04 March, SAN ANTONIO WATER SYSTEM (SAWS) RATE DESIGN STUDY ANALYSIS RATE ADVISORY COMMITTEE: MEETING 1 Bill Zieburtz Robert Chambers

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1 04 March, 2014 SAN ANTONIO WATER SYSTEM (SAWS) RATE DESIGN STUDY ANALYSIS RATE ADVISORY COMMITTEE: MEETING 1 Bill Zieburtz Robert Chambers

2 RATE STUDY & FINANCIAL PLANNING OBJECTIVES SECTOR OUTLOOK STUDY APPROACH UTILITY PRICING AND RATEMAKING THE ROLE OF THE COMMITTEE QUESTIONS 2

3 O B J E C T I V E S PROJECT GOALS & OBJECTIVES Development of a rate structure that generates sufficient revenues maintains stable revenue streams promotes the efficient use of water resources recovers costs equitably across customer classes Address customer affordability issues as a part of the Rate Design Analysis Appropriately plan and account for the DSP integration Incorporation of stakeholders prioritized issues and concerns as a part of the Rate Design Analysis 3

4 O B J E C T I V E S UNDERSTANDING OF KEY ISSUES Achieve Cost of Service based Rates Implementation of the Water Management Plan, SSO Reduction Initiatives, and Conservation Program Manage rate aspects of DSP Integration Enrichment of the existing Affordability Program Maintain Bond, Loan, and Other Financial Covenants and Requirements 4

5 S E C T O R O U T L O O K US WATER INDUSTRY ISSUES SNAPSHOT Revenue stability is a pressing and urgent concern Infrastructure renewal is a growing concern Water supply is a growing concern Affordability issues must be addressed Business Process issues are increasing Sustainability drivers are becoming recognized Financial Economic Environmental Social 5

6 S E C T O R O U T L O O K FITCH RATINGS FY 2014 OUTLOOK WATER AND SEWER SECTOR Outlook Stable The fundamentals of this sector have tempered the negative effects of global economic weakness in recent years For FY 2014, Fitch expects continued financial stability with possibly some additional incremental gain Fitch anticipates key debt ratios to rise around 3.0% as utilities continue to focus efforts on asset management Fitch expects the financial stress currently facing many utilities to continue into Economically sensitive revenue streams Increasing labor cost Fitch believes the sector is stable despite ongoing economic, capital, and political pressures 6

7 S T U D Y A P P R O A C H STUDY ENVIRONMENT Financial Planning, COS, & Rate Design Capital Program Customer Affordability Stakeholder Involvement Financing Environment Infrastructure Participants Regulatory Community Sustainable Financial Planning 7

FULLY SUPPORTED BY USER FEES Should account for all costs,

8 S T U D Y A P P R O A C H WHAT IS AN ENTERPRISE FUND? ADEQUATE RESERVES TO MAINTAIN SOLVENCY DEDICATED TO THE UTILITY FULLY SUPPORTED BY USER FEES Should account for all costs, revenues, and reserves COST & REVENUE NEXUS SELF- SUFFICIENT & STABLE No co-mingling of Funds 8

S T U D Y A P P R O A C H RATE STUDY BUILDING BLOCKS

Planning: What are the annual revenue requirements of

9 S T U D Y A P P R O A C H RATE STUDY BUILDING BLOCKS Pricing: How should the revenue be collected from the customer classes? Rate Design Cost Allocation: Who should pay and how much should each customer class pay? Cost of Service Revenue Requirements Forecast Financial Planning: What are the annual revenue requirements of the utility? Operating & Capital Costs Rate Revenues & Miscellaneous Revenues Objectives, Policies & Rate Setting Principles 9

