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08-15-2017 Item 02 - Water and Wastewater Rate Structure Review
Meeting Date: 8/15/2017 FROM: Carrie Mattingly, Utilities Director Prepared By: Jennifer Metz, Utilities Project Manager SUBJECT: WATER AND WASTEWATER RATE STRUCTURE REVIEW RECOMMENDATION Participate in the second of four water and wastewater rate structure study sessions with HDR Engineering, Inc. and prioritize rate structure goals. DISCUSSION Background At the July 18, 2017 City Council meeting, Shawn Koorn from HDR Engineering, Inc. (HDR) kicked off the Water and Wastewater Rate Structure Review by providing the Council with a presentation on the fundamentals of water and sewer rate structure design. The study session included a discussion on fundamentals of developing cost-based rate structures, rate setting philosophy, underlying rate setting goals and objectives, terminology, and technical aspects of rate structure design. The presentation also summarized the rate structure review process and the topics to be covered in the three remaining study sessions. During Study Session 2, Mr. Koorn will engage the Council in a discussion of commonly accepted rate structure design goals and objectives, their meanings and implications to an overall rate structure design, and current industry thinking and trends in rate design. The presentation will also include a review of the current rate structure and goals. This will give the Council a basis to develop a prioritized set of goals and objectives that will establish the basis for the conceptual rates and assist in the rate structure decision making process. Following an explanation of rate design goals, Council will work through identifying and defining goals in alignment with the City’s values, and then weight them; a process which will result in an updated set of rate design goals and objectives. Ultimately, Council and staff will be asked to prioritize their top five water and sewer rate structures. The last time City Council considered the rate structure was during study sessions focused on water in 2012. That prioritization is listed in the table.1 Prior to 2012, both water and 1 It should be noted that, regarding Goal 5, the idea of using a water rate structure to purely discourage wasteful water use has been deemed in violation of the requirements of Prop 218. Specifically, in the case of Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano , the court held, among other things, that a tiered water rate structure must correlate with the actual cost of providing water at those tiered levels. Rate pricing which is intended to purely discourage water use does not comply with this substantive mandate. 2012 City Council Rate Structure Design Goals & Objectives Prioritization 1. Revenue Stability and Predictability 2. Stability and Predictability of Rates 3. Easy to Understand and Administer 4. Fair Allocation of Costs 5. Discourage Wasteful Use Packet Pg 9 2 wastewater rate structures had been determined in 2006. Next Steps At Study Session 3 on October 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 structure design goals and objectives, conceptual water and wastewater rate designs (rate structures only, no actual rates, meaning no dollars) will be developed by HDR and presented to the City Council. Based on Council input from the meeting, HDR and staff will then narrow the field and select the top rate structures (e.g. 2-3 structures). The selected rate structures will be evaluated and presented to the Council at Study Session 4 on November 7. 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. 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 structures. 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 There is no fiscal impact associated with participating in the Water and Wastewater Rate Structure Review study sessions. Packet Pg 10 2 Public Utilities 879 Morro Street, San Luis Obispo, CA 93401-2710 805 781 7215 slucity orq Water and Wastewater Rate Structure Review Please rate your top five water and wastewater rate structure design attributes in priority from 1 through 5, with 1 being your highest priority and 5 being your lowest priority. RATE DESIGN ATTRIBUTES Rate Design Attribute Prioritization roComments 1. Effectiveness in yielding total This Goal will be met for all rate revenue requirements. N/A designs options developed as part of the review 2. Revenue stability and ( V&"c L'4 ►xe .. ' predictability. 5 ��.r �` m Jk'V u 3. Stability and predictability ofpo,rsPeA%ve- the rates themselves. Pie, 4lz�h , vim+ ti "b 4. Discourage wasteful use, while VI) � v ���CL �a CoJ v'V,1-t promoting all justified types Codd IC-ak Ib �nslx.G�t� and amounts. 