Town of Hillsborough. City Council Public Hearing. Water Rate Cost-of-Service Study. February 13, 2017

Transcription

1 City Council Public Hearing February 13, 2017

2 Public Hearing on Proposed Water Rates PRESENTED BY Kelly J. Salt Partner 2016 Best Best & Krieger LLP

3 Article X, section 2 (1928) The general welfare requires that the water resources of the State be put to beneficial use to the fullest extent of which they are capable, and that the waste or unreasonable use or unreasonable method of use of water be prevented

4 Water Code 100 & 106 (1943) Section 100 restates Article X, 2 Section 106 Use of water for domestic purposes is the highest use; irrigation is the next highest use

5 Water Code 375 (1977) Agencies may adopt and enforce a water conservation program Water conservation ordinance or resolution may encourage conservation through rate structure design

6 Brydon v. E. Bay MUD (1994) Shifting the costs of environmental degradation from the general public to those most responsible is consistent with the objectives of Proposition 13

7 Proposition 218 (1996) Article XIII D, section 6(a) established procedural requirements for imposing new, or increasing existing property-related fees and charges: Must hold a public hearing and mail notice of the public hearing not less than 45 days prior to the public hearing Rates may not be imposed if there is a majority protest

8 Majority Protest (GC 53755) One written protest per parcel, whether filed by one or several owners or tenants of the parcel, shall be counted in calculating a majority protest

9 Proposition 218 Article XIII D, section 6(b) established substantive requirements: Revenues derived from the fee or charge shall not exceed the funds required to provide the property related service. Revenues derived from the fee shall not be used for any purpose other than that for which the fee was imposed Fees shall not exceed the proportional cost of the service attributable to the parcel

10 Proposition 218 Fees may not be imposed for a service unless the service is actually used by or immediately available to the owner of the property No fee may be imposed for general governmental services including, but not limited to, police, fire, ambulance or library services where the service is available to the public at large

11 City of Palmdale v. Palmdale Water District (2011) Tiered water rate structures do not violate Article XIII D, 6(b) Article X, 2 may be harmonized with Article XIII D, 6(b) to structure water rates that incidentally encourage water conservation Lesson: Show your work!

12 Griffith (2013), Morgan (2014), Moore (2015) Rate-makers may group similar users together (i.e., calculate fees on a class-by-class basis) Apportionment is not a determination that lends itself to precise calculation Different users create different costs Ratemaking data does not need to be perfect Fees are not easily correlated to a specific, ascertainable cost An agency has a reasonable degree of flexibility to apportion the costs Apportionment in accordance with the City s informal, best cost estimates is sufficient

13 CTA v. City of San Juan Capistrano (2015) Inclining block rates that go up progressively in relation to usage, are compatible with Article XIII D, 6(b) City failed to demonstrate that the tiers correspond to the actual cost of providing service at a given level of usage

14 CTA v. City of San Juan Capistrano While tiered, or inclined rates that go up progressively in relation to usage are perfectly consonant with article XIII D, section 6, subdivision (b)(3)..., the tiers must still correspond to the actual cost of providing service at a given level of usage. As we will say numerous times in this opinion, tiered water rate structures and Proposition 218 are thoroughly compatible so long as and that phrase is drawn directly from Palmdale those rates reasonably reflect the cost of service attributable to each parcel.

15 CTA v. City of San Juan Capistrano [T]here is nothing at all in subdivision (b)(3) or elsewhere in Proposition 218 that prevents water agencies from passing on the incrementally higher costs of expensive water to incrementally higher users. That would seem like a good idea. [W]e see nothing in article XIII D, section 6, subdivision (b)(3) that is incompatible with water agencies passing on the true, marginal cost of water to those consumers whose extra use of water forces water agencies to incur higher costs to supply that extra water. Precedent and common sense both support such an approach.

16 CTA v. City of San Juan Capistrano Proposition 218 protects lower-thanaverage users from having to pay rates that are above the cost of service for them because those rates cover capital investments their levels of consumption do not make necessary.

