysis. Provided below is the detailed review of each of the rate structures.
Non-Residential Water Rate Structure 1
The first rate structure for single4amily residential customers was the City's existing rate
structure, with the addition of a third block. As noted above, the 3`d block is intended only for
single-family residential customers. Therefore, the first rate structure reviewed for non-
residential water customers is the City's existing water rate structure. Provided below is the
detail of this rate design.
NON-RESIDENTIAL RATE STRUCTURE 1 — INVERTED BLOCK RATE STRUCTURE WITH TWO
CONSUMPTION BLOCK(CITY'S EXISTING RATE STRUCTURE)
Consumption Charges-
Block 1 First 5 CCF/month $2.93/CCF
Block 2—All Usage Over 5 CCF/month $3.67/CCF
Consumption and Customers by 81=k The City's existing rate non--residential rate
customers uses the same block sizes and
00.0% 962% prices as the proposed first two blocks for
__ --._ 73.8%
80.0% — _. the single-family residential customers.
70.0% - - Not surprisingly, given thetype and.size of
60.0% - -
csm0k,. these customers, the vast majority of
60.0% b, p6bck2
40.0% consumption and customers fall into the
s0.ox - A.2% second block of structure. As can be seen
,o.ox _ LEM in the graph, approximately 86% of the
total consumption falls into block 2, while
fbnsurtpeon cuslem m roughly 74% of the customers have usage
in the second block. It should also be
noted that there is a wide range of customer types and consumption levels within this customer
class of service.
Since the rates have not changed for this rate structure there are no bill impacts to the non-
residential customers. In other words, all customers will pay the same bill as the City's current
rates, regardless of consumption levels:
PERCEIVED STRENGTHS OF NON-RESIDENTIAL RATE STRUCTURE I — Four perceived strengths
were identified with this rate structure. These strengths are as follows:
City of San Luis Obispo 38
Volume 1 -Review of Water and Sewer Rate Structures
■ Continuity of philosophy
■ Conservation incentive
® Ease of customer understanding
■ Ease of administration
Given no change in the rate structure or the price contained in each block, continuity of
philosophy is obviously strong. While HDR has noted this as a strength, it is only because the
rate structure does have other strong characteristics, including some level of conservation
incentive. Absent that, maintaining the existing rate. structure may have been perceived as a
weakness.
PERCEIVED WEAKNESSES OF NON-RESIDENTIAL USER RATE STRUCTURE 1 — This review
identified two perceived weaknesses associated with this rate structure. These weaknesses are as
follows:
■ Blocks are not developed around the non-residential customers consumption patterns
■ Structure may not work well with a non-residential type class of service
The block sizes for this customer class of service are really set (sized) based upon single-family
residential consumption. Given that, the size of the block probably does not have much
relationship to non-residential consumption patterns. As was seen in the consumption graph, a
majority of the consumption is in the second block. The other weakness is the difficulty in
designing an inverted block rate design for-non-residential customers that is fair and equitable. If
--_ the block sizes bear little relationship to the non-residential consumption patterns then some
level of inequity is bound to occur. As was discussed above, the complexity in designing an
inverted block rate structure for non:residential customers is the wide variety of customers and
consumption patterns in this class of service.
ADMINISTRATIVE CONSIDERATIONS OF NON-RESIDENTIAL RATE STRUCTURE 1 Given the
design of this rate structure being the current rate structure, it is assumed that there would not be
any administrative considerations associated with this.rate structure.
REVENUE STABILITY OF NON-RESIDENTIAL RATE_STRUCTURE 1 — In reviewing this rate
structure, the potential revenue volatility of a wet year or dry year was examined.. Under the wet
year scenario the City could see some impacts of reduced consumption which would lower the
overall level of revenues collected from this customer group. A dry year would increase the
level of consumption in the upper block and could increase the level of revenues collected from
this rate structure. However,the majority of the impacts would be seen in customers, both multi-
family and commercial, that don't have a separate irrigation meter for outdoor consumption:
Those remaining customers usage patterns are most.likely relatively flat and do not have large
peaking consumption patterns.
COMPATIBILITY OF NON-RESIDENTIAL RATE STRUCTURE 1 TO THE CITY'S EXISTING
SOFTWARE BILLING SYSTEM—This particular rate design is compatible with the City's existing
billing system.
