HomeMy WebLinkAboutA001 - Staff Report on Water Rate Options City of Ames, Iowa
Water and Pollution Control Department
Staff Report on Water Rate Options
March 24, 2009
Executive Summary
During each budget cycle, staff prepares long-range projections of the ending balance
of the Water Fund. These projections forecast operations and maintenance expenses
as well as anticipated Capital Improvement Plan projects. The goal of the projections
are to allow revenue adjustments to be proactively made more frequently in small
increments as opposed to increases that are less frequent but larger in magnitude.
During the 2008109 budget preparation cycle, staff identified a need for multiple revenue
increases over the next five years to fund both the on-going operations and
maintenance budget and to pay the debt service for an anticipated rehabilitation/
replacement of the existing water treatment plant. The first phase of these revenue
increases occurred in the FY 2008109 budget cycle with the implementation of a
seasonal inclining block rate structure. This rate structure serves the dual purposes of
delaying the need for expanded treatment capacity and allocating the ultimate cost for
treatment capacity to those customers whose pattern of water use may drive the need
for additional capacity.
Fund balance projections completed during the FY 2009110 budget cycle confirmed the
need for a series of revenue increases over the next four years, with each increase
being somewhere in the range of 10 to 15 percent each year. A 10 percent revenue
increase was recommended to Council as a part of the budget presentations in
February 2009. This report describes three options for implementing the revenue
increase: applying a uniform rate increase to each rate tier, applying a uniform dollar
increase to each rate tier, and assigning the revenue increase to the base tiers only.
Introduction
For the past four years, the Capital Improvement Plan for Water Operations has
included a project identified as the "Water Plant Expansion Project." There are two
primary forces leading to the inclusion of this project and its identification as the number
one priority for the water utility. The first is a growth in the seasonal demand for water
during the summer, and the second is the physical condition of the existing treatment
facility. Work on the project began in February 2008 when selection of a consultant was
initiated. The project started with a Capacity and Infrastructure Needs Assessment.
That assessment phase will culminate in a Council Workshop to be held in May 2009.
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At this time, it is unclear whether the best, most cost-effective solution will be to
rehabilitate and modernize the existing water treatment plant or to construct a new
water treatment facility. What is clear is that the condition of the existing facility will
require a significant investment in drinking water treatment infrastructure in the very
near future. The project is currently estimated at $29.25 million, a number that will be
refined over the next few months.
Fund Balance Projections
The Water Fund projections completed during the FY 2009/10 budget preparation
confirmed estimates that were made a year ago; namely, that the Water Fund cannot
support a project of this magnitude without a revenue increase. The Water Fund will
have approximately $6.9 million in revenue in the current fiscal year. The anticipated
debt service for the Water Plant Expansion Project is expected to increase expenses by
$2.4 million annually.
Chart 1: Projected Water Fund Balance without Revenue Adjustments,
by Fiscal Year, in $Millions
------ —
$o �
-$10
k
-$20k -- _ -
k
-$50 --- —
08-09 09-10 1011 11-12 12-13 i 1314 14-15 15-16 16-17 17-18 18-19
Year-end Fund Balance $3.5 $1.8 -$0.4 $5.0 -$9.4 $13.7 $18.8 -$24.3 -$30.3 -$36.8 443.8
Previous Revenue Adjustments
From 1939 through 1978, the City of Ames water rate structure was a "declining block"
format, meaning that the unit rate for water decreased as the consumption increased.
In 1971, a "Summer Beautification Rate" was incorporated into the sewer rate structure
that reduced sewer charges during the summer, further reducing the cost for high levels
of irrigation. The beautification rate was discontinued in 1977 when a severe drought
placed a strain on the water utility's ability to meet peak demands. In 1978, the water
rate structure was changed to a flat rate structure, again in response to the pressure
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placed on the water utility by the 1977/78 drought. The flat rate structure continued until
the implementation of the seasonal inclining block rate structure last summer.
The following is a summary of the revenue adjustments that have been implemented
over the past 20 years.
1992 — A 33% across-the-board rate increase was implemented. The unit rate
increased from $0.0071 to $0.0095 per cubic foot, and the minimum bill
charge was increased from $3.00 to $4.00 per month.
