DETERMINING WHEN A RATE CHANGE IS NEEDED. Lucretia Smith, Utility Analyst Maine Public Utilities Commission

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1 DETERMINING WHEN A RATE CHANGE IS NEEDED Lucretia Smith, Utility Analyst Maine Public Utilities Commission

2 Or are your water rates adequate? If the cash going out consistently exceeds the cash coming in, the water rates are likely not adequate.

3 Keeping Rates Low May Not be Best for Ratepayers Causes deferred maintenance that will have to be paid for by future ratepayers Causes much larger increases in the future (comments we have received show that customers prefer smaller more frequent increases than larger infrequent ones) Causes utility to have reduced eligibility for funds from lending agencies who compare rates within the state as part of review process Customers do not know the real cost of the water being used and therefore may not make changes to reduce their consumption (and ultimately causing some utilities to find additional sources)

4 Considerations in Calculating Revenue Requirements for Rates Test year actual 12 month period used as a base for setting rates (does not have to be a calendar year) The older the test year, the less likely it represents actual costs going forward Adjustments to test year for known and measurable changes (such as COLA s approved by Trustees) Helps mitigate the impact of regulatory lag

5 Considerations in Calculating Revenue Requirements for Rates Depreciation Commission rules allow inclusion of full depreciation in rates based upon rates in Chapter 68 Inclusion in rates is the only way to recover costs of capitalized plant from ratepayers Provides current cash flow for repair costs that may not have been included in O&M estimates Helps provide funding for future capital projects

6 Considerations in Calculating Revenue Requirements for Rates Depreciation Book depreciation must be recorded even if not included in rates unless a waiver is granted by MPUC Depreciation of plant paid for by Contributions in Aid of Construction (both by individuals or through Grants or Principal Forgiveness) is offset by CIAC amortization

7 Considerations in Calculating Revenue Requirements for Rates Contingency Statutes allow for inclusion of Contingency in determining revenue requirements for consumer owned water utilities 5% of revenue requirement if revenues greater than $85,000 10% of revenue requirement if revenues are $85,000 or less Statutes and rules no longer require keeping a contingency account

8 Considerations in Calculating Revenue Requirements for Rates Contingency Allows added flexibility due to regulatory lag Reflects increased period of time for rate cases by consumer owned water utilities The longer the period between the test year and the rate year, the more likely that an amount should be added for contingency Contingency should be used instead of increases to individual O&M accounts just in case those costs increase

9 Considerations in Calculating Revenue Requirements for Rates Debt Payments Consumer owned water utilities are allowed to include both principal and interest payments in revenue requirements The level of debt payments should be forward looking if initial payment is not due until in the middle of the rate year, consider averaging debt payments over the period between rate cases

10 Considerations in Calculating Revenue Requirements for Rates Debt Payments Sinking fund requirements can be included in revenue requirements (Rural Development loans) If District earns interest income on funds set aside and has access to the interest received, revenue requirements should be reduced by these amounts

11 Budgeting for the future Budgets do not have to be formal Should be on a cash basis to ensure all immediate cash needs (such as payroll and chemicals) can be met Budget both inflows (revenues) and outflows, including debt payments Budgets help prevent cash flow surprises and allow planning to determine if utility can afford plans with current rates If the revenues do not exceed the outflows, it is past time for a rate change!

12 Things to Consider in Budgeting: Revenue Changes Capital Needs Short term and long term and Debt Repayment Increased Operational Costs Regulatory Changes

13 Revenue Changes Usage Decreases due to conservation look at your sales over the last several years to see if there has been a continued decrease of average consumption per account which results in a decrease in revenues Decreases due to closing of industry or changes in the customer base these changes typically have a major impact on revenues if a large percentage of your revenues comes from one customer, be aware of any potential changes in that customer s usage Increases can your system handle increased usage and at what point would you need to find a new supply or add additional capacity

14 Revenue Changes (con t) Collections: Is there an increased period between sending the bills and receiving payments? Is there an increase in disconnection notices? Is there an increase in account write-offs? All of the above will decrease the cash flow to the utility.

15 Capital Needs and Debt Repayment Short-term projects that need to be done in the next two years Long-term projects that need to be done in the future In either case, how do you plan on funding these projects through current revenues or debt financing? Debt Repayment will there be a change in the level of debt repayment due to new bonds or bonds being paid off?

16 Budget for Increased Operational Costs Known annual changes such as cost of living increases in salaries Likely increases such as in health insurance costs Changes in your operations that affect other costs such as chemicals, power and fuel costs Other areas where costs are changing such as new training requirements due to new hires or new processes

17 Regulatory Changes Drinking Water Rules Increased Testing Requirements Will changes in facilities be necessary to meet new rules such as adding treatment that was not necessary before? Other PUC Rules Mapping Requirements New Chapter 660 will you need to make billing changes

18 The Mechanics of a Rate Case Pick a test period easiest is calendar year but consider most recent 12 months if June or later Total cash flows for that period from sales, jobbing (that is likely to continue), rental of water property (such as for cell towers), interest income Do not include cash received for grants, principal forgiveness or CIAC as these amounts are usually for a specific project and are not likely to be ongoing

19 The Mechanics For the same 12 month test period, determine your O&M costs Review these costs to determine if there are any that are unlikely to continue (one time expenditures) Review the costs to determine if they best reflect the likely costs going forward Warm winter costs may be too low for repairs to main breaks; cold winter may cause opposite Consider using three year average for these type of expenditures Consider adding an adjustment to reflect COLA s or known increases in costs such as insurance premiums or chemicals If you use other than actual historic account balances as a basis for calculation explain what you did because if there is a Commission investigation, you will be asked (for example: 3 year average 2008 to 2010; actual salaries plus 3% for COLA)

20 The Mechanics For the same 12 month test period, determine debt costs What did you actually pay for principal and interest during that period Determine if any of the bonds currently outstanding will be paid off in the next 12 months Determine if there are any new debt obligations that will require payments in the next 12 months (or period estimated between rate cases) Include any sinking fund requirements Total of the current continuing debt obligations plus the new debt obligations should be included in revenue requirements for Consumer Owned Utilities; Investor Owned Utilities will consider cost of debt when calculating Return on Rate Base

21 The Mechanics Revenue Requirements equal the sum of: Estimated O&M Costs Estimated Depreciation Estimated Debt Repayment Contingency Compare this total to Estimated Revenues to determine if there is a revenue shortfall If there is, utility should consider a rate increase Other Considerations: Date of last rate increase Impact on town (problems have incurred in the past when the town only became aware of potential increase after approving town budget, which includes fire protection) Timing of increase rate changes during winter have a higher impact on customers due to increased heating needs

22 Questions? The MPUC website is: Contact Information: Lucretia Smith Physical Address: 101 Second Street Hallowell, ME Mailing Address: 18 SHS Augusta, ME 04333

San Antonio Water System

CONDENSED MONTHLY FINANCIAL REPORT December 2018 San Antonio, Texas CONDENSED MONTHLY FINANCIAL REPORT SAN ANTONIO WATER SYSTEM DECEMBER 31, 2018 Attached is the monthly financial report of the (SAWS)