City of San_ Luis Obispo - -- - - 39
�-`l Volume 1 -Review of Water and Sewer Rate Structures
Non-Residential Rate Structure 2
The second rate structure reviewed for the non-residential customers was similar to the first rate.
structure reviewed, except it added a monthly fixed base:or service charge. Provided below is.
the detail of this rate design.
NON-RESIDENTIAL RATE STRUCTURE 2 — INVERTED BLOCK RATE STRUCTURE WITH TWO
CONSUMPTION BLOCKS AND A MONTHLY FIXED BASE CHARGE.
Fixed Charges- $1.50/Mon.th
Consumption Charges-
Block 1 -First 5 CCF/month $2.80/CCF
Block 2—All Usage Over 5 CCF/month $3.50/CCF
-------------
The rate structure under this alternative is very similar to the second residential rate structure
alternative, with the exception that the 37d block for consumption has been eliminated. The
prices for fixed and variable charges, along with the block.sizes, are all identical.
Given that the block sizes have not
SI` nipwison at Vw m uzaW Levels changed from the non=residential rate
- structure 1, the consumption by block
- shown in the previous chart is the same for -
so - both structures with approximately 86% of
S20the consumption falling in the second
S.100.0010.0025 `�� block and 74% of the customers having
o m 200
usage in the second block.
Mammy PmProposed $
Usage Bill Bill Difference
The major change from the non-residential
Bill
25 aee.os sass° ($2..5s) rate structure 1 is the addition of a fixed
so $179.80 $173.00 (86.90) - -
100 $363.30 SIU-8.00 (s15_30) monthly base charge to collect the
-_ - 200 X0'3098'000 accounting and billing costs of the water
utility. The price for each of the consumption blocks was based oil the prices for the single-
family residential rate structure 2. Similar to the single-family residential rate structure, the
prices were adjusted and reduced to reflect the revenues that would be received from the fixed
monthly charge.
The bill comparisons for this rate structure show a decrease to those customers with minimal
monthly consumption; While those customers with average consumption will see a slight
decrease due to the lower block prices and fixed monthly charge.
PERCEIVED STRENGTHS OF NON-RESIDENTIAL RATE STRUCTURE 2 —There are four perceived
major strengths associated with this rate structure. These strengths are as follows:
e Addition of a fixed monthly charge
® Continuity of philosophy
01 Conservation incentive
N �Eaasee of customer understanding
City of San Luis Obispo. 40
1 iJJJ Volume 1 -Review of Water and Sewer Rate Structures
Ease of administration
The strengths of this rate structure are very similar to those discussed for the previous rate
structure. The addition of a fixed monthly charge has produced a rate.structure that is more in
keeping with"generally accepted"rate structures for this customer class of service.
PERCEIVED WEAKNESSES OF NON-RESIDENTIAL RATE STRUCTURE 2 - There are two
perceived major weaknesses associated with this rate structure. These weaknesses are as
follows:
■ Blocks are not developed around the non-residential customers consumption patterns
■ Structure may not work,well with a non-residential type class of service
The weaknesses for this non-residential water rate structure are very similar to those discussed
for the prior non-residential water rate structure.
ADMINISTRATIVE CONSIDERATIONS OF NON-RESIDENTIAL USER RA'I'IE STRUCTURE 2 - As
with the non-residential rate structure 1, it is assumed that this rate structure would not have,any
major administrative or implementation issues associated with it.
REVENUE STABILITY OF NON-RESIDENTIAL RATE STRUCTURE 2 - In reviewing this rate
structure, the potential revenue volatility of a wet year or drought year was examined. The
impacts of a wet year under this rate structure could result in a decrease in the level of revenue
- typically collected. Conversely, a dry year could.result in increased revenues. However, it is
assumed that a majority of these customers do not have outdoor usage requirements and
therefore, may not be significantly impacted by weather conditions. Therefore, it is projected
that there should not be any significant changes in revenues from this rate structure due to
weather conditions.
COMPATIBILITY OF NON-RESIDENTIAL RATE STRUCTURE 2 TO THE. CITY'S EXISTING
SOFTWARE BILLING SYSTEM -This particular rate design is compatible with the City's existing
billing system.