4� reWcNa'— +1I�J Co%re.4r e4eroak covh6 �c �er 5. Reflect all present and future costs (internalities and 04'Jc a hb.n. S ens s? externalities) and benefits of providing utility service. t, 6. Fair allocation of total cost of : �� service among the customer �,' +w `' "I'll classes of service to attainavw� tf:`�'� S�'4�•�t)►t equity. 0- cv s6*w-t- 7. 7. Avoidance of undue _ discrimination in rate relationships. S easo,ne.0 ra�� s 8. Dynamic in its ability to respond to changing supply and demand conditions and/or environmental concerns. t: 9. Simple and easy to understand; easy to administer. l $ 10. Freedom from controversy as to interpretation. August 15, 2017 11 RI -11 �\\IaL�kIc Public Utilities 879 Morro Street, San Luis Obispo, CA 93401 -271 0 805.781.7215 slocity org Water and Wastewater Rate Structure Review Please rate your top five water and wastewater rate structure design attributes in priority from 1 through 5, with 1 being your highest priority and 5 being your lowest priority. Rate Design Attribute Prioritization Comment (1-5) (1-5) 1. Effectiveness in yielding total This Goal will be met for all rate revenue requirements. N/A designs options developed as part of the review 2. Revenue stability and AtiNVAL StiV Wei of W ^%IFE -mor► w17y A509, fur- oN Ak4f vr•, predictability. 1 3. Stability and predictability of AAtTE5 g%d`�� "F "° ' I*AN t/' job" the rates themselves. 4. Discourage wasteful use, while ) cJc-+5 cva EFd�1Gf€tel �YtitO1�'r+1�L� VJ�, promoting all justified types and amounts. 5. Reflect all present and future EauS o� Civ�EQsv�, ��pRrvICTR$LE costs (internalities and externalities) and benefits of providing utility service. 6. Fair allocation of total cost of '�v�'�'�''� y��stvy c�►�rh+N service among the customer classes of service to attain J equity. 7. Avoidance of undue ��� orrr�� ��S+o n� ��e•M�,25 discrimination in rate -A r'"�`° �`� T?C relationships. 8. Dynamic in its ability to respond to changing supply sib?+ -h °r- 01HE(: ceJANc C-) and demand conditions and/or environmental concerns. 9. Simple and easy to understand; easy to administer. 10. Freedom from controversy as to interpretation. August 15, 2017 Public Utilities Y) 879 Morro Street, San Luis Obispo, CA 93401-2710 805 781 7215 sWily oiq (/ ' Water and Wastewater Rate Structure Review Please rate your top five water and wastewater rate structure design attributes in priority from through 5, with 1 being your highest priority and 5 being your lowest priority. RATE DESIGN ATTRIBUTES Rate Design Attribute Pri `�rliti5) ion Comments 1. Effectiveness in yielding total This Goal will be met for all rate revenue requirements. N/A designs options developed as re kSC�r��� 'eos� part of the review 2. Revenue stability andbUdc�e(-t.,� predictability. 3. Stability and predictability of the rgty themselves. C / ✓moi✓ 4. Discourage wasteful use, while promoting all justified types 0,AYw tl- and,amounts. rci e'.if use 5. Reflect all present and future���� sc►+rll �,rSc� costs (internalities and 1 externalities) and benefits of providing utility service. ti 6. Fair allocation of total cost of T�Okn C55 Mw�-�j5 1�P� service among the customer wit( he Luo, ked off. classes of service to attain equity.y,Vef 7. Avoidance of undue GS Ove, discrimination in rate relati.gnships 117 ,4-a -7- %Lis s - 8. Dynamic in its ability to Re�liSh'callyl�is t5 o�� ft��. respond to changing supply �ynawi and demand conditions and/or environmental concerns. 9. Simple and easy to understand; NonAt(y I dont �A4ari u. c sor easy to administer. � ��s tea[ 10. Freedom from controversy as to interpretation. August 15, 2017 Public Utilities 879 Morro Street, San Luis Obispo, CA 93401-2710 805.781 7215 slucity orq �4 2 1 !> t �CL' f— Vn 'D t-� Water and Wastewater Rate Structure Review Please rate your top five water and wastewater rate structure design attributes in priority from 1 through 5, with 1 being your highest priority and 5 being your lowest priority. RATE DESIGN ATTRIBUTES Rate Design Attribute Prioritization 5tion Comments (1-5) 1. Effectiveness in total This Goal will be met for all rate yielding N/A designs options developed as revenue requirements. part of the review 2. Revenue stability and predictability. 3. Stability and predictability of the rates themselves. 4. Discourage wasteful use, while promoting all justified types I and amounts. 5. Reflect all present and future costs (internalities and externalities) and benefits of providing utility service. 