17 What are the marginal costs? Sources of supply Water conservation and efficiency programs

18 What are the marginal costs? System Capacity

19 Rate Study Process to Date February 2016 Rate study started Public Meetings Held 1. September 1, 2016 Financial Advisory Committee meeting 2. September 12, 2016 City Council study session 3. November 2, 2016 City Council study session 4. December 12, 2016 City Council meeting Final draft report presented Draft Proposition 218 notice to ratepayers presented to Council for approval Council authorized mailing notices to rate payers 5. January 31, 2017 Community meeting 6. February 13, 2017 Public hearing 18 City Council Public Hearing February 13, 2017

20 Study Background 19 City Council Public Hearing February 13, 2017

21 Objectives For Town s Water Utility 1. Safe, reliable drinking water Meets water quality regulations Available anytime, 24/7 Respond to emergencies 2. Maintain financial stability Set rates sufficient to cover full cost of service including CIP Set rates fairly and accurately, in proportion to the services being provided 3. Provide customer support - Billing questions, leak inquiries 20 City Council Public Hearing February 13, 2017

22 Challenges 1. Rising cost of purchased water 2. Aging infrastructure 3. Debt service requirements 4. Increasingly stringent State and Federal regulations 5. Maintaining adequate reserves 6. Multi-year drought 21 City Council Public Hearing February 13, 2017

23 SFPUC Sole source of Water Supply 22 City Council Public Hearing February 13, 2017

24 SFPUC Wholesale Water Rates Cost will increase five times in 15 years 23 City Council Public Hearing February 13, 2017

25 Town s Pipes, Pumps, and Tanks 24 City Council Public Hearing February 13, 2017

26 Need For Pipeline Maintenance Fiscal Year # of Breaks Lost Gallons FY 13/ ,250 FY 14/ ,675 FY 15/ ,750 Main breaks of aging pipelines result in significant water loss Occur throughout Town Enough water to cover a football field 2 feet deep Enough water to supply 3.4 average customers all year 25 City Council Public Hearing February 13, 2017

27 Transmission and Distribution Pipelines 92% of existing pipe is metallic pipe. Less than 1% is plastic pipe. Distribution system should upgrade to plastic pipe. 26 City Council Public Hearing February 13, 2017

28 Storage Tanks Meet Peak Demands 18 tanks 12 are between years old 5 are between years old Tank Name Capacity Year Recoat or (MG) Installed Retrofit 1 Forest View # Forest View # Skyfarm II # Skyfarm II # Skyfarm III # Skyfarm III # Crocker Reservoir Darrell # Darrell # Darrell # El Arroyo # El Arroyo # Major Hayes Vista Marlborough # Marlborough # Tournament # Tournament # City Council Public Hearing February 13, 2017

29 Capital Improvement Program $2.2 million annual average expenditure - 55% on water mains - 25% on tanks - 20% on pump stations Funded from rate revenue, not from debt Does not include new metering system - Funded by General Fund, not from rates 28 City Council Public Hearing February 13, 2017

30 More Efficient Meter Hardware Sensus and FlexNet System Power and CPU 29 City Council Public Hearing February 13, 2017

31 Water Rate Study 30 City Council Public Hearing February 13, 2017

32 Objectives for Water Rate Study Develop rates that: - Provide sustainable revenues for operations, maintenance and capital improvements - Conform with best practices for rate setting methodology - Are cost-based and equitable - No subsidies between users or classes - Encourage water conservation - Ensure rate tiers reflect actual cost of providing service 31 City Council Public Hearing February 13, 2017

33 Rate Study Methodology REVENUE REQUIREMENT PROJECTIONS Determines how much rate revenue is needed COST-OF-SERVICE ALLOCATIONS Allocates revenue requirements to charges and to customer categories RATE STRUCTURE DESIGN Calculates fixed charge rates per account and variable charge rates for metered water use CUSTOMER BILL ANALYSIS Evaluates impacts of proposed rates on customer bills for low, average, and high use 32 City Council Public Hearing February 13, 2017

34 Rate Study Methodology REVENUE REQUIREMENT PROJECTIONS Determines how much rate revenue is needed COST-OF-SERVICE ALLOCATIONS Allocates revenue requirements to charges and to customer categories RATE STRUCTURE DESIGN Calculates fixed charge rates per account and variable charge rates for metered water use CUSTOMER BILL ANALYSIS Evaluates impacts of proposed rates on customer bills for low, average, and high use 33 City Council Public Hearing February 13, 2017

35 Revenue Requirements Revenue from current rates 34 City Council Public Hearing February 13, 2017

36 Rate Study Methodology REVENUE REQUIREMENT PROJECTIONS Determines how much rate revenue is needed COST-OF-SERVICE ALLOCATIONS Allocates revenue requirements to charges and to customer categories RATE STRUCTURE DESIGN Calculates fixed charge rates per account and variable charge rates for metered water use CUSTOMER BILL ANALYSIS Evaluates impacts of proposed rates on customer bills for low, average, and high use 35 City Council Public Hearing February 13, 2017