This concludes the review of the water rate structures. The focus now shifts to providing a
technical review of the City's sewer rate structures.
4.6 Review of the Single-Family Residential Sewer Rate
Structures
Two sewer rate structures were reviewed for the single-family residential customer class of
service. The analysis undertaken was similar to that of the water utility rate structures. Provided
below is a detailed review of each of rate structure, a discussion of the perceived strengths and
weaknesses of each rate structure, along with any administrative and implementation issues
associated with the rate design.
Single-Family Residential Sewer Rate Structure 1
The first sewer rate structure reviewed is as a 100% volume-based rate. There is no monthly
fixed charge and total water consumption is used to determine the monthly bill.. The exception to
city of San Luis Obispo _ 41
-Q` Volume 1-Review of nater and Sewer Rate Structures
this is the residential customers. Under this rate structure the residential customers water
consumption used to calculate the sewer bill would be capped at 15 CCF per month. Provided
below is the detail of this rate design.
SINGLE-FAMILY RESIDENTIAL SEWER RATE STRUCTURE 1—VOLUME-BASED CHARGE ON ALL
WATER CONSUMPTION,WITH A CAP OF 15 CCF FOR SINGLE-FAMILY RESIDENTIAL.
Consumption Charges-
All Water Consumption Up to 15 CCF $4.10/CCF
The City's existing sewer rate for single-
Bill cwnparisoa at various usW Locals family residential customers is a fixed per
$150.00 _ _- . . living unit charge. Given that the City's
water rates are currently 100% volumetric
E700 00 in nature, the City wanted to explore
moving away from the City's current
- approach of a fixed sewer charge to a
so.°o — 100% volumetric rate for sewer. This
0 5 is zs 50 option presents a 100%volumetric rate for
_ °P`es B9®:':posed Bill single-family residential customers, but it
Monthly Present Proposed $ contains a "cap" provision. Single-family
Usage Bin Bill Difference residential customers will only be billed
o $64.61 $0.00 ($44.16) for water consumption P u to 15 CCF per
s $64.616 $zoso ($a4.�s) P
is $64.6.6 $61.50 ($3,16) month.9 The purpose of the cap is to
25 $64.66 $102.50 $37.94 so $64.66 $i23.00 $ss.3a avoid, to the extent that is reasonably
- possible, billing customers for water
consumption that is outdoor usage related. In contrast to assumed indoor usage, outdoor usage
(e.g. lawn watering) does not contribute to the wastewater flows to the treatment plant. This rate
structure assumes that any usage over and above 15 CCF is likely related to outdoor usage and
should not be billed as sewer related. The price of the volume charge was set to recover the full
revenue requirements of the sewer utility based on the assumed billing units..
As would be expected, moving from a rate that is 100% fixed to a rate that is 100% volumetric-
based will have some significant changes/impacts to customer bills. The bill comparisons
developed for this rate structure provided a wide range of impacts dependant on the level of
consumption. For those customers with minimal water consumption (<15 CCF/Month),
customers will see a substantial reduction bills. For large water users the impacts could be
significant. As with the water rate structures the sewer rate structures targeted the current
revenues to maintain a revenue neutral position.
9 Customers would be billed the lesser of their actual water consumption for the billing period or 15
CCF/month. A customer using less than 15 CCF/month in the billing period would be billed fortheir
lower amount of consumption. A customer using greater than 15 CCF/month in the billing period
would be"capped' at 15 CCF/month and billed.for 15 CCF/month for the billing period.
City of San Luis Obispo 42
� Volume 1 -Review of Water and Sewer Rate Structures '
PERCEIVED STRENGTHS OF SINGLE'FAMILY RESIDENTIAL SEWER RATE STRUCTURE 1 —There
are five perceived major strengths associated with this rate structure.. These strengths ace as
follows:
• Greater Equity—Relationship to Volumetric Contributions
® Ease of customer understanding
® Ease of administration '
i Conservation incentive
• Consumption cap
One of the main objectives of the City was to address the issue of customer equity on sewer
rates. Some customers were concerned that using a 100% fixed rate was inequitable in that it
bore no relationship to.wastewater contribution (e.g. family size, size of home, number of
bathrooms, etc.). This rate structure has moved toward rectifying that perceived weakness with
the existing rate structure. Overall, this rate structure is very easy to understand and should be
simple to administer. Another perceived strength of this rate structure is that some would
suggest it encourages water conservation. Whether this rate structure would add.to the City's
water conservation program is unclear, at best. Finally, the use of.a "cap" creates a level of
fairness in that the rate will not significantly over-charge for a customer with very high water
consumption.
