Sewer Rate Study CRESCENT CITY CALIFORNIA

Transcription

1 CRESCENT CITY CALIFORNIA Sewer Rate Study Via Industria, Suite 110, Temecula, California T F

2 Mr. Eugene Palazzo City Manager City of Crescent City City Hall 377 J Street Crescent City, Ca RE: Sewer Rate Study Mr. Palazzo: Willdan Financial Services ( Willdan ) is pleased to provide this of the Sewer Rate Study for the City of Crescent City ( City ). The attached presents the analysis conducted, and conclusions reached, during the Sewer Rate Study. The City retained Willdan Financial Services ( Willdan ) to prepare the attached analysis, including the gathering and analysis of historic information, budget information, financial records, and other relevant information. Key data and assumptions were derived from discussions with the City to gain a more complete understanding of the City s Sewer Utility Enterprise Fund, including actual, budgeted and projected revenues and expenses. The resultant analysis presented in this Report is the projected financial condition of the Sewer Utility Enterprise Fund under certain assumptions which are detailed in the Report. We appreciate the opportunity to be of service to the City on this important project. If you have any questions regarding the attached Report please feel free to contact us. Very truly yours, Jonathan Varnes Willdan Financial Services

3 Table of Contents Section 1 Introduction Introduction Organization of this Report... 1 Section 2 Overview of Utility RateMaking Principles, Processes and Issues Introduction Discussion of General RateMaking Principles The Revenue Sufficiency Process The Cost Allocation Process The Rate Design Process Financial Management Goals of the Utility... 6 Section 3 Rate Study Development and Results Revenue Sufficiency Analysis Cost of Service Analysis Summary of the Rate Study Section 4 Conclusions and Recommendations Conclusions Recommendations... 30

4 Section 1 Introduction 1.1. Introduction Willdan Financial Services ( Willdan ) was retained by the City of Crescent City, California ( City ) to conduct a Sewer Rate Study ( Rate Study ) for the City s sewer utility ( Utility ). This Rate Study Report details the results of the Rate Study for the fiveyear period FY The results of the Rate Study presented herein are a financial plan, and associated rates and charges, which were designed to provide revenues sufficient to fund the ongoing operating and capital costs necessary to operate the Utility, while meeting the financial requirements and goals set forth by the City for the sewer enterprise fund Organization of this Report This Rate Study Report presents an overview of the ratemaking concepts employed in the development of the analysis contained herein, followed by a discussion of the data, assumptions and results associated with the analysis. An appendix with detailed schedules is presented for a further investigation into the data, assumptions and calculations which drive the results presented in this Report. Appendix A presents the detailed schedules for the FY time period. The report is organized as follows: Section 1 Introduction Section 2 Overview of Utility RateMaking Principles, Processes and Issues Section 3 Rate Study Development and Results Section 4 Conclusions and Recommendations Appendix A Detailed Rate Study Schedules

5 Section 2 Overview of Utility RateMaking Principles, Processes and Issues 2.1. Introduction The Rate Study utilized generally accepted ratemaking principles which resulted in the development of rates and charges which are projected to: 1) generate sufficient revenue to meet the financial requirements of the utility, 2) address the need to recover costs from users in a manner which is fair and equitable relative to service provided, and 3) meet the rate design goals of the utility. A discussion of some of the key principles of ratemaking, and how the processes employed herein are guided by those principles, is presented below Discussion of General RateMaking Principles While the individual rates for each utility vary based on a variety of factors, the development of rates should, for the most part, be consistent with general ratemaking principles set forth in utility ratemaking practice and literature. The principle by which rate practitioners are guided is that rates designed for any utility should strike a reasonable balance between several key principles. In general, rates designed should: Generate a stable rate revenue stream which, when combined with other sources of funds, is sufficient to meet the financial requirements and goals of the utility Be fair and equitable that is, they should generate revenue from customer classes which is reasonably in proportion to the cost to provide service to that customer class Be easy to understand by customers Be easy to administer by the utility Minimize customer impact Encourage conservation of resources Designing a rate structure which completely addresses all of these principles is challenging given the sometimes competing goals of the principles. For instance, designing a rate structure which generates a stable revenue stream would guide the rate practitioner to the development of a rate structure with high fixed charges which result in an assumed guaranteed revenue stream each year. However, high Page 2

