HomeMy WebLinkAbout07/01/2008, B3 - REVIEW OF SEWER CONSUMPTION AND REVENUES Counat M"6ND" July 1,2008
j agcnaa Report
CITY O F SAN LUIS O B 1 S P 0
FROM: John Moss, Utilities Director
Prepared By: Kathe Bishop, Senior Administrative Analyst
SUBJECT: REVIEW OF SEWER CONSUMPTION AND REVENUES
CAO RECOMMENDATION
1. Review and accept the sewer consumption and revenue analysis, and;
2. Direct staff to provide notice to all sewer rate customers, of the proposed $0.50 increase to
the sewer volume charge from $5.56/CCF to $6.06/CCF to be effective September 3, 2008,
pending completion of the Proposition 218 notification and protest period and final rate
adoption at a public hearing to be held on September 2, 2008.
REPORT IN BRIEF
On May 20, 2008, staff presented the 2008 Sewer Fund Review to the City Council. The
analysis demonstrated a significant shortfall in sewer revenues, projected at $1.5 million for
fiscal year 2007-08. Council directed staff to return to Council in July 2008 with a report on the
sewer rate structure and/or rate modifications needed to close the revenue gap upon completion
of the consumption and revenue analysis, with implementation of any recommendations in
September 2008. The analysis as performed by HDR Engineering and City staff is complete.
This report delivers the results of the analysis, identifies the sources of revenue shortfall,
including consumption changes by customer type. Further, this report recommends:
1. No change to the current rate structure
2. No change to the sewer base rate
3. A $0.50 increase to the sewer volume charge from $5.56/CCF to$6.06/CCF
Note: CCF= 100 cubic feet= 748 gallons
DISCUSSION
Overview of the Analysis Process and Findings
City staff provided HDR Engineering with detailed consumption and billing information for
fiscal year 2007-08 by class of service for all 14,000 customer accounts. The billing units were
compared to the previously designed rates. For residential customers this included calculating
the average winter water consumption (AWWC) and determining the annual amount of billed
consumption for the last fiscal year. The AWWC calculation applies to all single family
residential accounts, and those multi-family and mobile home accounts without a separate
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irrigation meter. During this consumption and revenue projection process several data
components were noted that contributed to the revenue projection error.
1. Inappropriate inclusion of large commercial account with erroneous data. The
analysis of over 14,000 individual accounts identified a large commercial account (Cal
Poly) that was included twice and contained erroneous (overstated) consumption data
used in the projection of revenues. The value of this overstated consumption data,
accounts for approximately 70% ($1,036,100) of the overstated sewer revenue projection
error.
How did this happen? When generating and compiling the consumption data of over
14,000 commercial and residential accounts for the purpose of estimating revenue
projections, the information from the University was inadvertently provided and counted
twice, as it was tracked and provided in two different formats by staff. While not an
excuse, it is easy to see how that dual counting of the consumption data would not have
been readily apparent to our consultants.
The one data set for the University that should not have been included also contained the
erroneous overstated consumption. The University's sewer billing is based on measured
effluent flow and graphed via a flow chart recorder. The data is transmitted from the
campus via telemetry which includes computer programming to convert data to radio
signal for data transfer to a meter located at the City corporation yard where it is again
converted by programming back to an effluent flow rate, charted and totaled. A software
programming error occurred for a period of 14-months, resulting in false high meter
reads, that was corrected in 2006-07. As is standard practice for Utility billing/read
errors, the billing was corrected but the consumption data in our accounting programming
was not.
When billing credits occur for any customer, the correction in the utility billing system
occurs in dollars or payment adjustments. The consumption data remains the same, since
the meter will continue forward from the last meter read. When a customer has a water
leak, and requests an adjustment from the Utility Billing Adjustment Committee
(UBAC), providing proof of a leak and receipts for repair, the customer may receive a
credit adjustment to the amount billed on their account, up to once annually, but the
consumption data remains the same in the utility billing system. Utility billing
adjustment activity is tracked separately in another database with customer billing
information, nature of the adjustment, resolution and the dollar amount of the adjustment.
Since consumption data is now a key component of sewer revenue projections, staff has
added a data field to the UBAC database to track the measured consumption CCF value
of billing adjustments. Now, when data is pulled from the utility billing system,
consumption adjustment data is also pulled from the UBAC database so that revenue
projections are based on net consumption data. The problem regarding the data set being
overstated by the University's sewer data, which also contained erroneous data, has been
corrected in this analysis and is not a recurring issue with the rate structure.