PERCEIVED WEAKNESSES OF SINGLE-FAMILY RESIDENTIAL SEWER RATE STRUCTURE 1 —
There are two perceived major weaknesses associated with this rate structure. These weaknesses
are as follows:
E Potential revenue volatility
e Lack of a fixed charge
For this rate structure, potential revenue volatility could be an issue as more emphasis was put on
the volume charge. Going from a rate structure that is 100% fixed to a rate structure that is
100% volumetric will obviously introduce revenue volatility of some magnitude. The other
consideration is the lack of any fixed charge. The vast majority of costs incurred by a sewer
utility are fixed in nature, and some level of a fixed charge may be appropriate.
ADMINISTRATIVE CONSIDERATIONS OF SINGLE-FAMILY RESIDENTIAL SEWER RATE
STRUCTURE 1 —Given the design of this rate structure being similar to the current rate structure,
it is assumed that there would not be any administrative or implementation issues associated with
this rate structure.
REVENUE STABILITY OF SINGLE-FAMILY RESIDENTIAL SEWER RATE STRUCTURE I — Given
that this rate structure has used a "cap" the potential revenue volatility has been reduced
significantly in a wet or dry year.
COMPATIBILITY OF SINGLE-FAMILY RESIDENTIAL SEWER RATE STRUCTURE 1 TO THE CITY'S
EXISTING SOFTWARE BILLING SYSTEM — This particular rate design is compatible with the
City's existing billing system.
City of San Luis Obispo 43
Volume 1 -Review of Water and Sewer Rate Structures
1
Single-Family Residential Sewer Rate Structure 2
The second single-family residential sewer rate structure reviewed was similar to the first sewer
rate structure reviewed for the City. In this case, a fixed charge has been added to the rate
structure to collect the costs associated with customer accounting and billing. Provided below is
the detail of this rate design. '
SINGLE-FAMILY RESIDENTIAL SEWER RATE STRUCTURE 2—FIXED MONTHLY CHARGE AND A
VOLUME-BASED CHARGE ON ALL WATER CONSUMPTION,WITH A CAP OF 15 CCF FOR SINGLE-
FAMILY RESIDENTIAL.
Fixed Charges- $1.50/Month
Consumption Charges-
All Water Consumption Up to 15 CCF $4.00/CCF
Single-family residential sewer rate structure 2 includes a fixed charge per accounts and a
volume charge based on all water consumption. However, the single-family volume charge is
capped at 15 CCF per month. The price
for the consumption charge was based on
Biu comparison at various usage Lewis recovering the revenue requirements of the
$150.00 - -- __ City's sewer utility.
$100.00 As with the single-family residential sewer
SM.00 -— - - rate structure 1, the bill comparisons
= developed for this rate structure provided a
$0.00 —' = wide range of impacts dependant on the
o s 15 zs 50 level of water consumption. Similar to
0Preserd Bill 0 Proposed Bill
sewer rate structure 1, those customers
Monthly Present Proposed $ with minimal. water consumption will
Usage Bal Bin Difference experience a decrease in their sewer bill.
0 $64.66 $1.50 (W.16) However, for those customers having
5 $64.66 $21.50 ($43:16)
15 $64.66 $61.50 ($3.16) larger levels of consumption, their bills
25 $64.66 $101.50 $36,134 may be at or greater than the existing
50 $64.66 $121.50 $56.84
single-family residential flat rate.
PERCEIVED STRENGTHS OF SINGLE-FAMILY RESIDENTIAL SEWER RATE STRUCTURE 2—There
are five perceived major strengths associated with this rate structure. These strengths are as
follows:
■ Greater Equity-Relationship to volumetric contributions
E Maintenance of a fixed charge component
11 Ease of customer understanding
11 Ease of administration
M Consumption Cap
¢ity of San Luis Obispo
Volume 1 -Review of Water and Sewer Rate Structures
The strengths of this rate structure are based around the issues of customer equity and collection
of the revenue requirements from both a fixed charge "and a volumetric charge, with a cap on
maximum volumetric charges. From the perspective of customer understanding and
administration,this rate structure is very simple to understand and administer.