6. Fair allocation of total cost of service among the customer classes of service to attain equity. 7. Avoidance of undue discrimination in rate relationships. 8. Dynamic in its ability to respond to changing supply and demand conditions and/or environmental concerns. 9. Simple and easy to understand; h easy to administer. �J 10. Freedom from controversy as to interpretation. August 15, 2017 Public Utilities " 879 Morro Street, San Luis Obispo, CA 93401-2710 805.781,7215 sloaty.org Water and Wastewater Rate Structure Review Please rate your top five water and wastewater rate structure design attributes in priority from 1 through 5, with 1 being your highest priority and 5 being your lowest priority. Rate Design Attribute 1. Effectiveness in yielding total revenue requirements. 2. Revenue stability and predictability. 3. Stability and predictability of the rates themselves. 4. Discourage wasteful use, while promoting all justified types and amounts. 5. Reflect all present and future costs (internalities and externalities) and benefits of providing utility service. 6. Fair allocation of total cost of service among the customer classes of service to attain equity. 7. Avoidance of undue discrimination in rate relationships. Prioritization Comments 8. Dynamic in its ability to s respond to changing supply and demand conditions and/or environmental concerns. 9. Simple and easy to understand; easy to administer. 10. Freedom from controversy as to interpretation. This Goal will be met for all rate N/A designs options developed as part of the review August 15, 2017 © 2014 HDR, all rights reserved.August 15, 2017Setting Cost-Based Utility RatesRate Structure StudyStudy Session #2 Purpose of the PresentationOverview of the rate structure Review•Process and goals of reviewGain City Council direction on Rate setting goals and objectives• Prioritized list to develop conceptual rate structuresNext steps in the Rate Structure review process. • Technical analysis –development of the conceptual rate structures2 Overview of the PresentationOverview of the Rate Structure Review ProcessOverview of the Current Water and Wastewater Rate StructuresNext steps in the Rate Structure Review Process3 Rate Structure Evaluation ProcessReviewReview of the Current Water Rate Structure Review Current Industry Thinking and TrendsConceptualPrioritize Goals and ObjectivesDevelop Conceptual Rate StructuresSelect Conceptual Rate Structure(s) for Further Review TechnicalTechnical Analysis of Selected Conceptual Rate Structures4 Overview of the City’s Current Water Rate StructureWater Base Fee Per Account $12.33/MonthConsumption ChargeTier 1 – 1 to 8 units $7.27/UnitTier 2 – 9+ units $9.08/Unit1 Unit = 100 Cubic Feet (1 ccf)1 ccf = 748 gal5 History of the Current Water Rate StructureRate design goals and objectives were prioritized by Council and staff in 2005 and again in 2012•Goals and objectives were similar but overall priorities had changedRate structure was revised as a result of both reviews• 2005 focus was on conservation and simplicity• 2012 focus was on revenue and rate stability2012 study resulted in a single rate structure for all customers• Removed the third tier/block for residential• Added a fixed chargeRate structure is one tool in the toolbox to promote the City’s rate structure goals and objectives6 2005 and 2012 Prioritized Goals and Objectives2012 Prioritization of the Rate Design Goals and Objectives City Council Prioritization Rank City Staff Prioritization Revenue Stability & Predictability 1 Stability and Predictability of Rates Stability and Predictability of Rates 2 Revenue Stability & Predictability Easy to Understand and Administer 3 Fair Allocation of Costs Fair Allocation of Costs 4 Reflect Present and Future Costs Discourage Wasteful use 5 Easy to Understand and Administer 2005 Prioritization of the Rate Design Goals and Objectives 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 7 Declining consumptionoImpacting utilities across the U.S.Revenue stability and sufficiencyoResponse to changing weather/supply conditionsAffordabilityConservation based rate structureoCost-basis of a tiered/block rate structureSustainabilityCurrent Water Industry TrendsFlat2%Uniform28%Decreasing16%Increasing48%Increasing/ Decreasing6%Residential Rate StructureFlat3%Uniform45%Decreasing21%Increasing26%Increasing/ Decreasing5%Non‐Residential Rate StructureSource: AWWA & Raftelis Consultants, Inc. 2012 Water and Wastewater Rate Survey8 Overview of the City’s Current Wastewater Rate StructureBase Fee Per Account $8.57/MonthVolumetric ChargeAll