37 Cost-of-Service Analysis Based on industry best practice Base-extra capacity approach from AWWA M1 Manual Determines unit costs of demand and customer service All customers bear a proportionate share of the cost Customers who require less service are allocated their proportionate share of facilities required to provide for peak service and fire flow Unit costs for each service are applied equally to all customers No level of service is subsidizing another level of service 36 City Council Public Hearing February 13, 2017

38 Revenue Requirement Is Allocated to Functions Revenue Requirement FY O&M Expenses Water Supply - Variable $5,620,160 Water Supply - Fixed $674,959 Transmission $593,131 Pumping $663,901 Storage $552,991 Distribution $1,112,633 Customer Service $1,771,059 Subtotal - O&M Expenses $10,988,835 Capital Expenses Water Supply $0 Transmission $154,793 Pumping $308,059 Storage $1,041,073 Distribution $703,604 Customer Service $558,855 Subtotal - Capital Expenses $2,766,383 Less: Non-Operating Revenue ($130,000) Total Revenue Requirement $13,625, City Council Public Hearing February 13, 2017

39 What is an HCF? An HCF = One Hundred Cubic Feet of Water HCF=CCF=1unit An HCF = 748 Gallons of Water 38 City Council Public Hearing February 13, 2017

40 Establish Levels of Demand Base Day demand Average winter demand= indoor demand Average Day demand Base demand plus average annual outdoor use Maximum Day demand Average Day plus summer outdoor use Maximum Hour demand Max Day plus peak outdoor use 39 City Council Public Hearing February 13, 2017

41 Further Allocate Function Costs to Services Demand Services Base Average Maximum Maximum Customer Revenue Requirement Day Day Day Hour Service Total O&M Expenses Water Supply - Variable $5,620,160 $0 $0 $0 $0 $5,620,160 Water Supply - Fixed $0 $0 $0 $0 $674,959 $674,959 Transmission $158,797 $211,910 $222,424 $0 $0 $593,131 Pumping $177,744 $237,194 $248,963 $0 $0 $663,901 Storage $74,025 $98,785 $103,686 $276,496 $0 $552,991 Distribution $148,941 $198,757 $208,619 $556,317 $0 $1,112,633 Customer Service $0 $0 $0 $0 $1,771,059 $1,771,059 Subtotal - O&M Expenses $6,179,666 $746,646 $783,692 $832,812 $2,446,018 $10,988,835 Capital Expenses Water Supply $0 $0 $0 $0 $0 $0 Transmission $41,442 $55,303 $58,047 $0 $0 $154,793 Pumping $82,475 $110,061 $115,522 $0 $0 $308,059 Storage $139,361 $185,974 $195,201 $520,537 $0 $1,041,073 Distribution $0 $0 $0 $0 $703,604 $703,604 Customer Service $0 $0 $0 $0 $558,855 $558,855 Subtotal - Capital Expenses $263,279 $351,339 $368,771 $520,537 $1,262,458 $2,766,383 Subtotal - O&M and Capital $6,442,945 $1,097,985 $1,152,462 $1,353,349 $3,708,477 $13,755, % 8.0% 8.4% 9.8% 27.0% 100.0% Non-Operating Revenue Connection Fee Revenue $0 $0 $0 $0 ($20,000) ($20,000) Water Use Penalties $0 $0 $0 ($50,000) $0 ($50,000) Other Non-Operating Revevenu ($28,104) ($4,789) ($5,027) ($5,903) ($16,176) ($60,000) Subtotal - Non-Operating Revenue ($28,104) ($4,789) ($5,027) ($55,903) ($36,176) ($130,000) Total Revenue Requirement $6,414,841 $1,093,196 $1,147,435 $1,297,446 $3,672,300 $13,625, % 8.0% 8.4% 9.5% 27.0% 100.0% 40 City Council Public Hearing February 13, 2017

42 Cost of Service Analysis Summary Costs are classified according to functions performed by facilities Costs of functions are allocated to demand and customer services Costs of services are allocated to rates that charge in proportion to service Revenue Requirement Functional Costs Service Costs Rate Components ($000s) ($000s) ($000s) ($000s) O&M Functions Demand Service Volume Charges SFPUC water $5,785 Water supply $6,296 Base Day $6,416 Residential Salaries & Benefits $1,276 Transmission $748 Average Day $1,093 By tier $9,642 Materials $2,157 Pumping $972 Maximum Day $1,147 Non-residential Other $1,641 Storage $1,594 Maximum Hour $1,297 Uniform (no tiers) $311 Capital Distribution $1,816 $9,953 $9,953 PAYGo $1,556 Customer service $2,199 Customer Service Service Charges Debt $1,210 Total $13,625 Accounts $1,735 By meter $3,672 Total $13,625 Capacity $1,937 Total $13,625 $3,672 Total $13, City Council Public Hearing February 13, 2017