S T U D Y A P P R O A C H Market & Economic Context

February 2014 Industry Trends Utility Issues Dynamic

Conservation Customer Expectations Edwards Aquifer

Public Scrutiny Workforce Transformation EPA Consent

Solutions Rate Structure Transformation Affordability

10 S T U D Y A P P R O A C H Market & Economic Context Utility Context DECISION MAKING FRAMEWORK B&V 6 February 2014 Industry Trends Utility Issues Dynamic Decision Making Framework Declining Consumption Water Conservation Customer Expectations Edwards Aquifer Pumping Restrictions Utility Issues Capital Program Public Scrutiny Workforce Transformation EPA Consent Decree DSP Integration Industry Trends Practical Solutions Rate Structure Transformation Affordability Program Community Issue Customer Bill Impacts SOUND DECISION MAKING PROCESS 10

11 U T I L I T Y P R I C I N G A N D R A T E M A K I N G THE EVOLUTION OF WATER RATES Water was free Family, then community service/no rates Investment to provide safety and improve service Flat/uniform rates Appropriate cost classification began Meter based charges Uniform volumetric rates Revenue generation became a focus Meter based charges Declining block volumetric rates Generate sufficient revenues to cover cost 11

12 U T I L I T Y P R I C I N G A N D R A T E M A K I N G THE EVOLUTION OF WATER RATES Manage water resources Alter customer water usage patterns Conservation programs Inclining block volumetric rates Maintain Revenue Stability More emphasis on fixed charges (meter, billing, customer) Development of specific/special rates: Rate Stabilization Fuel/Energy Adjustment Capital Project Surcharge Customer Affordability Lifeline rates Special discounts and credits (income based) Targeted customer support 12

13 U T I L I T Y P R I C I N G A N D R A T E M A K I N G WATER UTILITY PRICING IS HIGHLY UNUSUAL Utilities are a unique kind of business Fundamental Life sustaining Community creating Yet they must fully recover their costs Utilities are not Typical units of local government Typical businesses Social service agencies 13

14 U T I L I T Y P R I C I N G A N D R A T E M A K I N G BUT AS MUCH AS BUSINESS PRINCIPLES APPLY The analogies break down Factors operate outside of utilities control that create challenges to fiscal stability Rainfall Consumption patterns Water resource availability Cost management is different from that of a manufacturing environment, as well as from that of a service environment 14

U T I L I T Y P R I C I N G A N D R A T E M A K I N G TWO WORLDS The service aspect Universally needed We don t want true income constraints to limit service The business aspect This is

15 U T I L I T Y P R I C I N G A N D R A T E M A K I N G TWO WORLDS The service aspect Universally needed We don t want true income constraints to limit service The business aspect This is a function that can carry its own weight Equitable rates and charges fairly apportion system costs Fully sufficient rates and charges encourage efficient behavior, benefitting everyone 15

16 U T I L I T Y P R I C I N G A N D R A T E M A K I N G YOU RE TOUCHING A TRULY ESSENTIAL FUNCTION SAWS is fundamental to Human health The environment Maintaining prosperity 16

17 T H E R O L E O F T H E C O M M I T T E E THE ROLE OF THE COMMITTEE Represent community interests Provide guidance to staff and consultant concerning factors important in developing utility rates; for example: Increased Conservation Affordability Financial stability Economic development Simplicity of structure 17

18 T H E R O L E O F T H E C O M M I T T E E NEXT STEPS RAC Rates Workshop April 1, 2014 SAWS Board Policy and Planning Meeting April 21, 2014 City Council B Session April 30, 2014 RAC Public Hearing May 6, 2014 Public stakeholders provide input RAC Priority Setting Workshop May 13, 2014 Following the receipt of priorities, the consultant will develop rate structure proposals to meet RAC priorities for discussion at later meetings Refinement of rate structure proposal will be the focus of the RAC s work through the rest of the year. 18

19 Q U E S T I O N S QUESTIONS 19

SAN ANTONIO WATER SYSTEM (SAWS) RATE ADVISORY COMMITTEE: MEETING 3

01 April, 2014 SAN ANTONIO WATER SYSTEM (SAWS) RATE ADVISORY COMMITTEE: MEETING 3 Bill Zieburtz Richard Campbell Robert Chambers RATE SETTING PROCESS STUDY APPROACH RATE SETTING OBJECTIVES FINANCIAL PLAN