6 fixed charges typically do not minimize customer impact, nor do they typically encourage conservation (through a price signal). Striking the appropriate balance between the principles of ratemaking is the result of a detailed process of evaluation of revenue requirements and cost of service and how those translate into the rate design alternatives which most closely meet the specific objectives of the individual utility under the circumstances in which the utility operates The Revenue Sufficiency Process In order to develop rates and charges which generate sufficient revenue to meet the fiscal requirements of the utility, a determination of the annual rate revenue required must be completed. This rate revenue, combined with other sources of funds, is evaluated to determine whether the total revenue is sufficient to meet those fiscal requirements. This process is typically referred to as a Revenue Sufficiency Analysis. The process employed in the Revenue Sufficiency Analysis results in the identification of revenue requirements of the system, such as operating expenses, capital expenses (minor and major), debt service expense (including a provision for debt service coverage), transfers out and the maintenance of both restricted and unrestricted reserves at appropriate levels. These revenue requirements are then compared to the total sources of funds during each year of the forecast period to determine the adequacy of projected revenues to meet projected revenue requirements. To the extent that the existing revenue stream is not sufficient to meet the annual revenue requirements of the system, a series of rate revenue increases are calculated which would be required in order to provide revenue sufficient to meet those needs The Cost Allocation Process In order to provide guidance to the utility as to how to appropriately recover the rate revenue requirements identified in the Revenue Sufficiency Analysis, a Cost of Service Analysis is required. The process employed in the Cost of Service Analysis results in the identification of the cost to provide water and sewer service to customers. These water and sewer cost allocations are then used as the basis for the assignment of revenue requirements to customer classes, upon which the development of rates and charges is based. Page 3

7 The common approach to the development of a sewer cost of service analysis is the Functional Cost Allocation methodology, as detailed in the Water Environment Federation (WEF) Manual 27 Financing and Charges for Wastewater Systems. The general approach to the development of cost of service allocations under the Functional Cost Allocation methodology is to: 1) identify the costs by functional cost category, 2) allocate the functionalized costs further to the cost categories of flow (volume/capacity) and strength (BOD/SS) and then 3) allocate rate revenue requirements to customer classes based on the distribution of costs and customer characteristics. The resulting allocations provide guidance to the rate practitioner which, combined with the other goals and objectives of the utility, provides the necessary information required to proceed to the development of utility rates and charges The Rate Design Process With the rate revenue requirement determined in the Revenue Sufficiency Analysis, and the manner in which that rate revenue should be recovered determined in the Cost of Service Analysis, the development of specific rates and charges can commence. Utilities consider a variety of factors in establishing rates, including cost allocation, customer impact, the conservation of resources and ease of administration. The rate design process seeks to find the balance between the need to recover sufficient revenue in a fair and equitable manner and the need to do so within the constraints of other objectives which are unique to each utility. By understanding the types of customers served by the utility, and the general usage characteristics of those customers, a system of rates and charges can be developed that balances those many objectives while also generating sufficient revenue. First, the rate design goals of the utility are reviewed to identify areas the utility wishes to address over the course of the Rate Study. Next, an assessment of the existing rate design is undertaken to identify what has worked well for the utility with regard to their specific goals and objectives, and the general goals and objectives of utility ratemaking. This assessment typically also identifies areas for improvement which can provide guidance to the rate practitioner with respect to the design of future rates and charges. Page 4

8 After a review of the existing rates and charges, a dialog of how to build on the positive aspects of the existing structure and how to address deficiencies in the existing structure occurs with utility management and staff. For instance, for a utility with a primary goal of encouraging water conservation, the substitution of a uniform rate structure, which charges the same unit price for water regardless of consumption level, with a conservation/inclining block rate structure, which charges a greater unit price as usage levels increase beyond certain thresholds, would better address that primary goal. With an evaluation of the strengths and weaknesses of the existing rate structure and the goals of the utility going forward, the development of a new rate structure can begin. Development of a new rate structure which recovers the costs to provide water and sewer service in a manner which achieves the goals of the utility in a manner consistent with standard ratemaking practice requires an analysis of the projected usage characteristics of the customer base to which the rates will apply. This analysis is typically referred to as a billing frequency analysis. The billing frequency analysis is provided through the billing system of the utility and then used by the ratepractitioner to accumulate billing statistics for each class of customer. Typical customer classes for water and sewer utilities consist of residential, sometimes broken down into subcategories such as single family and multifamily, and nonresidential, sometimes broken down into subcategories such as commercial, government, industrial and others. Billing data allows for the development of rates based on the use of the system by each class. Alternative rate designs which account for customer usage patterns and also address various combinations of utility ratemaking goals and ratemaking principles can then be developed and reviewed by both the ratepractitioner and the utility regarding the viability of each rate structure designed. With the identification of the rate revenue required, the manner in which those requirements should be recovered and the billing units to be used to recover the required revenue, specific rates and charges can then be developed. At the heart of successful rate design is the attempt to strike a proper balance between the many, sometimes competing, objectives of ratemaking while ensuring generation of revenue sufficient to meet system financial requirements. Page 5

9 2.6. Financial Management Goals of the Utility The establishment of specific financial management goals of a utility is a key step in developing financial plans which will ensure the financial health of the utility remains strong. The financial management goals of the City s Utility are described below Minimum Unrestricted Working Capital Balance In order to maintain a certain level of liquidity, the Utility has developed a goal of maintaining an unrestricted working capital operating fund reserve in an approximately equal to 90 days of operating expenses. The analysis presented herein projects a minimum unrestricted working capital operating fund reserve of greater than or equal to approximately 90 days during the forecast period Wastewater Capital Reserve Fund Balances The Utility s obligations under its State Sewer Loan covenants require it fund a Wastewater Capital Reserve Fund in an amount equal to 5% of the total loan amount of approximately $44 million. This equates to a required Wastewater Capital Reserve Fund of just under $2.2 million which may be funded in equal annual installments of $220,000 over a 10year period. The analysis presented herein assumes this reserve is funded in each year of the forecast period Debt Service Coverage The Utility has availed itself of a State Sewer Loan which contains covenants requiring the maintenance of rates and charges which will be at least sufficient to yield during each Fiscal Year, Net Revenues equal to the Installment Payments. This equates to a net revenue target of 100% of the annual debt service due (also expressed as 1.00x). In order to demonstrate financial strength for future debt, assumed to be required beyond the forecast period, to goal of maintaining a 1.25x debt service coverage ratio on all debt was developed and assumed for this analysis. The analysis presented is projected to meet this goal during the forecast period. Page 6