43 Rate Study Methodology REVENUE REQUIREMENT PROJECTIONS Determines how much rate revenue is needed COST-OF-SERVICE ALLOCATIONS Allocates revenue requirements to charges and to customer categories RATE STRUCTURE DESIGN Calculates fixed charge rates per account and variable charge rates for metered water use CUSTOMER BILL ANALYSIS Evaluates impacts of proposed rates on customer bills for low, average, and high use 42 City Council Public Hearing February 13, 2017

44 Rate Structure Monthly Bill = Service Charge + Volume Charge 1. Service Charge (fixed) Account Component (e.g., meter reading, billing) Capacity Component (meter size) 2. Volume Charge (variable) Rate per hundred cubic feet (HCF)* multiplied times metered water use Tiered structure for Residential customers (96%) Uniform (no tiers) structure for Non-residential customers (4%) 43 City Council Public Hearing February 13, 2017

45 Service Charge Rates Account Capacity Component Total Meter Component Capacity Service Charge Size ($/mo.) $/EMU Multiplier Total ($/mo.) (a) (b) (c) (d = b * c) (e = a + d) 3/4" $39.35 $ $24.25 $ " $39.35 $ $38.10 $ /2" $39.35 $ $69.27 $ " $39.35 $ $ $ " $39.35 $ $ $ " $39.35 $ $ $ " $39.35 $ $ $ " $39.35 $ $1, $1, EMU = Equivalent Meter Unit 94% of customers have a 1 meter 44 City Council Public Hearing February 13, 2017

46 Volume Charge Rates Reduce number of residential tiers from 5 to 4 Fewer and smaller tiers reflect current customer demands Rates per tier are based on cost-of-service analysis Current Proposed Customer Category Residential Tier Tier Size Rate Size 5/1/2017 1/1/2018 1/1/2019 1/1/2020 1/1/2021 (HCF/month) ($/HCF) (HCF/month) ($/HCF) ($/HCF) ($/HCF) ($/HCF) ($/HCF) Tier 1 1 to 10 $ to 10 $5.54 $5.98 $6.46 $6.78 $7.12 Tier 2 11 to 25 $ to 22 $7.03 $7.59 $8.20 $8.61 $9.04 Tier 3 26 to 50 $ to 35 $9.65 $10.43 $11.26 $11.82 $12.41 Tier 4 51 to 100 $11.58 Over 35 $14.74 $15.92 $17.20 $18.06 $18.96 Tier 5 Over 100 $14.18 Non-Residential $9.06 $7.43 $8.02 $8.66 $9.10 $ City Council Public Hearing February 13, 2017

47 Residential Tiers Tier 1 Tier 2 Tier 3 Tier 4 46 City Council Public Hearing February 13, 2017

48 Overall Design of Residential Rates Significant reliance on revenue from seasonal demand Underscores the need for revenue stabilization factors 47 City Council Public Hearing February 13, 2017

49 Revenue Stabilization Factors Revenue stabilization is needed to maintain adequate revenue during water rationing Last year Council adopted 22% Revenue Stabilization Surcharges when 36% cutbacks were required Proposed Revenue Stabilization Factors replace Revenue Stabilization Surcharges Apply to Volume Charge rates only when shortage cutbacks are declared or required Factors correlate with percentage cutback Council determines when to adjust Factors Assumed Revenue Conservation Stabilization % Factor 10% % % % % City Council Public Hearing February 13, 2017

50 Rate Study Methodology REVENUE REQUIREMENT PROJECTIONS Determines how much rate revenue is needed COST-OF-SERVICE ALLOCATIONS Allocates revenue requirements to charges and to customer categories RATE STRUCTURE DESIGN Calculates fixed charge rates per account and variable charge rates for metered water use CUSTOMER BILL ANALYSIS Evaluates impacts of proposed rates on customer bills for low, average, and high use 49 City Council Public Hearing February 13, 2017

51 Tiers Reflect Current Levels of Demand Tier 1 Tier 2 Tier 3 Tier 4 50 City Council Public Hearing February 13, 2017

52 Residential Monthly Bill Impact 36% 29% 16% 19% Tier 1 Tier 2 Tier 3 Tier 4 (0-10 HCF) (11-22 HCF) (23-35 HCF) (36+ HCF) Percent of Bills in each Tier 51 City Council Public Hearing February 13, 2017

