Introduction to the Water & Sewer Rate Studies

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Mountain House Community Service

District January 11, 2017

Introduction to the Water & Sewer Rate

Studies Presented by:

Ed Pattison – General Manager Sarah Ragsdale – Administrative

Services Director Greg Clumpner – Director, NBS Greg Henry – Consultant, NBS

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Overview of the Presentation:

“Rates 101” – Overview of a Rate Study

Rate History & Current Status

Initial Study Results

Summary of Board Direction Needed

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1. Rates 101 Overview of a “Rate Study”

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30,000-Foot Overview of Water Rates: • Enterprise Utilities are:

– Intended to be Self-Sufficient (Rate Revenue Cover Costs) – Fire-walled from General Fund Activities (Cannot fund GF)

• Mountain House CSD: – Is Special Case (i.e., a Master-Planned Community) –

Resulted in the General Fund Subsidizing Water and Sewer Utilities

– Unique in How the Community and Finances were Set Up – Long-Term Plan is to Reach Self-Sufficiency as Planned

Growth is Achieved; MHCSD is not a Typical Water Utility

1. Overview of a Rate Study

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Water Rates – Background and Industry Trends: Major Factors Influencing Rates: • Drought: Supply Shortages and Conservation Mandates • Legal Constraints (San Juan Capistrano, Palmdale, etc.) • Results: Most California Water Agencies are Raising Rates

1. Overview of a Rate Study (Cont.)

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Water Rates – Background and Industry Trends: • Legal Requirements:

– Compliance with Prop 218 (“Right to Vote on New Taxes”) • No Subsidies between Customer Classes • “Parcel” has been Legally Defined as Customer Classes (Not

Individual Parcels) • Rate Calculation must Be Cost-Based, but are not Required to

be “Precise” (i.e., they need to reasonably reflect actual costs) – SB 814 (new Drought/Excessive Water Use Act) – Must

adopt measures to prevent “Excessive Use” and Wasting Water, Including Conservation Rates and Penalties for “Excessive Use”

– Cost-Basis, Particularly for “Tiered” Volumetric Rates (Recently filed Hillsborough Lawsuit is about this Issue)

1. Overview of a Rate Study (Cont.)

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Considers what rate structure alternative best meets the District’s need to collect rate revenue from each customer

class.

Allocates revenue requirements to the

customer classes in a “fair and equitable"

manner that complies with Prop 218.

Compares current sources and uses of

funds and determines the revenue needed from

rates and projected rate adjustments.

FINANCIAL PLAN

COST-OF-SERVICE

ANALYSIS

RATE DESIGN a b c

1. Overview of a Rate Study (Cont.)

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How are Annual Rate Revenue Requirements

Determined?

1a. Financial Plan

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1. O&M Req’t

2. Debt Req’t

3. Capital Req’t

4. Reserve

Req’t Rates

Funding Priorities:

1a. Financial Plan (Cont.)

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Funding Priorities: 1. O&M Req’t

– Budgeted Expenses – Identified by type (labor cost, electricity) and projected

forward with a unique inflation factor – Non-Rate Revenue is deducted – For MHCSD, the GF subsidizes O&M Expenses – Pass Through Costs (Water Purchases)

2. Debt Req’t – Existing Debt Schedules – For MHCSD this is paid using the “pledge” revenue – Includes payment to developer

1a. Financial Plan (Cont.)

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Funding Priorities (cont.): 3. Capital Improvement Costs

– Based upon Capital Improvement Program – Inflated using Construction Cost Index – Can be financed or Pay-As-You-Go with reserves or rate

revenue – Can be reduced / extended at the direction of the Board

1a. Financial Plan (Cont.)

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Funding Priorities (cont.): 4. Reserve Requirements:

– Enterprise-Funded Utilities are supposed to be self-sufficient, so reserves are intended to avoid needing additional GF subsidies in the future.

– GFOA* standards “Start with 90 days of working capital, move up or down based upon specifics, never less that 45 day”

– Capital R&R fund standard is 3% net assets – Can be held for specific purpose (rate stabilization reserve) – Special reserves

• Often are restricted (for example, connection fees)

1a. Financial Plan (Cont.)

* GFOA = Government Finance Officers Association

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Board Direction Needed: 1. General Fund Subsidies:

– Continue at Current Levels? – Continue at Reduced Level? – Phase Out Over Time? (How fast?)

2. CIP Funding Levels: – 100% of Planned Capital Project? – Something less?

3. Reserve Fund Levels: – Allow to remain below target levels? – Raise rates in order to meet Target levels? How Fast?

1a. Financial Plan (Cont.)