10 Section 3 Rate Study Development and Results 3.1. Revenue Sufficiency Analysis General Methodology In order to develop rates and charges which generate sufficient revenue to meet the fiscal requirements of the Utility, a determination of the annual revenue from rates which, combined with other sources of funds, will provide sufficient funds to meet those fiscal requirements must first be completed. This process is typically referred to as a Revenue Sufficiency Analysis. The process employed in the Revenue Sufficiency Analysis resulted in the identification of revenue requirements of the system, such as operating expenses, capital expenses (minor and major), debt service expense (including a provision for debt service coverage, as applicable), transfers out and the maintenance of both restricted and unrestricted reserves at appropriate levels. These revenue requirements were then compared to the total sources of funds during each year of the forecast period to determine the adequacy of projected revenues to meet requirements. To the extent that the existing revenue stream was not sufficient to meet the annual revenue requirements of the system, a series of rate revenue increases were calculated to provide revenue sufficient to meet those needs. In addition, the Revenue Sufficiency Analysis resulted in a capital project funding plan for the forecast period which is projected to fund approximately 58% of FY capital projects with cash, 28% with grants and the remaining 14% with new debt. The Capital Improvement Plan (CIP), including the timing of projects and estimated costs, was provided by the Utility. Willdan relied on this information and the CIP was fully integrated into the Revenue Sufficiency Analysis Data Items Key data items reviewed, discussed and incorporated into the Revenue Sufficiency Analysis were: Financial management goals of the Utility FY 2015 Unaudited Financial Statements FY 2016 Operating Budget Page 7

11 Capital Improvements Plan (CIP) Loan documents associated with outstanding debt General assumptions related to: Customer growth Cost escalation factors New debt A discussion of the use of each of the above data items is presented below Fund Balances Related to the FY 2015 Unaudited Financial Statements To better understand what funds the Utility had on hand to start the forecast period, a detailed review of the City s System s financial statements, the FY 2015 Unaudited Financials, was conducted and reviewed with staff. Assumptions were made to estimate the actual funds available at the end of FY 2015, and therefore at the beginning of FY 2016, based on discussions with staff. A summary of the individual funds and fund balances associated with the sewer utility enterprise fund for FY 2016, as adjusted for use in this analysis, is presented in Table 31 below FY 2016 Budget Table 31 Beginning Fund Balances FY 16 Fiscal Year Ending June 30, 2015 (Per FY 15 Unaudited Financials) Description Amount Sewer Operating Fund Sewer Connection Fee Fund WCRF Reserve Note: [1] Staff provided the FY 2016 Budget, and associated lineitem revenue and expense detail, as the basis for the projection of financial performance for FY In addition, lineitem projected expenses for FY were developed using cost escalation factors. $3,094, ,000 A more detailed presentation of these fund balances is presented in Schedule A2 in the Appendix. Page 8

12 Cost escalation factors were reviewed by staff and were used to project lineitem costs beyond the 2016 budget. Those factors were applied based on lineitem cost classifications. A summary of the FY 2016 Budget, and subsequent projected budgetary expenses, is presented below in Table 32. A more detailed presentation of the lineitem budgeted and projected revenues and expenses is presented in Schedules A3 and A4, respectively, in the Appendix. Table 32 (Page 1 of 2) Summary FY 2016 Operating Budget Fiscal Year Ending June 30, Description FY 2016 Budget Finance Revenue/Billing Total Operating Uses $ 344,891 Total Capital Uses Total Financing Uses 220,000 Total Internal Uses 45,954 Subtotal $ 610,845 Sewer Lab [2] Total Operating Uses $ 337,729 Total Capital Uses 21,218 Total Financing Uses Total Internal Uses 37,477 Subtotal $ 396,424 Wastewater Treatment Plant (WWTP)[2] Total Operating Uses 1,328,849 Total Capital Uses 168,526 Total Financing Uses 1,100,000 Total Internal Uses 127,253 Subtotal $ 2,724,628 City Collection System Ops [2] Total Operating Uses 299,741 Total Capital Uses 150,000 Total Financing Uses Total Internal Uses 36,661 Subtotal $ 486,402 Lift Stations Total Operating Uses 84,391 Total Capital Uses Total Financing Uses Total Internal Uses 8,185 Subtotal $ 92,576 Page 9

