Detroit Water and Sewerage Department. The 5 Takeaways. Briefing to GLWA Board DWSD Water and Sewer Rate Setting - A Historical Perspective

Transcription

1 Detroit Water and Sewerage Department Briefing to GLWA Board DWSD Water and Sewer Rate Setting - A Historical Perspective March 5, 2015 The 5 Takeaways Page 2 1.! Average changes in DWSD "unit costs" are not materially different from those experienced in other major utility systems 2.! Water Sales to the DWSD customers have declined dramatically, a key contributor to the increase in unit costs 3.! DWSD cost of service and user charge methodologies traditionally sought precision in the pursuit of "equitability"!! Recent efforts have focused on simplifying traditional approaches and increasing understanding 4.! DWSD establishes schedules of charges for Wholesale Service - not Detroit retail rates 5.! The Lease Payment envisioned by the MOU is not a new BUDGET item, but rather a change in how such funds will be allocated to customers via the cost of service analyses 1

2 Perspective on DWSD Charges Page 3 Annual Changes in DWSD Water "Unit Costs" ( ) 600% 500% 400% Avg = 6.1% Avg = 5.6% 300% 200% 100% 0% Avg = 5.2% Avg =2.8% -100% Page 4 CPI Nat'l Water Rates Detroit Retail Suburban Wholesale 2

3 Annual Changes in DWSD Sewer "Unit Costs" ( ) 900% 800% 700% 600% 500% Avg = 7.1% Avg = 3.5% Avg = 6.0% 400% 300% 200% 100% 0% Avg =2.8% -100% Page 5 CPI Nat'l Sewer Rates Detroit Retail Suburban Wholesale 600 Illustration of Changes in Unit Costs 1989 thru 2014 Gradual Decline in Water Sales, accelerates with 2008 Financial Collapse, continues to recent 450% % % Large acceleration of Capital Program in late 90's / early 2000's - principally for CSO projects and new WWP Plant 225% 150% Pace of increase directly correlates with capital investment and water sales decline % 0% Page 6 Water Sales (mgd) CIP Investment ($ millions) Unit Cost Adj (Cumulative) 3

4 SUBURBAN CUSTOMERS DETROIT CUSTOMERS Local Community Costs/Services DWSD Costs/ Services Other Other Cust Svc Cust Svc Local Delivery/Collect Local Delivery/Collect Major Delivery/Collection Major Delivery/Collection Page 7 TREATMENT TREATMENT Utility Charges Equalizer Light Utility Capital Financing Strategies Heavy Utility Revenue Requirement Levels Utility Cost of Service Allocation Approaches Utility Rate Design Methodologies Page 8 3 / 5 / 1 5 4

5 Utility Charges Methodology: Cost of Service Continuum Reasonable Equitableness Precise Simple Complexity Complex High Predictability Low Page 9! DWSD Rate Fundamental Principle: Use best available, verifiable information to establish water and sewer rates Sewer Rate Methodology History Page 10 5

6 Sewer Rate History & Settlement Agreements: Major Event Timeline Dramatic WWTP Expansion 1st OMI Collapse 2nd OMI Collapse NPDES Permit CSO Discussions FY 1975 Rate Study Oakland State Court rate challenge EPA Suit / Judge Feikens FY 1978 Rate Study / Master's Report 1978 Rate Settlement Agreement FY 1980 Rate Study 1980 Rate Settlement Agreement FY 1982 Rate Study 1982 Rate Settlement Agreement Orig CSO Req'ts in NPDES Permit FY 1993 Rate Study Oakland County (+) Rate Challenge Sewer "Partnering" Agreements Water Quality Consortium Financial Collapse COD Bankruptcy 1995 Rate Settlement Agreement Original LTCSO Program Page Rate Settlement Agreement Oakland County Report 3rd OMI Collapse 800 MHz Radio System Implementation 2008 "Global Settlement" Agreement Decision to terminate URT / DRO2 LTCSO Plan Update Rouge with Green Infra Judge Cox Order(s) / Surviving Terms Exhibit 3-Year LBA Settlement Agreement Rate Simplification - LBA Eliminated GLWA Regional Authority MOU GLWA / DWSD-R Standup? Page 12 Chapter 1 The 1970s and Early 1980s! DWSD Under Federal Oversight! Original Challenge to DWSD Sewer Rates! Judge Feikens Oversight! OMI Collapses Twice! Series of Rate Settlement Agreements!!Utilize "Maximum Debt Financing" to Finance Capital Improvements!!Proportional Cost Allocation!!Introduction of Look-Back!!Specific Rules for OMI Repair Costs!!Definition of "Ownership Benefit" 6