1994 — A 20% unit rate increase was implemented, with the unit rate increasing
from $0.0095 to $0.0140 per cubic foot. The minimum bill charge was also
increased from $4.00 to $6.00 per month.
1995 — A yard water minimum bill was implemented at $1.75 per month.
1997 — A 10% revenue increase took place. The unit rate increased 8%, going
from $0.0114 to $0.0123 per cubic foot. The minimum bill increased 14%,
going from $6.00 to $6.85 per month.
2000 — A 10% revenue increase was implemented. The unit rate increased 13%,
going from $0.0123 to $0.0139 per cubic foot. The minimum bill increased
7%, going from $6.85 to $7.30 per month.
The 1992 rate adjustment was, at 33 percent, a fairly large percentage increase. It was
also the first water rate adjustment since 1978. At the time of the 1992 rate
adjustments, Council established a rate philosophy that encouraged the use of more
frequent rate adjustments that were of smaller percentages. Staff has continued to
implement the Council philosophy by recommending increases at intervals that allow
the percentage increase to be kept within 10 to 15 percent each year.
During the summer of 2008, a change was made to the water rate structure. A
seasonal inclined block structure was implemented for residential and commercial
accounts. The rate structure acknowledges the fact that the need for any additional
treatment capacity is being driven by seasonally high usage during the summer months.
Essentially, the rate structure was modified such that, for residential, irrigation, and yard
water accounts, as consumption increases above preset blocks, the unit rate increases.
The block thresholds and price differentials between blocks were based on the
anticipated debt service to construct new treatment plant capacity in conjunction with
either a rehabilitation of the existing facility or the construction of a new treatment plant.
Also in 2008, commercial and industrial accounts were moved from a flat rate to a
seasonal rate that only contained one block.
The seasonal rate structure did not alter the underlying base unit rate. The unit rate
charged during the winter and during the summer in the first block of the residential rate
was unchanged from the previous flat rate. Because of this, the majority of residential
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water customers did not experience a unit rate increase as a result of the rate structure
change.
Anticipated Timing and Magnitude of Future Revenue Needs
The table below shows the estimated timing for future revenue increases. The pattern
of adjustments is in accordance with the 1992 rate philosophy provided by Council to
keep rate increases to less than 15 percent. Note that these are projections only and
subject to change as projects change in cost and priority, as well as by the funding
strategy employed (GO bonds, revenue bonds, state revolving loan funds, etc.). The
adjustments shown for FY 09/10 through FY 12/13 are being driven mainly by the Water
Plant Expansion Project. The increase shown in FY 14/15 is due to the anticipated
expansion of source water capacity.
Table 1:Anticipated Pattern of Future Revenue Adjustments
09-10 10-11 11-12 12-13 1 13-14 14-15 15-16 16-17 17-18 18-19
10% X X X I X I X
With this pattern of revenue adjustments and the anticipated pattern of operating and
capital expenses, the Water Fund balance for the next ten years is projected as shown
below. Note that the rate adjustments keep the ending balance in the positive for the
entire 10-year period. The balances shown have had a 10 percent operating reserve
subtracted but do not include likely bond covenants that will be imposed upon the sale
of revenue-backed bonds.
Chart 2: Projected Water Fund Balance with Revenue Adjustments, by Fiscal Year, in$Millions
$4
$3
F
N /f
$2 a
z
$0 ' v
08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19
Year-end Fund Balance $3.5 $2.4 $2.1 $2.3 $2.5 $2.8 $1.3 $1.0 $1.4 $1.6 1 $1.6
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Current Year Revenue Needs
Avoiding large rate increases in a single year requires a multi-year management
strategy. Sometimes it is advantageous to implement a revenue adjustment one or two
years in advance of a deficit situation simply to keep the percentage increase lower.
Based on this strategy, the above projections suggest to staff that a 10 percent revenue
increase is appropriate for FY 2009/2010.
The revenue increase will come from the portion of the Water Fund revenue that is
generated by the rate ordinance. Rates for the two wholesale water customers (Iowa
State University Central Campus and Xenia Rural Water District) are not included, as
their rates are already adjusted on a regular schedule in conjunction with the actual
expenses of the utility. Adjustments to other revenues, such as cell antenna leases on
elevated water tanks and farm ground leases, are adjusted in accordance with the lease
terms.
