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HomeMy WebLinkAbout07-18-2017 Item 02 - Water and Wastwater Rate Structure Review Meeting Date: 7/18/2017 FROM: Carrie Mattingly, Utilities Director Prepared By: Jennifer Metz, Utilities Project Manager SUBJECT: WATER AND WASTEWATER RATE STRUCTURE REVIEW RECOMMENDATION Participate in the first of four water and wastewater rate structure study sessions with HDR Engineering, Inc. DISCUSSION Background The City’s Water and Sewer Funds are enterprise funds separate from the City’s General Fund with each fund’s operating, capital, and debt service expenditures are covered by rates and fees paid for the services provided to San Luis Obispo customers. The Water Fund is comprised of five programs that support the different elements involved in providing water service. The Sewer Fund is comprised of five operating programs that support the different tasks required to provide services that are highly regulated by state and federal mandates. In 2017, the Water Fund collects revenue from approximately 15,100 accounts to cover the cost for water services. operation, and infrastructure. Similarly, the Sewer Fund collects revenue from approximately 14,500 accounts to provide wastewater service, operation, and infrastructure. The City experienced a significant decline in water and wastewater revenue when the community’s water conservation efforts reduced consumption under State-mandated drought restrictions in place from 2015 into 2017. Though drought restrictions were rescinded by the City Council on June 20, resource protection and water conservation continues to remain a way of life. This water consumption pattern creates volatility under the current rate structures, which secure up to 87 percent of revenue through volumetric rates. The City must critically re-examine how to attain revenue stability in support of the provision of water and wastewater services now and into the future. If left unaddressed, the decrease in revenues will lead to structural deficits impacting the City’s ability to sufficiently fund operating costs, current and future capital improvement needs, maintain required coverage ratios for favorable debt financing, and mandated reserve levels. The City last reviewed its water rate structure in 2015 when a three-year increase to the base fee and drought surcharges were added to both the base fee and the volumetric charge. This surcharge was subsequently removed from the base fee in March 2017 and the volumetric charge in July 2017. Prior to that, the water rate structure was modified in 2013 when a base fee was added, a third volumetric tier was eliminated, and the number of units on the first tier of usa ge was changed from five to eight. Minor modifications were made to the wastewater rate structure in 2014 when the school category was eliminated and changed to non-residential. The wastewater rate structure was last Packet Pg. 23 2 comprehensively reviewed in 2007 when the City went to a volume-based residential rate structure. Commercial customers have historically been on a volume-based wastewater rate structure. The City’s current water rate structure includes a base account fee and a unit rate charged on the volume of water used. The City applies a two-tier rate structure with water usage over eight units charged at a higher rate than the first eight units. The City’s wastewater rate is likewise composed of a base rate and unit rate charged on the ratepayer’s water consumption. The wastewater charges for residential ratepayers are capped based on a three-month average winter water consumption; new customers are assigned a charge based on a historical, system -wide average winter water consumption (eight units). Rate Structure Review Scope The water and wastewater rate structure study sessions will be guided by HDR Engineering, Inc. (HDR). The outcome of the study sessions will be a recommended water and wastewater rate structure which will meet the Council’s rate philosophies and values established during the rate structure review process. It is important to understand the Council will not be considering actual water and wastewater rates during this study but only the structure that would be used for future rate setting processes. There are four study sessions planned between July and October 2017 and a final meeting for a final report on the recommended rate structure in December. These sessions will introduce the rate setting process and ultimately provide guidance to the City Council through its selection of a water and wastewater rate structure. A cost of services study will be proposed separately to review the City’s water and wastewater rates. Session Topic Outcome 1 Fundamentals of Rate Structures Basic understanding of water and wastewater rate structure design and review prior rate design goals and objectives 2 Rate Design Goals and Objectives Prioritize the City Council’s rate structure goals and objectives 3 Developing Conceptual Rate Structures Review conceptual water and wastewater rate structures 4 Technical Review of Rate Structures Review the final selected conceptual water and wastewater rate structures 5 Selection of Rate Structures Receive a report with final recommended water and wastewater rate structures Study Session 1. Fundamentals of Rate Structures – July 18, 2017 HDR will guide a thorough discussion on the fundamentals of developing cost-based water and wastewater rate structures and the philosophy of rate setting, underlying rate sett ing goals and objectives, terminology, and technical aspects of rate structure design. The presentation and interactive dialogue with the City Council will provide an overview of the rate setting methodology and the correlation between rate structure design and revenue generation to lay the foundation for the process. Packet Pg. 24 2 Study Session 2. Rate Design Goals and Objectives – August 15, 2017 HDR will lead a discussion of commonly accepted rate design goals and objectives, their meanings and implications to an overall rate structure design, and discuss typical rate structure design goals. From this dialogue, the City Council will be asked to prioritize its top six rate structure goals for use in developing the conceptual rate structures for review and discussion at Study Session 3. Study Session 3. Conceptual Rate Structures – September 2017 (working on specific date) At Study Session 3, HDR will present the results of the City Council weighting of recommended rate structure goals for discussion. Based on the City’s prioritized rate design goals and objectives, conceptual water and wastewater rate designs (rate structures only, no actual rates, meaning no dollars) will be presented. Based on input from the meeting, HDR and staff will then narrow the field and select the top three rate structures. These three rate structures will be evaluated and presented to the Council in Study Session 4. Study Session 4. Technical Review of Rate Structures – October 2017 (working on specific date) A fourth Study Session with the City Council is planned where HDR will present the “road test” of the final selected conceptual rate structure which will support the prioritized goals and financial policies. Actual rates and bill comparisons will be used to review any impacts to ratepayers based on current revenue levels (i.e. current rates). Although there will be numbers associated with the “road test” it is not an exercise in setting the actual rates. Meeting 5. Selection of the Final Rate Structures – December 5, 2017 After completion of the study sessions, HDR will provide the Council with a report summarizing the steps taken to review the rate structure, an overview of the rate structures reviewed during the study, recommendations of the analysis HDR will undertake, and recommended final proposed water and wastewater rate structure. ENVIRONMENTAL REVIEW No environmental review is required for Water and Wastewater Rate Structure Review study sessions. CONCURRENCES Concurrence from other City departments is not required for Water and Wastewater Rate Structure Review study sessions. FISCAL IMPACT On January 3, 2017, the City Council approved Request for Qualifications for On-Call Water and Wastewater Engineering Services and authorized the City Manager to execute agreements with the selected consulting firms. The City Manager awarded contracts to 12 engineering consulting firms on May 23, 2017, including HDR. Staff solicited a proposal from HDR for the Water and Wastewater Rate Structure Review. The project was funded from Water and Sewer Fund general carry-over totaling $29,885. Packet Pg. 25 2 Page intentionally left blank. Packet Pg. 26 2