13 Table 32 (Page 2 of 2) Summary FY 2016 Operating Budget Fiscal Year Ending June 30, Description FY 2016 Budget WWTP Maintenance Total Operating Uses 561,424 Total Capital Uses 166,672 Total Financing Uses Total Internal Uses 48,584 Subtotal $ 776,680 Total Expenses $ 5,087,555 Subtotal By Expense Type Total Operating Uses $ 2,957,025 Total Capital Uses 506,416 Total Financing Uses 1,320,000 Total Internal Uses 304,114 Total Expenses $ 5,087,555 Notes: [1] A more detailed presentation of these expenses is presented in Schedule A4 in the Appendix. [2] Total Capital Uses within this Cost Center have been lowered and are captured in the Capital Plan See Schedule A Capital Improvements Plan (CIP) The Utility provided Willdan with a forecast of capital requirements for the FY forecast period. This capital forecast was escalated by the City for use in the analysis. A summary table of the CIP for the FY forecast period is presented below in Table 33. A more detailed CIP, including the timing and funding source for each respective project, is presented in Schedules A5 and A7, respectively, in the Appendix. Page 10

14 Table 33 Capital Improvement Plan Fiscal Years Ending June 30 Description Total Capital Improvement Projects (WWTP) $ 2,794,627 $ 115,481 $ 741,251 $ 426,109 $ 1,210,375 $ 301,411 Lab (WWTP) 32,145 21,218 10,927 Major Maintenance (WWTP) 909, , , , ,782 Major Maintenance (Lab) Planning 395,762 53, , ,891 Collection 1,789, , , ,546 Total Capital Plan $ 5,920,926 $ 506,416 $ 858,268 $1,703,237 $ 2,203,812 $ 649, Outstanding State Sewer Loan The most common form of debt issued by utilities is either state loans or revenue bonds, which typically require a pledge of utility net revenue as the source of repayment for the debt. Also, there typically exists a debt service coverage requirement to be met in each year in which the debt is outstanding. Debt service coverage requirements generally mandate some multiple of annual net revenue, defined as operating revenue less operating expenses, as compared to annual debt service payments due. The Utility, like most utilities, has utilized longterm debt to fund capital assets in the past and the covenants associated with this debt require that minimum debt service coverage of 1.00x be maintained, or exceeded, in each year of the forecast period. As a further measure of financial strength, and in light of the fact that future debt may be revenue bond debt which typically requires a debt service coverage ratio anywhere from 1.10x to 1.25x, it was determined that a 1.25x debt service coverage ratio was prudent for this analysis. This means that in each year that a debt service payment is to be made, the Utility must generate net revenue that is at least 1.25x the annual debt service payment to be made in that year. The Proposed Rates presented herein demonstrate that the Utility is projected to meet or exceed the debt service coverage requirement beginning in FY 2016 and for the remainder of the forecast period. A summary of existing annual debt service is provided in Table 34. Table 34 Existing Annual Debt Service Fiscal Years Ending June 30 Description State Sewer Loan $1,100,000 $1,200,000 $1,300,000 $1,400,000 $1,500,000 Note: Debt service shown reflects the adjusted debt service on the outstanding State Sewer Loan per State Water Board. Page 11

15 3.1.7 General Assumptions In order to develop the financial and rate projections, certain assumptions were made with regard to elements of the revenue sufficiency analysis. A summary of those assumptions is presented below Growth The City has had limited growth in the recent past and this trend is expected to continue during the forecast period. Therefore, it was assumed that there would be no growth in the customer base during the forecast period Results of the Revenue Sufficiency Analysis After a thorough review of the abovementioned data elements, the resulting financial plan presented herein is the embodiment of the data, assumptions and review process undertaken with staff in several meetings Revenue Increases Required The revenue requirements and financial goals of the Utility during the forecast period necessitate the need for additional revenue in the form of customer revenue increases. Table 35 below presents a summary of the projected customer revenue increases required during the forecast period in order for the Utility to meet its financial goals. A more detailed presentation of the pro forma, including a fund balance reconciliation and projection of annual debt service coverage, is presented in Schedule A1 in the Appendix. Table 35 Projected Revenue Increases Fiscal Years Ending June 30 Annual Description Revenue Increases Month Assumed Effective 2016 $ NA ,476 July ' ,700 July ' ,485 July ' ,859 July '19 Page 12

16 Capital Project Funding With significant capital project funding needs projected during the forecast period, it is imperative the Utility develop a financial plan which provides for the full funding of the CIP. The City is projected to fund approximately 58% of the capital plan with existing and future cash 28% with grants. The remaining 14% of the capital plan is projected to be funded with new debt in the latter part of the forecast period. Table 36 below presents the summary capital project funding projections, by funding source and by year, for fiscal years 2016 through A more detailed presentation of the capital project funding plan is presented in Schedule A7 in the Appendix. Table 36 Projected CIP Funding Plan Fiscal Years Ending June 30 Description Total WCRF Reserve $ $ $ $ $ $ Grants 1,639, , ,546 Sewer Connection Fee Fund Sewer Operating Fund 3,425, , , , , ,782 New Debt 856, , ,411 Total $ 5,920,926 $ 506,416 $ 858,268 $ 1,703,237 $ 2,203,812 $ 649, Existing and Projected Debt Service As presented in Table 36 above, it is projected that the Utility will incur additional debt during the forecast period. A summary of total existing and projected debt service is presented below in Table 37. Table 37 Projected Debt Service Fiscal Years Ending June 30 Description Existing State Sewer Loan $1,100,000 $1,200,000 $1,300,000 $1,400,000 $1,500,000 New Debt 40,986 63,254 Total $1,100,000 $1,200,000 $1,300,000 $1,440,986 $1,563,254 Page 13

