HomeMy WebLinkAboutWater & Sewer Rate Structure and Rate Adoption - 02-06-2018 Council Agenda Report - Water and Wastewater Rate Setting MethodologyMeeting Date: 2/6/2018
FROM: Carrie Mattingly, Utilities Director
Prepared By: Jennifer Metz, Utilities Projects Manager
SUBJECT: WATER AND WASTEWATER RATE SETTING METHODOLOGY
RECOMMENDATION
Participate in a study session on water and wastewater rate setting methodology with HDR
Engineering, Inc.
DISCUSSION
Background
The City reviewed its water and wastewater rate structures
through study sessions in 2017 concluding on January 9,
2018. During one of these sessions the City Council
updated its rate structure goals. Key changes to the
proposed rate structures in alignment with these goals are:
1. A greater percent of revenues collected through
the fixed portion of the water and wastewater
rates.
2. The fixed portion of the water and wastewater
rates for non-residential water users based on
meter size.
3. The number of tiers for residential water users
increased from two to three.
Eighty to ninety percent of expenses associated with providing water and wastewater services are
fixed, meaning the expenses are the same each year regardless of the amount of water sold or
wastewater treated. These fixed costs include debt payments and operation and maintenance.
Currently, fixed revenues are 14 and 11.5 percent respectively. The appropriate level of fixed
revenue required for the water and wastewater funds will be proposed in alignment with
Council’s rate structure goals.
Rate Study and Proposition 218
With the Council’s guidance on rate structure goals, the City is moving forward with its water
and wastewater rate setting analysis and process. The goal of the rate setting process is to
provide sustainable funding to the City’s Water and Sewer Fund s for operation, maintenance,
and capital project needs. Rates must be developed that are stable, equitable, and cost -based in
compliance with California Constitution Article XIII C and D, commonly referred to as
Proposition 218 (Prop 218).
Table 1: City Council Rate
Structure Goals
Revenue Stability and
Predictability
Discourage Wasteful Use
Stability and Predictability
of the Rates
Fair Allocation of Total Cost
of Service Among Customer
Classes
Reflect all Present and
Future Costs
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The City hired HDR Engineering, Inc. (HDR) to assist with this process and prepare the rate
studies. The studies will provide necessary documentation and an administrative record of the
cost basis for the proposed water and wastewater rates in compliance with California
Constitution Article XIII D, section 6 which regulates property-related fees and charges to which
water and wastewater are bound [California Supreme Court in Bighorn-Desert View Water
Agency v. Verjil (2006)]. In accordance with the provisions of Prop 218, water and wastewater
rates are designed based on a cost -of-service methodology that fairly apportions costs to all
customers.
Rate Setting Process - Methodology
The City’s water and wastewater rate setting process will use a three-component methodology
accepted in the water and wastewater industry: a revenue requirement analysis; a cost of service
analysis; and rate design analysis, described in detail below, will incorporate the Council’s rate
structure goals.
Revenue Requirements Analysis
The City’s current Water and Sewer Funds revenue requirements from the 2017-19 Financial
Plan are shown in Figure 1. The following financial objectives and recognized best management
practices will be used in the revenue requirement analysis to identify projected rates:
1. Current and Projected Operation and Maintenance Expenses - aligned with Fiscal
Health Response Plan direction to the City’s Enterprise Funds.
2. Debt Service Coverage Requirements - based on outstanding obligations; driven by
capital needs and policy direction.
3. Level of Operating Expenses in Reserves - funding reserves to maintain prudent
financial practices.
18.7
18.9
19.1
19.2
19.4
19.6
15.6
16.2
16.8
17.5
19.2
21.2
5.0 $10.0 $15.0 $20.0 $25.0
2017-18 (Current)
2018-19
2019-20
2020-21
2021-22
2022-23
Current and Projected
Water and Wastewater Fund Revenue Requirements
In million $)
Wastewater Fund Water Fund
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4. Rate Funded Capital Program - target annual asset depreciation expenses at a
minimum, with the balance of necessary capital projects funded through reserves,
capacity and connection fees, and/or long-term debt proceeds. Current annual
depreciation for water ~$3 million; wastewater ~$2.5 million.
5. Term of Rate Increases - The City has historically aligned its rate increases with its
Financial Plan cycle every two years, however, a longer term of projected increases
such as three years, or a shorter term such as a single year, will be considered.
6. Inflationary Rate Increases – to minimize the potential for dramatic rate increases
associated with not maintaining adequate revenues to absorb chemical and electrical
cost increases rates should increase by an inflationary factor annually at a minimum,
such as the Municipal Cost Index.
7. Affordability - will be assessed by comparing the City’s average customer water and
wastewater bills as a percentage of median household income.
As described in objective #4, Rate Funded Capital Program, the rate studies will identify a rate
funded capital program based on annual depreciation. The City adopted a series of water and
wastewater master plans to identify and prioritize necessary capital improvements following the
adoption of the General Plan’s updated Land Use Element in November 2014. The City updated
its water and wastewater asset lists as part of those efforts. The master plans include:
Potable Water Distribution System Operations Master Plan (2015)
Wastewater Collection System Infrastructure Renewal Strategy (2015)
Water Resource Recovery Facility Facilities Plan (2015)
Recycled Water Master Plan (2017)
These documents, along with the City’s Financial and Capital Improvement Plans, provide the
basis for depreciation estimates and future project capital costs.
Cost of Service Analysis
The cost of service analysis will describe customer class characteristics, identify unit costs, and
equitably allocate costs among the City’s customer classes to establish the cost -basis of the
proposed rates. At least three technical approaches will be considered to demonstrate the
individual pricing of the tiers including:
Cost differences in water supply (i.e., contract purchases).
Cost differences from high peak use consumers (relationship of average use to peak use).
Direct assignment of costs to specific tiers (e.g., conservation program costs, etc.).
This analysis will also look at water consumption, seasonal usage patterns, water meter sizes,
wastewater strength, and other factors to determine service-related cost factors. For residential
customers, tier pricing will be developed to provide the cost -basis and meet the requirements of
Prop. 218.
Rate Design Analysis
The final step in the preparation of the City’s water and wastewater rate studies is the design of
rates to collect the desired levels of revenues based on the results of the revenue requirement and
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cost of service analyses. Rate design will align with the goals identified by the City Council
through the rate structure review.
The City’s recycled water rate design, including the
construction water permit cost, will also be reviewed as
part of the water rate study.
Public Outreach
The City is committed to helping the public understand the
rate setting process. The Utilities Department included a
feature article on the water and wastewater rate structure
changes in the most recent Resource publication and
information on the Utilities web page. Outreach efforts,
such as open houses at 879 Morro Street, will continue
until final consideration of the proposed rates in June.
CONCURRENCES
Concurrence from other City departments is not required
for this item.
ENVIRONMENTAL REVIEW
No environmental review is required for this study session. Modification of rates and charges by
public agencies is statutorily exempt from the California Environmental Quality Act (CEQA)
under Section 15273 of the Public Resources Code because the change in fees is not intended to
fund expansion of capital projects not otherwise evaluated under CEQA.
FISCAL IMPACT
There is no fiscal impact associated with Council participation in this study session.
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