Setting Rates to Support a Capital Improvement Plan

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1 Setting Rates to Support a Capital Improvement Plan Stacey Isaac Berahzer 18th Alabama Annual Surface Water Meeting October 29, 2015

Dedicated to enhancing the ability of governments

programs and services in fair, effective, and

Research Teaching and Outreach Program Design and

2 Dedicated to enhancing the ability of governments and other organizations to provide environmental programs and services in fair, effective, and financially sustainable ways through: Applied Research Teaching and Outreach Program Design and Evaluation How you pay for it matters 2

Alabama Department of Environmental Management Alabama is blessed with a wealth and variety of natural resources which provide significant social, economic, and environmental benefits and

3 Alabama Department of Environmental Management Alabama is blessed with a wealth and variety of natural resources which provide significant social, economic, and environmental benefits and opportunities for the citizens of Alabama. Our mission at ADEM is to protect and improve the quality of Alabama's environment and the health of all its citizens. Funding for this project was provided by the Alabama Department of Environmental Management s State Revolving Fund (SRF) program. For more information about how the SRF can help your utility save money and keep rates affordable, please contact: James Dailey SRF Section Alabama Department of Environmental Management PO Box Montgomery, AL (334) jwd@adem.state.al.us

4 Objectives Learn components of water setting rates Become familiar with the features of the Alabama water and wastewater rates dashboard Learn how to apply several useful financial benchmarks to your rate setting process Briefly introduce the capital planning process Demonstrate how to use the EFC s User- Friendly Capital Improvement Plan for Water & Wastewater Utilities tool Provide a list of other resources

5 SETTING RATES

6 Types of Revenue Rates Period charges Assessments One-time fees Innovative funding sources (services) Debt

7 Systems Love Low Rates, but... Once again, the [City s] Water Department proved to have some of the lowest water and sewage rates in the state.

8 Are we following the applicable laws? Will it provide sufficient cost recovery? What exactly does this include? Will revenues be resilient to changing water demands? Are we allocating the costs to the right customers? Do these rates send the right signals to our customers, based on our objectives? Will our customers understand these rates? Will our customers be able to pay these rates?

9 Goal Should be Full Cost Pricing: Operations & maintenance expenditures Taxes and accounting costs Contingencies for emergencies Principal and interest on long-term debt Reserves for capital improvement Source water protection

10 Elements of Rate Structure Design 1. Customer classes/distinction 2. Billing period 3. Base charge 4. Consumption allowance included with base charge 5. Volumetric rate structure 6. (If applicable) Number of blocks, block sizes and rate differentials 7. (Optional) Drought Rates 8. Frequency of rate changes

11 Rank Your Rate Setting Objectives Full cost recovery/ revenue stability Fostering businessfriendly practices Encouraging conservation Maintaining affordability (keeping rates low to whom?) Refer to this list and focus on the highest ranked objectives when following the guidelines for selecting the appropriate rate structure design.

12 Determining Your Financial Needs Your current O&M costs Your current and future debt service Your rainy day fund in case of budget shortfalls Your planned capital projects

13 Rates in Alabama 2014 Water and Wastewater Residential Rate Survey for the State of Alabama Conducted by the Alabama Department of Environmental Management 451 utilities (2014 responses only) Municipalities, Not-for-profits, Authorities, Counties/Districts, and For profits

14 Median Monthly Drinking Water Bills (5 kgal) (by number of people served) (2014 responders) (n=473) $40.00 Median Monthly Drinking Water Bill ($) $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $31.25 $33.00 $31.67 $27.20 $5.00 $0.00 Fewer than 1,000 Between 1,000 and Between 5,000 and 4,999 9,999 System Size by Number of People Served 10,000 or higher

15 Median Monthly Wastewater Bills (5 kgal) (by number of people served) (2014 responders) (n=142) $40.00 $35.00 Median Monthly Wastewater Bill ($) $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $21.50 $22.50 $24.03 $25.67 $0.00 Fewer than 1,000 Between 1,000 and Between 5,000 and 4,999 9,999 System Size by Number of People Served 10,000 or higher

16 Drinking Water Rates in Alabama Uniform Rate Increasing Block n=95

17 Wastewater Rates in Alabama

18 Base Charges in Alabama

19 Alabama Rates Dashboard Free online tool available: On the EFC Website Go to and search for Alabama Water and Wastewater Rates Dashboard

20 BENCHMARKING RATES

21 Comparing Rates The Old Way Source: NC Triangle J Council of Government

22 What s Wrong With It? Poor sample selection (number, types of systems) Comparing only one bill amount Comparing nothing besides rates pressure to keep rates low regardless of financial condition of utility ignores customers ability to pay ignores price signals and utility s policies

23 Solution: Provide More Information? 185 pages of wonderful tables, full of data you can use!

24 Rates Dashboards Created for AL, AZ, CO, GA, IL, NC, OH, TX, VA, and WI. Coming soon: SC and MA. Free, online, open to the public. Compares rates against multiple characteristics: Utility finances; System characteristics; Customer base socioeconomic conditions; Geography; History Compare to similar utilities (large samples): All utilities; similar service population; similar water source; using same rate structure; similar customer income; same type of utility; within 50 miles distance

25 Demonstrate the AL Dashboard, Report and Tables

26 2016 Rates Survey ADEM will be collecting your water and wastewater rates and financial data between October 2015 and February 1, 2016 An updated Alabama Water and Wastewater Rates Dashboard should be available by June Enhancements coming to the dashboard: Easier way to select utility from the dropdown menu: type in utility name Much faster load and response times with the dashboard Ability to click on and select any utility on the map Ability to edit a utility's data or add a new utility/rate structure to the dashboard. View rates at 500 gallon/month increments between 0 and 15,000 gallons/month Ability to observe the effects of raising rates by up to 100% Numerous other function and aesthetic changes to improve the use and feel of the dashboard