17 Summary of Revenue Sufficiency Analysis The resulting financial plan presented herein includes a series of rate revenue increases, presented earlier in Table 35, which provide for funding of projected revenue requirements during the forecast period. The financial goals projected to be met are as follows: Unrestricted working capital and operating fund balances greater than or equal to approximately 90 days operating expenses during the forecast period. Net revenue greater than or equal to 1.25x for the State Sewer Loan during the forecast period. Annual funding of the Wastewater Capital Reserve Fund, as mandated by the State Sewer Loan agreement, in the amount of $220,000. The summary of Revenue Sufficiency Analysis is presented in Tables 38 and 39 below. Table 3 8 presents the Projected Financial Results for the sewer enterprise fund, including a sources and uses and fund balance reconciliation. Table 39 presents projected key metrics for the sewer enterprise fund specifically projected working capital reserve levels and debt service coverage for the forecast period. A more detailed presentation of the financial plan, including fund balance reconciliations for each fund, is presented in Schedule A1 in the Appendix. Page 14

18 Table 38 Projected Financial Results Fiscal Years Ending June 30 Description Sources and Uses of Funds with Fund Balance Reconciliation Beginning Total Fund Balance $ 3,314,565 $ 3,212,443 $ 2,783,707 $ 2,362,665 $ 1,995,256 Sources of Funds Sewer Rate Revenue $ 4,489,520 $ 4,713,996 $ 4,949,696 $ 5,197,181 $ 5,457,040 Other Operating Revenue 271, , , , ,913 Interest Income Operating Fund 4,000 3,000 3,000 2,000 1,000 Sewer Connection Fee Revenue 75,000 75,000 75,000 75,000 75,000 Transfer In to Wastewater Capital Reserve Fund 220, , , , ,000 Interest Income Wastewater Capital Reserve Fund 1,000 1,000 1,000 1,000 Grants for Capital Projects 819, ,546 Total Sources of Funds $ 5,060,433 $ 5,284,909 $ 6,340,155 $ 6,586,640 $ 6,025,953 Uses of Funds Operating Expenses $ 3,261,139 $ 3,360,377 $ 3,462,960 $ 3,569,022 $ 3,678,690 Minor Capital 506, , , , ,782 Major Capital Funded with Existing Reserves/Current Cash 212, , ,604 Transfers Out to Wastewater Capital Reserve Fund 220, , , , ,000 Non Operating Expenses Transfer of Sewer Connection Fee Revenue to Operating Fund for Eligible Debt Service 75,000 75,000 75,000 75,000 75,000 Existing SRF Debt Service 1,100,000 1,200,000 1,300,000 1,400,000 1,500,000 New SRF Debt Service Existing Revenue Bond Debt Service New SRF Debt Service 40,986 63,254 Uses of Funds other Than Major Capital Major Capital Funded with Grants 819, ,546 Total Uses of Funds $ 5,162,555 $ 5,713,645 $ 6,761,197 $ 6,954,049 $ 5,884,726 Net Cash Flow (102,122) (428,736) (421,042) (367,409) 141,227 Ending Total Fund Balance 3,212,443 2,783,707 2,362,665 1,995,256 2,136,482 Composition of Ending Fund Balances: Unrestricted Operating Fund Balance (Working Capital) $ 2,772,443 $ 2,122,707 $ 1,480,665 $ 892,256 $ 812,482 Sewer Connection Fee Fund Balance Combined State Sewer Loan & Capital Reserve Fund Balance 440, , ,000 1,103,000 1,324,000 Total Ending Fund Balances $ 3,212,443 $ 2,783,707 $ 2,362,665 $ 1,995,256 $ 2,136,482 Page 15

19 Table 39 Calculation of Unrestricted Reserves and Projected Debt Service Coverage Fiscal Years Ending June 30 Description Calculation of Unrestricted Operating Fund Balance (Working Capital Reserve) Unrestricted Operating Fund Balance (Working Capital) $ 2,772,443 $ 2,122,707 $ 1,480,665 $ 892,256 $ 812,482 Operating Expenses $ 3,261,139 $ 3,360,377 $ 3,462,960 $ 3,569,022 $ 3,678,690 Days of O&M Target Calculation of Debt Service Coverage Operating Fund Revenue $ 4,765,433 $ 4,988,909 $ 5,224,609 $ 5,471,094 $ 5,729,953 Operating Fund Expenses 3,261,139 3,360,377 3,462,960 3,569,022 3,678,690 Net Revenue Available for Debt Service Coverage Test $ 1,504,294 $ 1,628,532 $ 1,761,649 $ 1,902,072 $ 2,051,263 Total Debt Service $ 1,100,000 $ 1,200,000 $ 1,300,000 $ 1,440,986 $ 1,563,254 Debt Service Coverage State Loan Target Cost of Service Analysis In order to develop rates which recover rate revenue in a manner consistent with cost of service principles, a detailed cost of service analysis was undertaken as part of the study. The first step in the cost of service analysis was to allocate the detailed lineitem budget to functional cost components (treatment, collection, etc.). The next step was to compile billing determinants by customer class in order to both test the integrity of the sewer billing database and to better understand how each customer class utilizes the sewer system. Finally, an estimate of the strength of sewer contributed by each class was developed in order to assign strengthrelated costs to each customer class. The resultant allocation of costs was used to develop the rates presented herein. Allocation of Lineitem Budget to Functional Cost Components A detailed review of the lineitem operating and capital budgets was undertaken as part of this study and resulted in a comprehensive allocation of costs. This cost allocation was then used as the basis for the allocation of the FY 2017 rate revenue requirement to functional cost components. The results of this functional cost allocation are presented below in Table 310. Page 16