7 Page 13 Chapter 1 - Impact of Initial Rate Settlement Agreements on DWSD Rates! Aggressive debt issuance for capital! Costs must be assigned proportionally! No recognition of "ownership" structure via a differential rate of return, but...! Adjustment A - recognizes that Detroit is designating property for regional treatment facility!!shift $1 million from Detroit class responsibility to Suburban class!!inflate 5% annually! Complicated treatment of OMI Repair costs! Look-Back is implemented in a very precise manner Page 14 Chapter 2 The 1990s! Relative quiet in late 1980s! 1989 NPDES Permit requires DWSD to begin investment in CSO Facilities! Rate Challenge over 1993 Sewer Rates, principally over responsibility for CSO costs!!subsequently resulted in 7 total "Areas of Concern"! Launch of "Partnering Agreements" 7

8 Page 15 Chapter and 1999 Rate Settlement Agreements! Bad Debt Expense (1995 RSA)!!City of Detroit bad debt included in City of Detroit rates!!suburban bad debt included in Suburban Wholesale Rates!!Implemented through Look-Back! CSO Responsibility (1999 RSA)!!83% Detroit / 17 % Suburban! "Unaccounted Flows" (1999 RSA)!!Use Best Available Data from GDRSS and Other Sources!!Shifts Cost Responsibility from Suburban Wholesale to Detroit!!Encourages pursuit of "precision" in cost allocations Page 16 Chapter 3 The 2000s! "Water Quality Consortium"!!Launched by Oakland County Report identifying additional "areas of concern"! 3rd OMI Collapse in 2004!!Macomb County objects to repair costs! 800 Mhz Radio System!!Counties protest allocation to DWSD! Global Financial Crisis 8

9 Page 17 Chapter 3 - Sewer Rate Developments in the 2000s! Consortium Activity Launches "Customer Outreach Rate Rollout" Activities!!But no changes in rate methodologies! 2008 Global Settlement!!Sets up transfer of OMI to Macomb and Oakland Counties!!Resolves 800 Mhz Radio matter!!requires all parties to enter into "model contract"! Upper Rouge Tunnel terminated!!dwsd demonstrates affordability issues!!launches "Green Infrastructure" program Chapter thru 2013! Judge Cox assumes oversight role! Issues order(s) to:!!reconstitute DWSD Board of Water Commissioners!!Separate certain DWSD and City of Detroit activities "!Procurement, rate setting, etc.! Rate Simplification Efforts Page 18 9

10 Page 19 Chapter 4 - Sewer Rate Developments 2010 thru 2013! BOWC only acts on Wholesale Rates!!Retail rates subject to City Council! Rate Simplification is approved!!shares established and locked for Initial Rate Period!!100% Fixed Charge recovery "!Revenue Stability!!Look-Back is "Killed" "!5-Year LBA thru FY 2012! Rate Settlement Agreements codified into "Surviving Terms" document Page 20 Chapter 5 Current Events! City of Detroit Bankruptcy! Memorandum of Understanding to Establish GLWA and DWSD-R!!Establishes Lease Payment as "Commonto-All" Budget Item!!Establishes funding for 0.5% of annual revenues!!locks in "Ownership Benefit" at current level of ~ $5.5 million! Continued efforts to distinguish DWSD charges for services from individual community water and sewer rates 10

11 Water Rate Methodology History Page 21 Water Rate History: Major Event Timeline B&V Rate Study CDM Rate Study Peaking Factor Field Studies Max Day / Peak Hour in Rates Some Distance / Elevation in Rates Across the Board Rate Adjustment Across the Board Rate Adjustment Peaking Factors - Engineering Estimates More Specific Distance / Elevation Individual Community Peaking Factors - Est FY 1993 Rate Study Black & Veatch Rate Model Review s Water Quality Consortium Peaking Factors Updated Financial Collapse Phase in Fixed Chgs COD Bankruptcy GLWA Page 22 Oakland County Report Initial Implementation of AMMR Model Contract Approved - Initial Adopters Contract Method Rates GLWA Regional Authority MOU Modifications = 60% Fixed / Uniform Sales Est 11

12 Page 23 Chapter 1 The 1960s - Original Rate Methodology! Black & Veatch 1966 Water Rate Study!! First Effort at Specific Community Peaking Factors Based on Engineering Estimates!! Max Day and or Peak Hour Customer!! Some Recognition of Distance and Elevation!! Suburban Wholesale Rate Classes "! 12 Different Rates for 67 Different Communities! Rates Updated Across the Board 1972 and 1976! CDM 1980 Water Rate Study!! First IMPLEMENTED Effort at Specific Community Peaking Factors Based on Engineering Estimates!! More Refined Distance And Elevation Recognition!! Still Large Wholesale Rate Classes Page 24 Chapter 2 The 1980s! Michigan Public Act 89 & Utility Basis! Computerized Water Rate Model 1982!! Utilizes CDM Methodology!! First True Specific Community Peaking Factors!! Unique Customer Specific Wholesale Rates! Initiation of Peaking Factor Study 1982!! Five Year Program to Collect Max Day and Peak Hour Information for Each Community! Black & Veatch Water Rate Model Review 1985!! Suggested Refinements to Basic CDM Methods! Completion of Peaking Factor Study 1986! Computerized Rate Model Converted to PC Based