27 CAPITAL IMPROVEMENT PLANNING

28 Water Water System Nightmares!

29 How Do You Pay for This? How do you plan to keep your water system operational? Emergency repair vs. Preventative rehab./ replacement (capital planning)

30 General Capital Planning Process 1. Create an inventory of all your assets: Name, description, location Age Current condition Criticality (how important is it?) Expected useful life remaining

31 Example of an Asset Inventory Source: EPA s Asset Management: A Handbook for Small Water Systems

32 General Capital Planning Process 2. Prioritize rehabilitation/replacement of assets 3. Determine timeline of rehabilitating and replacing all assets Asset Management Plan

33 General Capital Planning Process 4. Identify capital projects that would complete next few years AMP goals + new assets 5. Estimate costs for projects Asset Management Plan

34 General Capital Planning Process 6. Determine how will pay for capital projects 7. Adjust timelines as needed Capital Improvement Plan Asset Management Plan

35 Helpful and Important Estimate rate increases required and steps needed to obtain funding Get board approval Capital Improvement Plan Asset Management Plan

36 User-Friendly Capital Improvement Plan (C.I.P.) for Water & Wastewater Utilities Tool Free, simplified CIP tool using only MS Excel, developed by the Environmental Finance Center at UNC. Download the latest version at Find it in Resources / Tools. Tool development was funded by the Public Water Supply Section of DWR/ NCDENR and partly by the USEPA.

37 What the Tool Does Summarizes your utility s capital needs in the next 20 years, and estimates rate increases needed to fully fund the capital projects, based on debt and/or cash funding requirements

38 Inputs Basics of current rates and water use, growth, reserves, revenues and expenses

39 Inputs Capital projects, including timeline, costs, financing mechanism (debt, capital reserves, grant), terms of debt, start year to build up reserves, changes to O&M expenses

40 Outputs Year-by-year projections and graphs

Automatically-forecasted minimum rate increases needed to ensure

41 Outputs Total expenses by year (O&M, changes, capital) Projected end-of-year fund balance (yearly revenues from rates, yearly expenses) Automatically-forecasted minimum rate increases needed to ensure year-end fund balance always remains above target Smoothed out rate increases when possible

42 Simple tool = some limitations (in this version) Limited to the options and assumptions included. Cannot add more complexity. e.g.: rate structure details, non-linear growth of expenditures or water use, more specifics of revenues, etc.

43 This model estimates rate increases needed to pay for this CIP, but does not prescribe rate increases. Projections are purely illustrative. A rate study is still necessary.

44 When you first use this file after downloading from our website, click on Enable Editing at the top

Download the latest version at http://efc.sog.unc.edu Go to Resources / Tools, then scroll to find it.

45 Download the latest version at Go to Resources / Tools, then scroll to find it. For more resources on Alabama water/sewer rates, at the EFC website: Go to Programs / Drinking Water & Wastewater / Alabama Water and Wastewater Rates and Rate Structures

46 Demo of the User-Friendly C.I.P. for Water & Wastewater Utilities Tool

Developed by the Environmental Finance Center

47 Developed by the Environmental Finance Center at the University of North Carolina, Chapel Hill Development was funded by the Public Water Supply Section of the North Carolina Department of Environment and Natural Resources, and by the U.S. Environmental Protection Agency

48 Resources on Capital Planning

49 s/pdfs/final_asset_inventory_for_small_sys tems.pdf

50 Software: CUPSS (EPA)

Resource Webpage for Capital Planning http://www.efc.sog.unc.

51 Resource Webpage for Capital Planning Search for CAPITAL PLANNING RESOURCES FOR WATER AND WASTEWATER UTILITIES

52 Tool: What to Include in your Capital Plan: A Reference Guide for Water and Wastewater Utilities (NC)

53 How Quickly are Costs Related to Capital Rising? Instead of looking at Consumer Price Index, look at Construction Cost Index (CCI). ~3%/year. %/year 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% Annual Changes to CPI-U ("Inflation") and Construction Cost Index: Inflation (Annual Change in the CPI-U) Annual Change in the Construction Cost Index Data Sources: Bureau of Labor Statistics, Engineering News-Record ENR.com, InflationData.com, USDA Natural Resources Conservation Services

54 Other EFC Financial Tools All free. Find all tools in Resources / Tools:

55 Resource Website (Asset Management, Capital Planning and Rates & Finance for Small Water Systems) Look in Resources Resource Library

56 Small Systems: Get Free Help Now! Thanks to the US EPA, Small Water Systems (10,000 or fewer people served) are applicable to seek out free technical assistance from the Environmental Finance Center Network (EFCN): Creating an Asset management plan Near-term financial planning and rate setting Analyzing your revenues and expenses Offering ideas on how to effectively budget Long-term capital planning Assessing options for lowering energy use and/or water loss Identifying sources of outside funding Collaborating with other water systems In-depth assistance includes several hours of back and forth between the Environmental Finance Center Network and the water system staff or their consultants. Sign up for direct assistance at by Friday, November 13, 2015.

57 Stay in Touch to Learn More Subscribe to our Environmental Finance Blog Tools, trainings, assistance and resources for small water systems from the EFCN Follow us on

58 Contact Stacey Isaac Berahzer EFC at University of North Carolina, Georgia David Tucker EFC at University of North Carolina, Chapel Hill

Capital Planning and the User- Friendly Capital Improvement Plan

Capital Planning and the User- Friendly Capital Improvement Plan Tool David Tucker Shadi Eskaf September 23 and 25, 2014 http://efc.sog.unc.edu @EFCatUNC Dedicated to enhancing the ability of governments