20 Table 310 Sewer Cost of Service Summary of Allocation of Costs to Functional Cost Components Cost Allocation Categories Allocation of FY 2017 Rate Revenue Requirement to Fixed and Flow Charge Component Based on Cost of Service Collectionrelated? Average Annual Costs FY 1620 % A detailed review of billing determinants was completed and used as the basis for the development of the cost of service analysis and resultant allocation of revenue requirements to customer class. A summary of both the sewer rate revenue requirements and cost of service determinants, by customer class, is presented in Tables 311 through 315. For purposes of this analysis, it was assumed that the City collects approximately 45% of its rate revenue target from the Fixed Charge. 1 Allocation of Test Year Rate Revenue Requirement Volume Capacity Strength SS Strength BOD Billing & Collection / Customer Service Total % Sewer Coll Y $ 369, % $ 269,790 $ $ 269,790 $ $ $ $ 269, % Sewer Lift Station Y 101, % 74,207 74,207 74, % Sewer Pump N 0.0% 0.0% Sewer Treat N 4,072, % 2,971,014 1,681, , ,826 2,971, % Sewer CS N 648, % 473, , , % Sewer Admin N 0.0% 0.0% Sewer CIP Coll Y 0.0% 0.0% Sewer CIP Non Coll N 1,268, % 925, , , , , % Total $6,461, % $ 4,713,996 $2,205,568 $ 343,996 $ 592,308 $1,098,887 $ 473,237 $4,713, % 1 This City has historically collected approximately 60% of its revenue from the fixed charge as the majority of customers were on a fixed bill basis. By transitioning to a fixed/flow charge billing basis for the residential class it was determined that a lower percent of revenue should be collected via fixed charge and 45% was assumed as it is more in line with industry standards. Page 17

21 Table 311 Sewer Cost of Service Summary Proof Fixed Charge Revenue vs Cost of Service Revenue Cost of Service Determinants Total Fixed Total Annual % Sewer Rate Code Description Charge Revenue Bills % Inside Residential Flat Rate $ 587, % 12, % Outside Residential Flat Rate 1,104, % 24, % Inside Light Commercial 124, % 2, % Outside Light Commercial 40, % % Inside Heavy Commercial 18, % % Outside Heavy Commercial 2, % % Inside MultiFamily 40, % % Outside MultiFamily 14, % % Inside Sewer Only 3, % % Outside Sewer Only 168, % 3, % Combined Inside Res/Light 2, % % Combined Outside Res/Light % % Comb Inside Res (2) / Light 1, % % Harbor Light Commercial 10, % % Harbor Heavy Commercial 2, % % Harbor MultiFamily 1, % % Total $ 2,121, % 46, % Page 18

22 Table 312 Sewer Cost of Service Summary Proof Flow Charge Revenue vs Cost of Service Non Collectionrelated Flow Component Cost of Service Revenue Determinants Sewer Rate Code Description Total Flow Charge Revenue Non Collection Component % Total Annual Flow (CCF) Inside Residential Flat Rate $ 264, % 187, % Outside Residential Flat Rate 0.0% 0.0% Inside Light Commercial 75, % 53, % Outside Light Commercial 0.0% 0.0% Inside Heavy Commercial 27, % 19, % Outside Heavy Commercial 0.0% 0.0% Inside MultiFamily 160, % 113, % Outside MultiFamily 0.0% 0.0% Inside Sewer Only 28, % 20, % Outside Sewer Only 0.0% 0.0% Combined Inside Res/Light % % Combined Outside Res/Light 0.0% 0.0% Comb Inside Res (2) / Light % % Harbor Light Commercial 0.0% 0.0% Harbor Heavy Commercial 0.0% 0.0% Harbor MultiFamily 0.0% 0.0% Total $ 557, % 394, % % Use of Winter Average Billing Basis for Residential Customers The proposed rates presented herein move the City away from the existing flat rate structure for residential customers to a combination fixed charge/flow charge rate system for all customers. This allows customers more control over the magnitude of their sewer bill as it is now based in part on flow. However, sewer billings are based on water flows read through a water meter and, in some instances, the water flow may not be a good surrogate for sewer flow as some of the water which passes through the water meter may not be returned to the sewer system. Use of water for irrigation is a prime example of this. Therefore, many sewer rate structures employ the use of a winter average calculation to approximate the amount of water which is likely returned to the sewer. The structure presented Page 19