53 Residential Monthly Bill Impact Tier 1 Tier 2 Tier 3 Tier 4 Monthly Bills (1" Service) Water Use Proposed $ Diff. HCF/mo Gal/Day Current 5/1/2017 per Month 0 0 $70.00 $77.45 $ $77.14 $82.99 $ $84.28 $88.53 $ $91.42 $94.07 $ $98.56 $99.61 $ $ $ ($0.55) $ $ ($8.55) $ $ ($9.96) $ $ ($15.62) $ $ ($22.68) $ $ ($25.51) $ $ ($24.29) $ $ ($21.87) $ $ ($21.99) $ $ ($22.12) $ $ ($17.06) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Approximately 2/3 of bills will decrease - 94% of bills are 60 HCF/month or less 52 City Council Public Hearing February 13, 2017

54 Example Monthly Water Use by Average Customers Both customers used 264 HCF in FY User #1 bill = $2, for the full year User #2 bill = $3, for the full year Bills fall within all four tiers Water use restrictions were in place during this period 53 City Council Public Hearing February 13, 2017

55 What we heard Why are four tiers being proposed? Why not a uniform rate? Does the steepness of the tiers result in higher water users subsidizing lower water users? How does capacity (size of meter) relate to the cost of the service charge? If I am not using a meter to its ultimate capacity size, why am I being charged for it? Why was Hillsborough s $30 penalty per unit higher than other cities during the mandatory conservation period? Are costs allocated to both residential and nonresidential customers? 54 City Council Public Hearing February 13, 2017

56 Why is the Non-Residential rate decreasing from existing rates? Hillsborough is a declining use system, use is down the past 20 years about 40% from capacity, so large customers don t add to operating costs. How is lot size taken into consideration to calculate the rates? Why are the costs for residential meter charges changed (and going up for some) from a flat amount to varied based on meter size? Why are larger meter size rates decreasing? What steps have been done to minimize maintenance and operations costs? 55 City Council Public Hearing February 13, 2017

57 Why do we have to go through the SFPUC for water? Would it reduce costs or be beneficial to move to Cal Water? Bear Gulch = 45 miles of pipes, 59,000 population, 18,000 accounts Hillsborough = 98 miles of pipes, 11,000 population, 4,300 accounts Fire suppression should be a separate charge and allocated across all equally. Capacity is already built and paid for charges should be uniform. How does one lot that s the same size as four lots using the same amount of water end up paying x more?» much» double» exponentially 56 City Council Public Hearing February 13, 2017

58 Week Day January February March April May June July August September October November December City Council Public Hearing February 13, 2017

59 HIGH USE SCENARIO SUMMER USAGE (JULY) Tier 1 ( units) Tier 2 ( units) Tier 3 ( units) Tier 4 (35.0+ units)

60 HIGH USE SCENARIO WINTER USAGE (DECEMBER) Tier 1 ( units) Tier 2 ( units) Tier 3 ( units) Tier 4 (35.0+ units)

61 AVERAGE USE SCENARIO SUMMER USAGE (JULY) Tier 1 ( units) Tier 2 ( units) Tier 3 ( units) Tier 4 (35.0+ units)

62 AVERAGE USE SCENARIO WINTER USAGE (DECEMBER) Tier 1 ( units) Tier 2 ( units) Tier 3 ( units) Tier 4 (35.0+ units)

63 Rates Based on Consumption, Not Lot Size - Small lots may use more water than large lots and vice versa 62 City Council Public Hearing February 13, 2017

64 TYPICAL SCENARIO SUMMER USAGE (JULY) Tier 1 ( units) Tier 2 ( units) Tier 3 ( units) Tier 4 (35.0+ units)

65 TYPICAL SCENARIO WINTER USAGE (DECEMBER) Tier 1 ( units) Tier 2 ( units) Tier 3 ( units) Tier 4 (35.0+ units)

66 Summary Changes in customer demands have resulted in changes in the Town s water rate structure Rates are designed in conformance with AWWA industry standards Rates are designed to recover the incremental costs to the Town of providing sufficient capacity to serve higher demands Rates are designed in conformance with Proposition 218 and current court decisions 65 City Council Public Hearing February 13, 2017

67 Discussion and Questions 66 City Council Public Hearing February 13, 2017

68 Drinking Water Lost Due to Water Main Breaks FY 13/14 67 City Council Public Hearing February 13, 2017

69 Drinking Water Lost Due to Water Main Breaks FY 14/15 68 City Council Public Hearing February 13, 2017

70 Drinking Water Lost Due to Water Main Breaks FY 15/16 69 City Council Public Hearing February 13, 2017

71 AMI SOFTWARE 70 City Council Public Hearing February 13, 2017

72 71 City Council Public Hearing February 13, 2017