13 State Statute Governing DWSD Water Rates Michigan Public Act 89 Page 25 The People of the State of Michigan enact: Sale of water; authority of municipal corporation to contract with city, village, township, or authority; price; limits; applicability and effective date of subsection (2); adjustments; proceedings to determine rate changes; retail rate; applicability of act. [M.S.A ] Sec. 1. (1) A municipal corporation, referred to in this act as a corporation, authorized by law to sell water outside of its territorial limits, may contract for the sale of water with a city, village, township, or authority authorized to provide a water supply for its inhabitants. (2) The price charged by the city to its customers shall be at a rate which is based on the actual cost of service as determined under the utility basis of ratemaking. This subsection shall not remove any minimum or maximum limits imposed contractually between the city and its wholesale customers during the remaining life of the contract. This subsection shall not apply to a water system that is not a contractual customer of another water department and that serves less than 1% of the population of the state. This subsection shall take effect with the first change in wholesale or retail rate by the city or its contractual customers following the effective date of this subsection. Any city that has not adjusted rates in conformity with this subsection by April 1, 1982 shall include in the next ensuing rate period an adjustment to increase or decrease rates to wholesale or retail customers, so that each class of customer pays rates which will yield the same estimated amount of revenue as if the rate adjustment had been retroactive to April 1, A city that is subject to section 5e of Act No. 279 of the Public Acts of 1909, being section 117.5e of the Michigan Compiled Laws, shall begin proceedings to determine rate changes pursuant to section 5e(b) of Act No. 279 of the Public Acts of 1909, being section 117.5e of the Michigan Compiled Laws. Page 26 Chapter 3 The 2000s! Subtle Tweaks in Rate Model and Methodology from 1986 through 2002! Implementation of Automatic Master Metering Program in early 2000's!! Availability of "Real Time" Data to evaluate customer community demands! Renewal of Peaking Factor Update Studies for Rates from 2004 through 2009!! Creates volatility in annual changes in rates! Partnering and Customer Outreach Programs Focus on Establishing Increased Understanding of Water Rates 13

14 Chapter thru 2013! Model Contract and Contract Method established in 2008 for FY Water Rates!! Aligns customer and utility planning efforts!! Ties assigned demands to negotiated contractual amounts!! Stabilizes volatility in annual changes in rates! Phase in of Fixed Component for Suburban Wholesale Charge Structure!! ~10% in FY !! ~25% in FY !! ~40% in FY (thru FY ) Page 27 Chapter 5 Current Events! City of Detroit Bankruptcy! Memorandum of Understanding to Establish GLWA and DWSD-R!!Establishes Lease Payment as "Common-to-All" Budget Item!!Establishes funding for 0.5% of annual revenues!!locks in "Ownership Benefit" at current level of ~ $20.7 million Page 28 14

15 Page 29 Chapter 5 Current Events continued! Suburban Wholesale Water Sales Continue Decline, Significantly Below Amounts in Contract "Exhibit B's"! FY Proposed Modifications!!Raise Fixed Charge Component to 60%!!Implement Uniform Forecasting Model to Project Annual Sales Volumes - 24 month average for FY ! Continued efforts to distinguish DWSD charges for services from individual community water and sewer rates Perspective on the "Lease Payment" Page 30 15

16 Question: Lease Payment Page 31 How will the cost of the lease payment be made up, will capital projects be cut?!!no. Capital projects for the System will not be impacted by the Lease Payment!!The Lease payment is simply a first call on revenues to finance capital projects for the Detroit retail system.!!common to all capital projects will continue to be financed by revenue transfers and by bond proceeds. Question: Lease Payment Page 32!!The Lease Payment is not a new BUDGET item, but rather a change in how such funds will be allocated to customers via the cost of service analyses.!!in effect, the Lease Payment arguably slows the transition away from debt to finance System Common-to-All capital projects. "!Revenue financed capital items are directed towards retail capital first 16

17 Question: Lease Payment Page 33 Does Detroit Retail pay a portion of the lease?!!yes. Approximately $14.4 million of the total $50 million Lease Payment is allocated to the Detroit Retail class.!!the revenue requirement allocated to the Detroit Retail class includes a proportional share of the Lease Payment which is defined in the MOU as common-to-all revenue requirement. 17