23 herein uses this winter averaging based on an empirical analysis of billing data 2. This winter averaging is only applicable to residential customers and, should a new residential customer request sewer service from the City it is recommended the City assign a sewer winter average of 5 CCF per month 3 until that customer has a full winter s history upon which to base their winter average. Incorporation of Reduced Flows as a Result of Updated Rate Structure (Elasticity of Demand Impact) In order to address the State of California s guidance with respect to water restrictions, and as the sewer flows are measured from water billings, this analysis incorporated an assumed reduction in flow for certain customer classes. Staff has indicated that flows are already very low compared to historical levels and that there may not be much room for additional reduction in flow. However, it was decided in consultation with staff that some measure of flow reduction should be factored into the analysis and this was done. A 10% reduction in flows was assumed for all Non Residential customers. As Residential customers have been moved to a winter average flow basis for their sewer bills it was assumed that this winter average flow amount already represented minimum necessary flows for each household and therefore no further reduction was assumed. Tables 312 through 315 below presents the revenue and cost of service analysis for the flowbased components of the sewer rate and depict the annual rate revenue targets for each customer class, based on the cost of service analysis presented herein, as compared to the total rate revenue requirement for FY The flows presented account for both winter averaging for residential customers and a 10% reduction in flow for nonresidential customers. The specific components to the flow portion of the rate are: 1. Noncollection flow rates a. This rate recovers all revenue requirements not allocated to Fixed, Collection, Biochemical Oxygen Demand (BOD) or Suspended Solids (SS). The results of this are presented in Table The rates presented herein assume a certain winter average, unique to each residential customer, developed using the City s FY 15 billing database. The City s billing system calculates its own winter average, which may differ somewhat. This difference could be material and could result a material over/undercollection of sewer revenue and should be tracked by the City for consistency with the revenue projections presented herein. 3 5 CCF is the average monthly billed water flow for residential customers. Page 20

24 2. Collection a. This rate recovers only collectionrelated portion of the revenue requirement in order to properly exclude Outside (County) customers from the collection portion of the rate structure as they maintain their own collection infrastructure outside of the City. The results of this are presented in Table Biochemical Oxygen Demand (BOD) a. This rate recovers only the revenue requirements associated with treating and managing BOD at the sewer treatment plant. The results of this are presented in Table Suspended Solids (SS) a. This rate recovers only the revenue requirements associated with treating and managing SS at the sewer treatment plant. The results of this are presented in Table Page 21

25 Table 313 Sewer Cost of Service Summary Proof Flow Charge Revenue vs Cost of Service Collectionrelated Flow Component Cost of Service Revenue Determinants Sewer Rate Code Description Total Flow Charge Revenue Collection Component % Total Annual Flow (CCF) Inside Residential Flat Rate $ 407, % 187, % Outside Residential Flat Rate 0.0% 0.0% Inside Light Commercial 116, % 53, % Outside Light Commercial 0.0% 0.0% Inside Heavy Commercial 41, % 19, % Outside Heavy Commercial 0.0% 0.0% Inside MultiFamily 246, % 113, % Outside MultiFamily 0.0% 0.0% Inside Sewer Only 44, % 20, % Outside Sewer Only 0.0% 0.0% Combined Inside Res/Light % % Combined Outside Res/Light 0.0% 0.0% Comb Inside Res (2) / Light % % Harbor Light Commercial 0.0% 0.0% Harbor Heavy Commercial 0.0% 0.0% Harbor MultiFamily 0.0% 0.0% Total $ 856, % 394, % % Page 22

26 The calculation of estimated pounds of Biochemical Oxygen Demand (BOD) and associated BODrelated revenue requirement allocations to each customer class is presented in Appendix A in Schedule A 9. Table 314 Sewer Cost of Service Summary Proof Flow Charge Revenue vs Cost of Service Strength/BOD Component Cost of Service Revenue Determinants Sewer Rate Code Description Total Flow Charge Revenue BOD Component % Total Annual Pounds (BOD) Inside Residential Flat Rate $ 409, % 204, % Outside Residential Flat Rate 0.0% 0.0% Inside Light Commercial 165, % 82, % Outside Light Commercial 0.0% 0.0% Inside Heavy Commercial 190, % 95, % Outside Heavy Commercial 0.0% 0.0% Inside MultiFamily 288, % 143, % Outside MultiFamily 0.0% 0.0% Inside Sewer Only 44, % 22, % Outside Sewer Only 0.0% 0.0% Combined Inside Res/Light % % Combined Outside Res/Light 0.0% 0.0% Comb Inside Res (2) / Light % % Harbor Light Commercial 0.0% 0.0% Harbor Heavy Commercial 0.0% 0.0% Harbor MultiFamily 0.0% 0.0% Total $ 1,098, % 549, % % Page 23