The rate ordinance revenues consist of four budget line items; namely, metered sales
(consumption), minimum charges, yard meter minimum charges, and multi-unit charges.
With a 10 percent revenue increase needed, the following dollar amounts can be
assigned to each revenue line.
Table 2: Calendar Year 2008 Revenues
Revenue 10%
510-0000-346.5000 Metered Sales $3,570,534 $357,052
510-0000-346.5000 Minimum Charge 2,270,502 227,050
510-0000-346.5003 Yard Meter Minimum Charge 64,636 6,464
510-0000-346.5004 Multi-Unit Charge 183,397 18,340
NOTE: The calculations in this assessment use data from the second half of FY 2007/08
and the first half of FY 2008/09. In effect, the revenue numbers are for calendar year
2008. This allows the inclusion of the seasonal rate structure implemented last July.
It is permissible to adjust each element of the rate-derived revenue by different
percentages. This would be desirable if there was data to suggest that costs were
increasing at a differential rate between fixed and variable expenses. Discussions
between staff and Council during the 2005 Sewer rate adjustments indicated a Council
preference to not increase the minimum bill charges at a greater rate than the unit rate
due to concerns that it would result in a larger percent increase to low consumption
customers who were presumed to be more likely to also be low income customers.
Given this philosophy, staff did not perform a detailed assessment of the fixed versus
variable components, and are recommending that both the minimum bill and unit rate
components increase at the same ten percent rate.
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Minimum Bill Options
From Table 2 above, there are three components that are collective referred to as the
"minimum bill." This includes a "Minimum Charge" that is based on the size of an
account's water meter; the "Yard Meter Minimum Charge," which is a flat rate for
irrigation and yard water accounts, and a "Multi-unit Charge" for accounts where
multiple dwelling units are served by a single meter. Staff is aware of no rationale to
suggest that one component is increasing at a different rate than another.
Consequently, staff is recommending that the existing charges for these minimum bill
elements be increased across-the-board by ten percent.
Metered Sales Rate Options
For the "Metered Sales" category, the seasonal rate structure implemented last summer
provides multiple options for Council to consider for recovering the portion of the ten
percent revenue increase attributable to consumption.
Staff has prepared three possible options for Council to consider. Each option will
generate essentially the same revenue. Each option can be supported by a clear policy
direction. This is important, as municipal water and sewer utilities are generally given
wide discretion in setting rates so long as there is a rational policy that governs the
rates, as opposed to setting rates arbitrarily, capriciously, or in a discriminatory manner.
Option 1: Uniform Ten Percent Increase for All Blocks
This option is the most straight-forward option, since it simply takes the existing
ordinance rates and increases them by the desired percent increase in revenues. This
is the method that has historically been used in Ames when the unit rate is adjusted.
This method increases every water customer's bill by the same percentage.
Table 3: Uniform Percent Increase, $ per cubic foot
Existing Adjusted Difference
Winter (All customers, all consumption) $0.0139 $0.0153 $0.0014
Summer
Residential
Block 1 (First 1,000 cf) 0.0139 0.0153 0.0014
Block 2 (Next 1,500 cf) 0.0278 0.0306 0.0028
Block 3 (Over 2,500 cf) 0.0417 0.0459 0.0042
Irrigation and Yard Water
Block 1 (First 2,000 cf) 0.0209 0.0230 0.0021
Block 2 (Next 3,000 cf) 0.0417 0.0459 0.0042
Block 3 (Over 5,000 cf) 0.0695 0.0765 0.0070
Non-Residential
All Consumption 0.0188 0.0207 0.0019
Non-peaking Industrial
All Consumption 0.0139 0.0153 0.0014
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Option 2: Uniform $0.0017 per Cubic Foot Increase for All Blocks
This option takes the existing ordinance rates and increases them all by the same dollar
amount. The amount of the increase is determined by taking the desired revenue
increase and dividing it by the total consumption.
From the data shown above in Table 2, the desired revenue from Metered Sales is
$357,052. The total billed consumption for calendar 2008, excluding the volume billed
to wholesale customers, was 212.7 million cubic feet. The uniform dollar increase then
becomes $0.0017 per cubic foot. This amount is added to each of the existing block
rates to determine the new adjusted unit rates.