Consumption* $9.44/Unit1 Unit = 100 Cubic Feet (1 ccf)1 ccf = 748 gal* Residential customers are billed based on winter water average (Dec – Feb) 9 History of the Current Wastewater Rate StructureRate design goals and objectives were prioritized by Council and staff in 2005•Goals and objectives were similar but overall priorities had changedWorked with the Council and developed a proposed wastewater rate structure in 2007• Added a fixed charge•Move to volumetric billing • Residential –winter water•Non‐residential –all water consumptionRate structure is one tool in the toolbox to promote the City’s rate structure goals and objectives10 Movement towards volumetric based billingoCity currently bills on a volumetric basisRevenue stability and affordabilityoImpacts of declining water consumptionCurrent Wastewater Industry TrendsFlat18%Uniform66%Decreasing6%Increasing9%Increasing/ Decreasing7%Residential Rate StructureSource: CA SWRCB FY 2016/17 Wastewater User Charge SurveySource: AWWA & Raftelis Consultants, Inc. 2012 Rate Survey11 Purpose of Reviewing the City’s RateDesign Goals and ObjectivesProvide a perspective on how the current rates were developedGain an understanding of what other utilities consider or think aboutProblem of competing goals and objectivesDetermine if the current rate structures meet the City’s goals and objectivesWhat is important and what should the City carry forward in any proposed rate structure12 Attributes of a Sound Rate StructureVarious rate setting manuals include rate design goals and objectives (attributes)Principles of Public Utility Ratesby James C. Bonbrightprovides the most quoted listList is often paraphrasedBonbrightrecognized:•List is a reminder of possible considerations•Some goals may conflict•Lack of clear definitions13 Defining Bonbright’s Rate Structure AttributesDevelop working definitions suitable for reviewing the City’s ratesClarify Bonbright’slanguage and intentStart with Bonbright’s list of 10 attributes14 15 Attribute #1(Applies to all rate design alternatives)Revenue‐Related AttributeBonbright: Effectiveness in yielding total revenue requirements under the fair return standard without any socially undesirable expansion of the rate base or socially undesirable level of product quality or safety.Restated: The City’s rates should meet the total revenue requirement needs of the City.Definition: The rate structure will be developed to cover the total costs of utility operations, under a “cash needs” approach –operating, taxes/transfers, capital, debt service and reserves.16 Attribute #217Revenue‐Related AttributeBonbright:Revenue stability and predictability, with a minimum of unexpected changes seriously adverse to utility companies.Restated:Revenue stability and predictability, with a minimum of unexpected changes seriously adverse to the City’s utilities.Definition:The rate structure will be developed to eliminate swings in revenue generation from year‐to‐year based on such factors as weather, conservation and customer usage changes. Annual swings in planned revenue should be no greater than 10% and 10%. Attribute #318Revenue‐Related AttributeBonbright:Stability and predictability of the rates themselves, with a minimum of unexpected changes seriously adverse to ratepayers with a sense of historical continuity. (Compare ”The best tax is an old tax”).Restated:From the customer’s perspective, the rates should appear to be stable and result in customer bills that are relatively predictable. There should be a continuity of philosophy in the establishment of the rates, with a minimum of unexpected changes seriously adverse to customers.Definition:The implementation of new rate structures should be consistent with past utility rate setting philosophy and minimize 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 on cost of service. Attribute #419Cost‐Related AttributeBonbright:Static efficiency of the rate classes and rate blocks in discouraging wasteful use of service while promoting all justified types and amounts. •in the control of the total amounts of service supplied by the company•in the control of the relative uses of alternative types of service by ratepayers (on‐peak versus off‐peak service or higher quality versus lower quality of service).Restated:Efficiency and effectiveness of the rate classes and rate blocks in discouraging wasteful use of service while promoting all justified types and amounts. Definition:The rate structure should promote efficient use of water and discourage or penalize inefficient uses. Attribute #520Cost‐Related AttributeBonbright:Reflection