PERCEIVED WEAKNESSES OF SINGLE-FAMILY RESIDENTIAL SEWER RATE STRUCTURE 2 —
There is only one perceived weakness associated with this rate structure. This weakness is as
follows:
■ Revenue volatility
Similar to the previous single-family residential rate structure, movement towards a sewer rate
based largely upon volumetric consumption introduces a potential level of revenue volatility.
This level of revenue volatility is mitigated by the use of a`-`cap" on volumetric charges..
ADMINISTRATIVE CONSIDERATIONS OF SINGLE-FAMILY RESIDENTIAL SEWER RATE
STRUCTURE.2—Given that this rate structure is very similar to the City's-existing non-residential
sewer rates, it is assumed there would not be any administrative considerations associated with
this rate structure.
REVENUE STABILITY OF SINGLE-FAMILY RESIDENTIAL SEWER RATE STRUCTURE 2 — The
revenue impact of this rate structure would vary based upon a wet or dry year as the volume
charge is based upon water consumption. However, as noted above,the volumetric cap helps to
mitigate revenue volatility by not relying on billing consumption from high use customers.
COMPATIBILITY OF SINGLE-FAMILY RESIDENTIAL SEWER RATE STRUCTURE 2 TO THE CITY'S
EXISTING SOFTWARE BILLING SYSTEM — This particular rate design is compatible with the
City's existing billing system.
4.7 Review of the Non-Residential Sewer Rate Structures
The final set of sewer rates reviewed was the non-residential sewer rate structures. Similar to the
other technical analyses, two rate structures were reviewed for the City's non=residential sewer
customers. Provided below is a detailed review of each of rate structure.
Non-Residential Sewer Rate Structure 1
The first non-residential sewer rate structure reviewed is a 100% volumetric rate. There is no
monthly fixed charge. Unlike the single-family residential rate structure that had a volumetric
cap, this rate structure does not contain a volumetric cap. This rate structure is applied to both
the multi-family and all other (commercial) customers. Provided below is the detail of this rate
design.
NON-RESIDENTIAL SEWER RATE, STRUCTURE 1 — VOLUME-BASED CHARGE ON ALL WATER
CONSUMPTION.
Consumption Charges-
Al1 Water Consumption $4.10/CCF
_DjCity of San Luis Obispo 45
Volume 1 -Review of Water and Sewer Rate Structures
As will be recalled, the City's existing non-residential rate structure contains a fixed charge with
a consumption allowance. All consumption over and above the allowance is billed at the
volumetric rate. Under this rate structure,
13111cmno�eon n varix u$osa9e Lo�i8 there is no fixed charge, and all
consumption is billed on a volumetric
S2.250.00 basis. Similar to the City's existing sewer
750.
$
i,500.00 _ 4 rate structure"consumption" is based upon
arzso.00 _.................
51.000.00 _ - - ------=-- :..., the customer's metered waterSSM.
-_ — - consumption. The price of the volume
5250.00 - charge was set to recover the full revenue
$o.00
50 150 M soo requirements for all customers based on
oP ant Dn o dem the assumed billing units.
Monthly ed for this
Present Proposed $ Thbill idl
Usage comparisons developed usage Bill Bill Difference P P
50 $240.16 $.205.00 ($as.as) rate structure provided a wide range of
2so $026.16 ssts.00 ($15.16)
zso s1,026.16 $t, z .00 $4.84 impacts dependant on the level of
500 $1.995.16 suso.00 .s54.84 consumption. For those customers with
minimal water consumption, the elimination of the fixed charge will likely decrease their sewer
bill. However, for those large water users the impacts could be increased bills.
PERCEIVED STRENGTHS OF NON-RESIDENTIAL SEWER RATE STRUCTURE 1 — There are three
perceived major strengths associated with this rate structure. These strengths are as follows:
■ Ease of customer understanding
■ Ease of administration
■ Potential conservation incentive
The strengths of this sewer rate structure are based on this rate structure being very simple for
the City's customers to understand. This sewer rate structure is also similar to the current rate
structure.so there are no administrative or implementation issues.. This rate structure may also
provide a water conservation incentive given that the billing is tied to water consumption.