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2. Format of data used for the projections. The data set for the previous rate and rate
structure analysis included several months of bi-monthly consumption data, because the
City was transitioning to a monthly billing cycle. The most recent consumption data is all
in monthly form. . Monthly utility billing was approved by the City Council in the 2006-
07 Budget and implemented by staff in October 2006. With complete data on the
monthly billing cycle, the data set is now refined, and provides a more precise analysis for
this review and future reviews. However, the billing units used to calculate the
consumption in 2007 were based on the prior 12-months of data, not on a fiscal year
basis, to capture the most recent winter water use period. As a result, the values used in
the rate analysis in early 2007, and values for fiscal year 2006-07 and 2007-08 do not tie
out exactly. These data constraints contributed to approximately 12% ($175,900) of the
revenue projection error.
3. Effects of weather on consumption. Original projections were based on information
from the 2006-07 fiscal year. In reviewing the weather patterns for the most recent fiscal
years, it was dryer in the revenue projection fiscal year of 2006-07, than in fiscal year
2007-08. With less rainfall, more irrigation likely occurred in 2006-07. The average
rainfall in San Luis Obispo is 21"-22" annually. The following table displays rainfall for
the past three years.
Rainfall in San Luis Obispo
Period Rainfall
2007-08 20"
2006-07 Ill.
2005-06 30"
Overall customers reduced their consumption. Requiring less irrigation in 2007-08 than
in the prior year is one of the factors that did appear to have a slight impact on customer
consumption. The $288,000 remaining sewer revenue shortfall is due to consumption
reductions across most customer classes as shown in the following table:
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Consumption and Revenue Comparison for 2006-07 and 2007-08
Class of Service Consumption in Units $Change % of Total
2006-07 2007-08 +/(-)
Residential 1,206,381 1,174,013 (32,368) (163,458) 56.8%
Multi-Family w/o Irrigation Meter 27,964 21,222 (6,742) (34,047) 11.8%
Commercial/Church/Halls 246,349 241,456 (4,893) (24,710) 8.6%
Care Facility 83,202 79,494 (3,708) (18,725) 6.5%
Governmental Facilities 23,225 20,465 (2,760) (13,938) 4.8%
Bar/Restaurant 55,555 53,139 (2,416) (12,201) 4.2%
Hotels 87,413 85,467 (1,946) (9,827) 3.4%
City Facilities 14,348 12,864 (1,484) (7,494) 2.6%
Laundry 11,629 11,077 (552) (2,788) 1.0%
Manufacturer/Warehouse 8,968 8,513 (455) (2,298) 0.8%
Fast Food/Deli/Bakery 13,064 13,078 14 71 0.0%
Child Care 1 1,1411 1,4221 281 1,419 -0.5%
Total 1 1,779,239 1,722,210 (57,029) (287,996)1 100.0%
Consumption differences in the residential classes of service were present as customers
further conserved based on individual choices and/or changes in rainfall. The residential
(including multi-family) consumption change is valued at $197,500. This level of
consumption variability between 2006-07 and 2007-08 is reasonable. According to
industry standards on volume based rate structures customers tend to reduce their
consumption the greatest amount—during the second year(second AWWC period) after
the volume rate structure implementation. In addition, the remaining $90,500 in sewer
revenue shortfall reflects normal consumption variability for non-residential customers.
In summary, approximately 70% of the sewer revenue shortfall for 2007-08 is due to a
consumption (revenue) projection error as a result of including the University effluent flow
(wastewater generation) as a separate commercial account which also contained erroneous data.
Approximately 12% of the shortfall is due to data constraints from bi-monthly data and data set
periods. Monthly utility billing data will significantly increase the accuracy of data for this
analysis and the future. The issue of data changes within 12-month periods (data sets) will
continue to some degree as consumption trends vary and the solution may be in averaging future
projection values and in establishing a modest revenue reserve to buffer changes in consumption
and weather. A revenue reserve will be further evaluated as part of the sewer fund analysis and
rate setting during the 2009-11 Financial Plan development process.
While the reduction in consumption has negatively affected sewer revenues, customer response
in the form of reduced consumption is one of the objectives of the volume based rate structure.
Once our customer responses to the new rate structure normalize, this level of variability should
diminish.
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Conclusion
To meet the revenue requirements of the sewer fund and to continue to encourage conservation
and provide equity and fairness between classes of customers, staff is recommending a $0.-50
increase to the sewer volume charge only, from $5.56/ccf to $6.06/ccf pending rate setting
adoption on September 2, 2008.