of all of the present and future private and social costs and benefits occasioned by a service’s provision. (i.e., all internalities and externalities).Restated:The rate should reflect all of the utility’s present and future internal costs, and potentially other external private and social costs/benefits.Definition: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 externalities of present and future costs and benefits (i.e. marginal cost and/or value of water). Attribute #621Cost‐Related AttributeBonbright:Fairness of the specific rates in apportionment of total costs of service among the different ratepayers so as to avoid arbitrariness and capriciousness and to attain equity in three dimensions: (1) horizontal (i.e., equals treated equally); (2) vertical (i.e., unequal treated unequally); and (3) anonymous (i.e. no ratepayer’s demands can be diverted away uneconomically from an incumbent by a potential entrant).Restated:Fairness of the rates in the allocation of total costs of service among the different ratepayers so as to avoid arbitrariness, capriciousness and to attain equity.Definition:The rates and the rate structure shall be based on an equitable allocation of total cost of service among the customer classes of service by use of a “generally accepted” cost of service methodologies (i.e. AWWA‐M1 rate manual). Attribute #722Cost‐Related AttributeBonbright:Avoidance of undue discrimination in rate relationships so as to be, if possible, compensatory (i.e. subsidy free with no inter‐customer burdens). Restated: The rates should be, as practically possible, non‐discriminatory, between customer groups, and within each customer group.Definition:The rate structures should avoid interclass subsidies whenever possible to ensure each class pays their full cost of service. [Prop 218 ‐The amount of a fee or charge imposed...shall not exceed the proportional cost of the service attributable to the parcel ] Attribute #823Cost‐Related AttributeBonbright:Dynamic efficiency in promoting innovation and responding economically to changing demand and supply patterns.Restated:The ability and efficiency of the rate to respond to changing demand and supply patterns. Definition:The rate structure should be developed such that it either responds appropriately and directly to changes in supply, demand, etc, or 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, lack of treatment capacity, etc.). Attribute #924Practical‐Related AttributeBonbright:The related, practical attributes of simplicity, certainty, convenience of payment, economy in collection, understandability, public acceptability and feasibility of application.Restated:The attributes of simplicity, certainty, convenience of payment, economy in collection, understandability, public acceptability and feasibility of administration.Definition:From the customer’s perspective, the rate structure should be simple to understand, such that a customer can easily determine their bill. From 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.” Attribute #1025Practical‐Related AttributeBonbright:Freedom from controversies as to proper interpretation.Restated:Freedom from controversies as to the application of the rate schedule to the customer and calculation of the customer’s bill. Definition: The rate structure should not be ambiguous in its terminology and structure. It should be simple to explain and understand by the average customer to minimize any misinterpretation regarding the customer’s bill and the overall goals that the rate structure has been developed to meet. Rate Structure Goals and Objectives(Summarized)Revenue Attributes•Rates should meet (yield) the total revenue needs (total revenue requirements)• Revenues are stable and predictable (City perspective)•Rates themselves are stable and predictable (Customer perspective)Cost Attributes• Discouraging wasteful use•Rate structure should reflect all costs the City Incurs•Rates are fair and equitable between customers•Rates are non‐discriminatory and avoid subsidies•Rates structure is flexible to respond to supply and demandPractical Attributes•Rate structure should be simple to understand (Customer perspective)•Rate structure should be simple to explain, interpret and administer26 27 Next Steps28TodayGained an understanding of the goals and objectivesSelect your top 5 of the list we reviewed todayDevelop Conceptual Rate StructuresPresent to City Council (Study Session #3)Selection of preferred alternativesTechnical Review of Rate Structures Development of actual ratesPresent results to City Council (Study Session #4)