Table 4: Uniform Dollar Increase, $ per cubic foot
Existing Adjusted Difference
Winter (All customers, all consumption) $0.0139 $0.0156 $0.0017
Summer
Residential
Block 1 (First 1,000 cf) 0.0139 0.0156 0.0017
Block 2 (Next 1,500 cf) 0.0278 0.0295 0.0017
Block 3 (Over 2,500 cf) 0.0417 0.0434 0.0017
Irrigation and Yard Water
Block 1 (First 2,000 cf) 0.0209 0.0226 0.0017
Block 2 (Next 3,000 cf) 0.0417 0.0434 0.0017
Block 3 (Over 5,000 cf) 0.0695 0.0712 0.0017
Non-Residential
All Consumption 0.0188 0.0205 0.0017
Non-peaking Industrial
All Consumption 0.0139 0.0156 0.0017
In comparison to Option 1, this option increases the winter rate, the Residential Block 1
rate, and the Non-peaking Industrial rate by an additional $0.003 per cubic foot. The
other summer block rates are higher than the existing rate ordinance, but the increase is
not as great as the increase contained in Option 1.
Option 3: Increase All Blocks Except Summer Blocks 2 and 3 by $0.0018 per
Cubic Foot
This option would generate the desired ten percent revenue increase in Metered Sales
in the winter rate, the Residential Block 1 rate, the Irrigation Block 1 rate, and both
summer non-commercial rates. It does not make any adjustment to the Block 2 and
Block 3 summer rates.
The rationale for Option 3 is that the cost of constructing additional treatment capacity
was the basis for the seasonal rate structure. With the cost of new capacity already
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incorporated into the rate structure, what remains is to cover the routine operations and
maintenance cost increases and the cost to rehabilitate or replace the existing capacity.
These are costs that can be viewed as costs to which all customers should contribute
equally.
By placing the increase in the winter rate and first summer blocks, all customers
(including those who irrigate) will share in the cost of the Water Treatment Plant's on-
going operations and maintenance and in the anticipated cost of replacing our existing
treatment capacity.
By dividing the desired revenue increase by the volume of water consumed last
calendar year in the winter and in the base summer blocks, a rate adjustment of
$0.0018 per cubic foot is determined.
Table 5: Increase Winter Rate and First Summer Block Rates Only, $ per cubic
foot
Existing Adjusted Difference
Winter (All customers, all consumption) $0.0139 $0.0157 $0.0018
Summer
Residential
Block 1 (First 1,000 cf) 0.0139 0.0157 0.0018
Block 2 (Next 1,500 cf) 0.0278 0.0278 0
Block 3 (Over 2,500 cf) 0.0417 0.0417 0
Irrigation and Yard Water
Block 1 (First 2,000 cf) 0.0209 0.0227 0.0018
Block 2 (Next 3,000 cf) 0.0417 0.0417 0
Block 3 (Over 5,000 cf) 0.0695 0.0695 0
Non-Residential
All Consumption 0.0188 0.0206 0.0018
Non-peaking Industrial
All Consumption 0.0139 0.0157 0.0018
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Comparison of Options
The chart and tables that follow demonstrate the differences between the three options
and provide examples of customer bills for each option.