However,the existing non-residential rate structure is very similar, so no Significant or additional
conservation savings would be expected.
PERCEIVED WEAKNESSES OF NON-RESIDENTIAL SEWER RATE STRUCTURE 1 — There are two
perceived weaknesses associated with this rate structure. These weaknesses are as follows:
■ Revenue volatility
® Lack of a fixed charge
The perceived weaknesses of this rate structure are similar to previous comments on the 100%
volumetric sewer rate structure. The potential revenue volatility is greater with this group of
customers since there is no volumetric cap. However, multi-family and commercial customers
that have irrigation meters help to reduce the potential revenue volatility of this rate structure.
ADMINISTRATIVE CONSIDERATIONS OF NON-RESIDENTIAL SEWER RATE STRUCTURE 1 —
Given that this rate structure is very similar to the City's current rate structure, it is assumed that -
there would not be any administrative considerations associated with the iriiplementation of this
rate structure.
lalCity of San Luis Obispo - - 46
Volume 1 -Review of Water and Sewer Rate Structures
REVENUE STABILITY OF NON-RESIDENTIAL SEWER RATE STRUCTURE 1 —The revenue impact
of this rate structure could vary based upon a wet or dry year as the volume charge is based upon
Water consumption. However, the volatility should be manageable and not.significant.
COMPATIBILITY OF NON-RESIDENTIAL SEWER RATE STRUCTURE I TO THE CITY'S EXISTING
SOFTWARE BILLING SYSTEM —This particular rate design is compatible with the City's existing
billing system.
Non-Residential Sewer Rate Structure 2
The second non-residential sewer rate structure reviewed is somewhat similar to the City's
current rate structure. The main difference is the use of a reduced fixed charge, and a volumetric
billing based upon all water consumption. No allowance for volumetric use is provided within
the fixed charge. Provided below is the detail of this rate design. _
NON-RESIDENTIAL SEWER RATE STRUCTURE 2—FIXED MONTHLY CHARGE AND A VOLUME-
BASED CHARGE ON ALL WATER CONSUMPTION
Fixed Charges- $1.50/Month
Consumption Charges-
All Water Consumption $4,00/CCF
Non-residential sewer rate structure 2 includes a fixed charge per account to reflect the customer
accounting and billing costs, and a volume charge based on all water consumption. The price for
the fixed charge was based on a review of the accounting and billing costs per account, while the
volume charge was based on recovering
Bill Compertsm at vannas usage levels the total revenue requirements of the
City's sewer utility.
as.zs5.00 -
$2,050.00 -- ,
$1,750.00 - _ '-
$1,5w.0o ---••- Similar to the results of the bill
$1•0m.w mm comparisons developed for non-residential
$750.00
$770.00 sewer rate structure 1, there is a wide
—
:� _ t range of impacts dependant on the
so iso xo 700 -customer's level of water consumption.
O Present Bill 0 Proposed Bill Those customers with minimal water
Monthly Present Proposed $ consumption could see a slight decrease in
Usage' Bal Bill Difference their sewer bill. However, for those
50 $240.16 $201.50 ($36.66) customers using larger quantities of water,
150 $630.16 $601.50 ($28.66)
250 $1,020.16 $1.001.50 ($18.66) they may have an increase in their sewer
500 $1,995.16 $2.001.50 $6.34 bill.
PERCEIVED STRENGTHS OF NON-RESIDENTIAL SEWER RATE STRUCTURE 2 — There are three
perceived major strengths associated with this rate structure.. These strengths.are as follows:
® Continuity of philosophy
City of San Luis Obispo 47
-5666 Volume 1 -Review of Water and Sewer Rate Structures
Ease of customer understanding
® Ease of administration
The strengths of this rate structure center around the rate being very similar to the current sewer
rates for the City's non-residential customers. While it has modified the rate structure slightly,
particularly by reducing the fixed charge, the overall rate structure is very similar to the City's
current philosophy.
PERCEIVED WEAKNESSES OF NON-RESIDENTIAL SEWER RATE STRUCTURE.2 — There are one
perceived weakness associated with this rate structure. The perceived weakness is as follows:
■ Revenue volatility
This rate structure for non-residential sewer customers has moved more towards and volumetric
rate,and.has reduced the existing fixed charges for this group of customers.