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How do we determine the cost of serving

individual customers (or customer classes)?

1b. Cost of Service Analysis

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What are “Defensible” Water Rates?: • Charges Cannot be More Than Actual Cost of

Serving that Customer/Parcel • Cost-Based (Follow Industry Standards and San

Juan Capistrano guidelines) • Non-Discriminatory (One Class is Not Subsidizing

Another Class) • Volumetric Tiers must demonstrate their “cost-

basis” (i.e., not merely set to achieve conservation objectives)

1b. Cost of Service Analysis (Cont.)

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Allocating Costs to Customer Classes (Part 1):

• Allocated by peak water use & meter size

Capacity Related Costs

• Allocated equally to each meter

Customer Related Costs

• Allocated by meter size to fire meters

Fire Protection Costs Fixe

d C

osts

1b. Cost of Service Analysis (Cont.)

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• Allocated by consumption

Commodity Costs

• Allocated by consumption

Conservation Costs

Varia

ble

Cos

ts

Allocating Costs to Customer Classes (Part 2):

1b. Cost of Service Analysis (Cont.)

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Revenue Requirements Allocated Each Customer Class:

Total Fixed Costs by Class

+ Total Variable Costs by Class

= Revenue Requirement by Class

1b. Cost of Service Analysis (Cont.)

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Board Direction Needed: 1. Should Current Customer Classes be Retained?

– Density-based EDU’s? – Single-Family, Multi-Family & Non-Residential? – Meter sizes as customer classes?

1b. Cost of Service Analysis (Cont.)

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How should rate revenue be collected from

customers & customer classes?

1c. Rate Design Analysis

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What are Fixed vs. Variable %’s

30% Fixed

70% Variable

This Promotes Revenue

STABILITY

This Promotes Revenue

INSTABILITY 30% Variable

70% Fixed

Due to Drought/Conservation Impacts, Revenue Stability Now Plays a Bigger Role in Rate Design Than in the Past.

1c. Rate Design Analysis (Cont.)

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Volumetric & Tiered Rate Designs: The San Juan Capistrano court ruling established (at least for now) that tiered volumetric rates must reflect actual costs.

1c. Rate Design Analysis (Cont.)

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Board Direction Needed: 1. What % of Rate Revenue Should be Collected from

Fixed vs. Volumetric Rates? – Higher Fixed % provides more revenue stability – Higher Volumetric % Provides more Conservation Incentives – Meter sizes as customer classes?

2. What Volumetric Rate Should be Used? – Uniform Tier (one volumetric rate for all customers & usage) – Tiered Rates (how many, can they be cost-based, etc.) – Meter sizes as customer classes?

3. Rate Design for Sewer Rates? – Should volumetric rates be Used? – If yes, should they be based on average winter water use?

1c. Rate Design Analysis (Cont.)

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2. Current Status – Current Bill

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2. Current Status – Current Bill

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2. Rate History

$-

$20

$40

$60

$80

$100

$120

$140

$160

$180

Total Utility Bill Charges

Water use Water base Wastewater base Stormwater base

Water debt service Wastewater debt service Stormwater debt service Garbage

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2. Rate History (cont.)

$-

$20

$40

$60

$80

$100

$120

$140

Utility Bill Charges excluding Garbage

Water use Water base Wastewater base Stormwater base

Water debt service Wastewater debt service Stormwater debt service

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$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

Utility Bill Debt Service Charges

Water debt service Wastewater debt service Stormwater debt service

2. Rate History (cont.)

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$-

$10

$20

$30

$40

$50

$60

Utility Bill O&M Charges

Water use Water base Wastewater base Stormwater base

2. Rate History (cont.)

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$-

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Water and Wastewater O&M Charges

Water use Water base Wastewater base

2. Rate History (cont.)

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2. Rate History (cont.)

2002-2003 2016-2017 % IncreaseWater charge (5 units) 2.38$ 2.25$ -5%Water base 14.81 14.08 -5%Water debt service 18.40 37.11 102%Storm debt service 4.42 10.81 145%Storm fee 8.85 7.84 -11%Sewer fee 24.56 25.41 3%Sewer debt service 16.52 32.07 94%Garbage (64 gal toter, bi-weekly recycle) 27.20 38.60 42%

117.14$ 168.17$ 44%

Comparison of Utility Billing for Medium Density Residence

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2. Rate History (cont.)