Based on the consumption and revenue analysis and findings, and given that the most significant
component driving the revenue shortage is a one-time issue and not reoccurring — staff
recommends no changes to the current rate structure at this time. Staff believes that the current
rate structure has the ability to provide revenue adequacy to meet system operating and capital
needs. A modest revenue reserve will be further evaluated as part of the sewer fund analysis and
rate setting during the 2009-11 Financial Plan development process to ensure sewer revenue
stability until we can establish and evaluate multiple years of sewer consumption and revenue
trends.
The transition from a residential fixed sewer rate structure to the current volume based rate
structure meets the Council's rate structure goals and objectives:
1. Encourages conservation
2. Provides equity and fairness between classes of customers
3. Allows customers choices and control of their utility costs
4. Improves customer service–delivering on our customers#1 utility billing request
5. Easy to understand and administer
Staff is proposing no change to the current sewer base rate of$5.50 per account. Customers with
lower consumption and less impact to the sewer system will see a lower overall rate change to
their sewer bill. With the rate change on the volume charge only, those customers with greater
consumption and impact to the sewer system will see a greater overall rate change on their sewer
bill.
Next Steps
Before July 15, 2008 – Proposition 218 rate change notification will be mailed to all sewer
customers informing them of the proposed sewer rate change for September 2008 and the protest
process. Proposition 218 requires rate change and protest process notification at least 45-days
prior to the public hearing to consider rate change adoption.
July/August 2008 – Utility billing inserts will be included with water and sewer bills
communicating the proposed rate change and directing customers to the City's website where
additional information will be available.
September 2, 2008 –Public Hearing for final adoption of the sewer rate change. If approved, the
new sewer rate will be effective September 3, 2008.
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FISCAL IMPACT
To off-set the $1.5 million revenue shortfall an increase of $0.50 on the sewer volume charge,
from $5.56/ccf to $6.06/ccf, is recommended pending completion of the Proposition 218
notification period and rate setting adoption on September 2, 2008.
Sewer Service Charges
Effective Date: July 1,2007 July 1,2008 September 3,2008
Volume Based Rates Adopted with Residential Adopted Proposed
Implementation
Base Charge: $5.00 $5.50 $5.50
Volume Charge: $5.05/ccf $5.56/ccf $6.06/ccf
NOTE: CCF=100 cubic feet= 748 gallons
The sewer rates for residential customers are capped by averaging the residential customer's
winter (December, January and February) water use which is presumed to be most representative
of the customer's wastewater generation. The table below displays how the proposed sewer rate
change would affect the "average" single family residential customer, assuming a sewer cap of 7-
units.
Average Residential Sewer Customer Monthly Bill Sample
Assuming Average Winter Water Consumption"Sewer Cap"of Seven(7)Units .
Effective Date: July 1,2007 July 1,2008 September 3,2008
Historical Current Proposed
Base Charge: 5.00 5.50 5.50
Volume Charge: 35.35 38.92 42.42
Total $40.35 $44.42 $47.92
The average residential customer has a 7-unit sewer cap, which represents the most the "average"
customer would have to pay for monthly.sewer service for that year, but the customer could pay
less if metered use fell below their individually established sewer cap. Customers with lower
consumption and less impact to the sewer system will see a lower overall rate change to their
sewer bill. With the rate change on the volume charge only, those customers with greater
consumption and impact to the sewer system will see a greater overall rate change on their sewer
bill.
The proposed sewer rate change will provide the revenues necessary to meet the approved sewer
operating and amended capital improvement plan budgets included in the 2007-09 Financial Plan
Supplement: 2008-09 Budget, as adopted on June 3, 2008.
Review of Sewer Consumption and Revenues Page 7
ALTERNATIVES
1. Return the sewer rate structure to a flat (fixed) rate structure. While this alternative is
attractive in terms of predictability and ease, it is not what our customers requested and does
not meet the other rate structure goals of the Council. Staff believes the change to the
volume based rate structure has been extremely well received by the community and has
demonstrated its ability to meet all program objectives, including revenue adequacy once the
corrections to the consumption data and volume rate are completed. This alternative is
therefore not recommended.
2. Defer consideration of the proposed adjustment to the volume charge for sewer. Not moving
forward with the Proposition 218 rate change notification and protest period for the proposed
rate change at this time will result in a greater revenue shortfall in the sewer fund. The
shortfall will compound over time and require a greater rate change in the future to meet
system operating needs, capital improvement project plans, regulatory requirements and debt
service coverage requirements. This alternative is not recommended. Staff recommends
moving forward with the proposed rate notification process to rectify sewer revenues to meet
system operating expenses, amended capital improvement project budgets, regulatory
requirements and debt service coverage requirements as approved in the 2007-09 Financial
Plan Supplement: 2008-09 Budget.
GXAR Reports\2008 Council Agenda Reports\Review of Sewer Consumption and Revenues.doc
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