ADMINISTRATIVE CONSIDERATIONS OF NON-RESIDENTIAL SEWER KATE STRUCTURE 2 —
Given the design of this rate structure being very similar to the current rate structure, it is
assumed that there would not be any administrative or implementation issues associated with this
rate structure.
REVENUE STABILITY OF NON-RESIDENTIAL SEWER RATE STRUCTURE 2—The revenue impact
of this rate structure would vary based upon a wet or dry year as the volume charge.is based
upon all water consumption. However, the level of the volatility should not vary significantly
from the volatility of the City's existing non-iesidential.sewer rates.
COMPATIBILITY OF NON-RESIDENTIAL SEWERRATESTRUCTURE 2 TO THE CITY'S EXISTING
SOFTWARE BILLING SYSTEM — This particular sewer rate design is compatible with the City's.
existing billing system
This concludes the technical review of the residential and non=residential sewer rate structures.
4.8 Summary
This section of the report has developed a technical review of each of the selected water and
sewer rate structures for the City's residential and non=residential customers._ The objective of
this technical analysis was to determine-whether there is any significant technical, administrative
or billing system issues associated with the rate structures that would.suggest not considering
them f u then No significant technical, administrative, or utility billing system issues were noted
for any of the rate structures reviewed.
laqCity of San Luis Obispo 48
Volume 1 -Review of Water and Sewer Rate Strgetues
Section
Rate Structure Study Conclusions and
Recommendations
5.1 Introduction
In the previous section of the report, the City's conceptual rate structures were reviewed. The
technical review concludes the review and analysis of the various rate structures. This section of
the report will summarize HDR's conclusions and recommendations from that analysis.
5.2 Rate Structure Study Conclusions
This study reviewed in depth the water and sewer rate design options. In reviewing the City's
existing water and sewer rates, it was noted that the water rates were for the most part
contemporary and in keeping with current industry trends. The lack of a fixed charge in the
City's water rates is a bit unusual, but the trade-off is in sending a stronger conservation price
signal. In contrast to the water rates, the City's sewer rates probably rely too heavily upon a
fixed charge approach, and movement towards a more variable (consumption) based approach
may be appropriate.
Based upon the technical review of the two water and sewer rate design options, HDR did not
discover any technical, administrative or utility billing system issues that would suggest that the
rate structures reviewed did not have any major hurdles in their use or implementation. The
issue of how they are implemented and rate transition may be another issue, particularly for the
sewer utility.
5.3 Rate Structure Study Recommendations
In the opinion of HDR, each of the water and sewer rate structures reviewed in the technical
analysis portion of this study would be acceptable for adoption. The use of a pure volumetric
rate would show a strong commitment on the part of the City to encourage conservation and
efficient use. At the same time, the level of the fixed charges included in the fixed/variable rate
alternatives is not significant from a revenue stability standpoint. However, in the opinion of
HDR, the rate structures that contain both a fixed charge and a variable (consumption) charge are
technically the most appropriate in that they do recognize the cost issue of fixed and variable
charges. In summary form,these would be all of the Option 2 rate structures that were reviewed.
5.4 Implementation Issues
HDR does not see any major implementation issues associated with the water rate structures that
were reviewed and recommended by this study. The level of customer impacts are fairly
T T1f1.Jl� City of San Luis Obispo 49
l�— Volume 1 -Review of Water and Sewer Rate Structures
minimal and the customers that should see any impacts are the high use "inefficient or wasteful"
customers.
In contrast to the water utility, implementation of.the sewer rate structures, particularly for
single-family residential customers, will require more thought. It is difficult to transition from a
100% fixed mate to a 100% volumetric rate. Therefore, the City should consider some transition
period where the fixed charge is reduced and the volumetric charge increased over time. The
City certainly could:implement a 100% volumetric charge immediately, but HDR's sense is that
the City would receive a number of customer complaints concerning the change in the size of
bills. Customer education and information about the change in billing approaches will be an
important element of the rate transition plan.
City of San Luis Obispo — -- -- --- --- — - so
Volume t Review of Water and Sewer Rate Structures