Chart 3: Comparison of Options—Summer Residential Rates
$0.0500
$0.0450
$0.0400
$0.0350
$0.0300
$0.0250 - ---- -----
$0.0200 - -
$0.0150
$0.0100
$0.0050 - - -
$0.0000
Option 1 Option 2 Option3
Chart 4: Comparison of Options—Summer Irrigation Rates
$0.0900
$0.0800
$0.0700
$0.0600
$0.0500 _
$0.0400
$0.0300 - -
$0.0200
$0.0100
F$0.0000 - -
Option 1 Option 2 Option3
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Chart 5: Comparison of Options—Summer Commercial and Industrial Rates
$0.0250
Non•Residential in blue
Non-peaking Industrial in red
$0.0200 - --
$0.0150
$0.0100
$0.0050 _
i
$0.0000
Option 1 Option 2 Option3
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Table 6: Typical Water Bill for"Median" Residential Customer Using 600 cubic feet per month
Existing Option 1 Option 2 Option 3
Minimum Bill $7.30 $8.03 $8.03 $8.03
Consumption, 600 cf 8.34 9.18 9.36 9.42
Total Water Bill $15.64 $17.21 $17.39 $17.45
Increase, $/month -- 1.57 1.75 1.81
Increase, % -- 10.0 11.2 11.6
Table 7: Typical Water Bill for ,901h Percentile" Irrigation Customer
Using 3,000 cubic feet per month
Existing Option 1 Option 2 Option 3
Minimum Bill $7.30 $8.03 $8.03 $8.03
Consumption
Block 1, 2,000 cf 41.80 46.00 45.20 45.40
Block 2, 1,000 cf 41.70 45.90 43.40 41.70
Total Water Bill $90.80 $99.93 $96.63 $95.13
Increase, $/month -- 9.13 5.83 4.33
Increase, % -- 10.1 6.4 4.8
Table 8: Water Bill for a"Non-Residential" Customer Using 20,000 cubic feet per month
(Typical of a moderate-size restaurant
Existinq Option 1 Option 2 Option 3
Minimum Bill $58.40 $64.24 $64.24 $64.24
Consumption, summer 376.00 414.00 410.00 412.00
Total Water Bill $434.40 $478.24 $474.24 $476.24
Increase, $/month -- 43.84 39.84 41.84
Increase, % -- 10.1 9.2 9.6
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Comparison of Ames' Rates to Peer Communities
Every two years, the Ames Water and Pollution Control Department conducts a rate
survey of other Iowa communities. The data presented below are from the 2007 survey
and includes rates from 21 communities with a population greater than 10,000 that use
a similar treatment process as the one used in Ames.
The table below reflects the percentile ranking of Ames. A percentile ranking of 0
percent means Ames is the lowest, 50 percent means Ames is in the middle, and 100
percent means Ames is the highest. Because the variations between Options 1, 2, and
3 are relatively small, all three would result in the same percentile rankings for Ames.
Many utilities indicated in 2007 that they would be implementing rate increases in 2007
and 2008. The rankings shown for Ames do not include any rate increases
implemented in other communities in the past two years. Thus, the rankings may show
Ames rates being higher than may be the case.
Table 9: Comparison of Ames Water Rates to Other Iowa Communities
Consumption Existing Options
cf/month Rates 1, 2, or 3
Residential
200 70 85
600 60 65
1,000 35 50
10,000 100 100
Non-residential
10,000 55 55
50,000 50 65
100,000 65 65
Staff Recommendation
The multi-year fund balance projections for the Water Fund suggests that multiple years
of rate increases may be necessary to maintain a positive fund balance. Even though
the fund balance is not projected to go negative in FY 2009/10, staff is recommending
that a ten percent revenue increase be implemented effective this July in order to keep
future rate increases within the range preferred by past Council guidance.
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Also based on previous preferences expressed by Council, staff is recommending that
the portion of revenues attributable to metered sales and the portion attributable to the
minimum bill be increased by the same percentage.
Minimum Bill: Staff is aware of no rationale to suggest that expenses due to the
different individual components of the minimum bill are increasing at different rates.
Thus, staff recommends that each of the individual minimum bill components be
increased by ten percent.
Metered Sales: After developing the three options presented in this report, staff is
recommending the adoption of Option 3, placing the entire revenue increase in the
winter rates, the first summer blocks for residential and irrigation accounts, and the non-
residential and non-peaking industrial rates.
This structure is most in keeping with the seasonal inclining block structure adopted last
summer. Placing an increase in the Block 2 and Block 3 summer rates would increase
the revenue generated by those blocks beyond what was intended when the seasonal
rate structure was adopted in 2008. Option 3 places the revenue increase in the blocks
that are used by all customers. This allows the cost of rehabilitating or replacing the
existing treatment capacity, as well as the on-going operations and maintenance cost
increases, to be shared by all customers equitably.
Going beyond the rationale offered above, staff also noted that the Block 3 rate for
residential accounts is already among the highest in Iowa. Options 1 and 2 would both
place an additional increase in this block. This would provide an additional argument
that favors Option 3 over Options 1 and 2.
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