General Fund Subsidy Subsidies by Year Cumulative Subsidies

Water Wastewater Stormwater Water Wastewater Stormwater

FY 08-09 593,058 1,338,227 198,012 593,058 1,338,227 198,012 FY 09-10 648,469 483,953 52,380 1,241,527 1,822,180 250,392 FY 10-11 611,624 353,231 - 1,853,151 2,175,411 250,392 FY 11-12 530,515 374,800 - 2,383,666 2,550,211 250,392 FY 12-13 - 261,598 - 2,383,666 2,811,809 250,392 FY 13-14 42,254 217,210 - 2,425,920 3,029,019 250,392 FY 14-15 230,745 112,640 - 2,656,665 3,141,659 250,392 FY 15-16 715,000 17,000 - 3,371,665 3,158,659 250,392

Total - $6,780,716

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2. Rate History (cont.)

General Fund Subsidy Subsidies by Year Cumulative Subsidies

Water Wastewater Stormwater Water Wastewater Stormwater

FY 08-09 593,058 1,338,227 198,012 593,058 1,338,227 198,012 FY 09-10 648,469 483,953 52,380 1,241,527 1,822,180 250,392 FY 10-11 611,624 353,231 - 1,853,151 2,175,411 250,392 FY 11-12 530,515 374,800 - 2,383,666 2,550,211 250,392 FY 12-13 - 261,598 - 2,383,666 2,811,809 250,392 FY 13-14 42,254 217,210 - 2,425,920 3,029,019 250,392 FY 14-15 230,745 112,640 - 2,656,665 3,141,659 250,392 FY 15-16 715,000 17,000 - 3,371,665 3,158,659 250,392

Total - $6,780,716

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2. Rate History (cont.)

General Fund Subsidy

$0.0 Mil

$0.5 Mil

$1.0 Mil

$1.5 Mil

$2.0 Mil

$2.5 Mil

FY 08-09 FY 09-10 FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16

Utility Subsidies by Year

Water Wastewater Stormwater

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2. Current Status – Bill Comps

$23.70

$29.51$31.99

$42.27

$51.53 $51.73 $52.00$56.59

$64.63$68.78

$75.58

$-

$20

$40

$60

$80

Regional Water Bill Comparisons (Monthly)Single Family Residential* (12 hcf / month)

Water: VariableWater: Fixed

* Has implemented Penalty/Drought Rates or Surcharges.˜ Water & Wastewater services provided by multiple agencies.

Currently doing a Rate Study. ** Recently completed a Rate Study.

*Assumed to be a medium density home with a 3/4" meter

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2. Current Status – Bill Comps

$31.87 $33.76 $34.00

$42.06$44.78

$51.25

$57.12 $57.48

$67.00 $68.76 $69.28

$-

$20

$40

$60

$80

Regional Wastewater Bill Comparisons (Monthly)Single Family Residential

Sewer: VariableSewer: Fixed

* Has implemented Penalty/Drought Rates or Surcharges.˜ Water & Wastewater services provided by multiple agencies.

Currently doing a Rate Study. ** Recently completed a Rate Study.

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2. Current Status – Bill Comps

$57.70

$76.03$80.76

$94.06 $96.51$100.75

$107.44$114.07

$118.53$125.90

$133.91

$-

$20

$40

$60

$80

$100

$120

$140

$160

Regional Total Water & Wastewater Bill Comparisons (Monthly)

Wastewater

Water

* Has implemented Penalty/Drought Rates or Surcharges.˜ Water & Wastewater services provided by multiple agencies.

Currently doing a Rate Study. ** Recently completed a Rate Study.

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3. Scenarios of Initial Results & Rate Increases

Pledge: • Revenue Excluded from Analysis • Expenses Covered Via Pledge Revenue Excluded

– Bond Service Payments – Repayment to Developer

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3. Scenarios of Initial Results & Rate Increases

Water Scenario #1: Highest Water Rate Increases: - GF subsidy is phased out - Reserves = Industry Standard

Water Scenario #2 Lowest Water Rate Increases: - GF subsidy continues - GF funds Emergency Reserves - Reserves set at Minimum

Sewer Scenario #1: Highest Sewer Rate Increases: - GF subsidy is phased out - Reserves = Industry Standard

Sewer Scenario #2: Lowest Sewer Rate Increases: - GF subsidy continues - Reserves set at Minimum

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3. Initial Results Water Scenario #1

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

2017 2018 2019 2020 2021 2022

Annu

al O

blig

atio

ns

Fiscal Year Ending June 30

Water Revenue Requirements vs.Revenue Under Existing and Increased Rates

Reserve Funded Capital Expenses

Rate Funded Capital Expenses

O&M Expenses

Revenues under Existing Rates

Revenues under Increased Rates

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$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

2017 2018 2019 2020 2021 2022Fiscal Year Ending June 30

Ending Cash Balances vs.Recommended Reserve Targets

Un-Restricted

Ending Cash Balance Minimum Target Reserve Balance

3. Initial Results Water Scenario #1

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3. Initial Results Water Scenario #1

0.00%

33.02%

11.69%10.65%

8.04%6.13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2017 2018 2019 2020 2021 2022

Cum

ulat

ive

Rat

e In

crea

se

Annu

al R

ate

Incr

ease

Fiscal Year Ending June 30

Projected Increases to Rate Revenue

Rate Increases Cumulative Rate Increase

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$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

2017 2018 2019 2020 2021 2022

Annu

al O

blig

atio

ns

Fiscal Year Ending June 30

Water Revenue Requirements vs.Revenue Under Existing and Increased Rates

Reserve Funded Capital Expenses

Rate Funded Capital Expenses

O&M Expenses

Revenues under Existing Rates

Revenues under Increased Rates

3. Initial Results Water Scenario #2

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$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

2017 2018 2019 2020 2021 2022Fiscal Year Ending June 30

Ending Cash Balances vs.Recommended Reserve Targets

Un-Restricted

Ending Cash Balance Minimum Target Reserve Balance

3. Initial Results Water Scenario #2

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3. Initial Results Water Scenario #2

0.00% 0.00% 0.00% 0.00% 0.00% 0.92%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2017 2018 2019 2020 2021 2022

Cum

ulat

ive

Rat

e In

crea

se

Annu

al R

ate

Incr

ease

Fiscal Year Ending June 30

Projected Increases to Rate Revenue

Rate Increases Cumulative Rate Increase

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$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

2017 2018 2019 2020 2021 2022

Annu

al O

blig

atio

ns

Fiscal Year Ending June 30

Wastewater Revenue Requirements vs.Revenue Under Existing and Increased Rates

Reserve Funded Capital Expenses

Rate Funded Capital Expenses

O&M Expenses

Revenues under Existing Rates

Revenues under Increased Rates

3. Initial Results Wastewater Scenario #1

49 $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

2017 2018 2019 2020 2021 2022Fiscal Year Ending June 30

Ending Cash Balances vs.Recommended Reserve Targets

Wastewater Fund - Un-Restricted Reserves

Ending Cash BalanceMinimum Target Reserve Balance

3. Initial Results Wastewater Scenario #1

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3. Initial Results Wastewater Scenario #1

0.0%

31.9%

22.3%

1.6%

7.7%

16.1%

0%

20%

40%

60%

80%

100%

120%

0%

5%

10%

15%

20%

25%

30%

35%

2017 2018 2019 2020 2021 2022

Cum

ulat

ive

Rat

e In

crea

se

Annu

al R

ate

Incr

ease

Fiscal Year Ending June 30

Projected Increases to Rate Revenue Rate Increases Cumulative Rate Increases

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$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

2017 2018 2019 2020 2021 2022

Annu

al O

blig

atio

ns

Fiscal Year Ending June 30

Wastewater Revenue Requirements vs.Revenue Under Existing and Increased Rates

Reserve Funded Capital Expenses

Rate Funded Capital Expenses

O&M Expenses

Revenues under Existing Rates

Revenues under Increased Rates

3. Initial Results Wastewater Scenario #2

52 $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

2017 2018 2019 2020 2021 2022Fiscal Year Ending June 30

Ending Cash Balances vs.Recommended Reserve Targets

Wastewater Fund - Un-Restricted Reserves

Ending Cash BalanceMinimum Target Reserve Balance

3. Initial Results Wastewater Scenario #2

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3. Initial Results Wastewater Scenario #2

0.0%

5.1% 5.0% 4.8% 4.7% 4.6%

0%

20%

40%

60%

80%

100%

120%

0%

5%

10%

15%

20%

25%

30%

35%

2017 2018 2019 2020 2021 2022

Cum

ulat

ive

Rat

e In

crea

se

Annu

al R

ate

Incr

ease

Fiscal Year Ending June 30

Projected Increases to Rate Revenue Rate Increases Cumulative Rate Increases

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4. Summary of Board Direction Needed

• Financial Plan – Continue, Reduce, Eliminate General Fund Subsidy? – CIP Funding Level (100%, 50%, 25%?) – Strive to Meet Industry Standard Reserve Targets?

• Cost of Service – Customer Classes (EDU’s, SFR/MFR/Commercial, or

Meter Sizes)? • Rate Design

– % of Rate Revenue from Fixed vs % Variable Charges? – Volumetric Rates (Uniform, Tiered)? – Wastewater Rates with volumetric component?

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Questions