27 The calculation of estimated pounds of Suspended Solids (SS) and associated SSrelated revenue requirement allocations to each customer class is presented in Appendix A in Schedule A 10. Table 315 Sewer Cost of Service Summary Proof Flow Charge Revenue vs Cost of Service Strength/SS Component Cost of Service Revenue Determinants Sewer Rate Code Description Total Flow Charge Revenue SS Component % Total Annual Pounds (SS) Inside Residential Flat Rate $ 256, % 204, % Outside Residential Flat Rate 0.0% 0.0% Inside Light Commercial 64, % 51, % Outside Light Commercial 0.0% 0.0% Inside Heavy Commercial 72, % 58, % Outside Heavy Commercial 0.0% 0.0% Inside MultiFamily 169, % 135, % Outside MultiFamily 0.0% 0.0% Inside Sewer Only 27, % 22, % Outside Sewer Only 0.0% 0.0% Combined Inside Res/Light % % Combined Outside Res/Light 0.0% 0.0% Comb Inside Res (2) / Light % % Harbor Light Commercial 0.0% 0.0% Harbor Heavy Commercial 0.0% 0.0% Harbor MultiFamily 0.0% 0.0% Total $ 592, % 472, % % Page 24

28 Tale 316 below presents the summary sewer rate revenue targets for each customer class, based on the cost of service analysis presented herein, as compared to the total rate revenue requirement for FY This table also presents how much of the rate revenue requirement is collected from the fixed charge and from each of the flow charge components. Schedule A11 in Appendix A presents a Revenue Test to validate that the rates presented herein are projected to generate the rate revenue requirements for FY Table 316 Summary of Revenue by Customer Class Sewer Rate Code Description Total Fixed Charge Revenue Total Flow Charge Revenue Non Collection Component Total Flow Charge Revenue Collection Component Total Flow Charge Revenue BOD Component Total Flow Charge Revenue SS Component Total % Total Sewer Rate Revenue Requirement Inside Residential Flat Rate $ 587,430 $ 264,919 $ 407,057 $ 409,539 $ 256,533 $1,925, % Outside Residential Flat Rate 1,104,039 1,104, % Inside Light Commercial 124,074 75, , ,223 64, , % Outside Light Commercial 40,626 40, % Inside Heavy Commercial 18,666 27,046 41, ,887 72, , % Outside Heavy Commercial 2,196 2, % Inside MultiFamily 40, , , , , , % Outside MultiFamily 14,274 14, % Inside Sewer Only 3,294 28,704 44,105 44,394 27, , % Outside Sewer Only 168, , % Combined Inside Res/Light 2, , % Combined Outside Res/Light % Comb Inside Res (2) / Light 1, , % Harbor Light Commercial 10,431 10, % Harbor Heavy Commercial 2,196 2, % Harbor MultiFamily 1,098 1, % Total $2,121,336 $ 557,507 $ 856,629 $1,098,887 $ 592,308 $5,226, % $ 4,713, % % 41% 11% 16% 21% 11% 100% % Var Page 25

29 The Proposed Sewer Rates presented in Tables 317 and 318 below are projected to recover the projected sewer rate revenue requirements of the system over the forecast period. Table 317 reflects Option 1, an updated rate structure which includes, among other things, a change in the residential rate structure which charges residential customers a fixed charge and a flow charge per CCF. While the FY 2017 rates in Table 317 are based on the updated rate structure presented in this Report, the subsequent year s rates apply the annual 5% rate increases proposed through FY Ra te Code Description 1st 500 CF Table 317 Existing and Proposed Rates Option 1 (Change Rate Structure) Existing Proposed FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Rate per 100 CF Applicable to Usage above 500 CF Fixed Charge Rate per 100 CF Applicable to All Usage Fixed Charge Rate per 100 CF Applicable to All Usage Fixed Charge Rate per 100 CF Applicable to All Usage Fixed Charge Rate per 100 CF Applicable to All Usage Inside Residential Flat Rate $ NA $ $ 7.14 $ $ 7.50 $ $ 7.88 $ $ Outside Residential Flat Rate NA Inside Light Commercial Outside Light Commercial Inside Heavy Commercial Outside Heavy Commercial Inside MultiFamily Outside MultiFamily Inside Sewer Only (See Note 1) NA Outside Sewer Only (See Note 1) NA Combined Inside Res/Light NA Combined Outside Res/Light NA Comb Inside Res (2) / Light NA Harbor Light Commercial Harbor Heavy Commercial Harbor MultiFamily Note 1 Sew er only customers to be charged based on an assumed Winter Average of 500 Cubic Feet per Month unless a different flow amount is determined to be more applicable. The average flow for residential customers is approximately 500 cubic feet per month. Therefore, as new residential customers receive service it is assumed they will be assigned a winter average of 500 cubic feet per month until sufficient water billing data is compiled to determine their actual winter average. Also, it is assumed that residential customers who only receive sewer service, and therefore have no water billings, will be assigned a winter average of 500 cubic feet. Page 26

30 Table 318 presents Option 2, whereby the existing rate structure remains in place and the rates have been increased to recover the annual 5% rate revenue increase to all rates in the system. Under this scenario an assumed reduction in flow for customers with flow charges has been factored in, consistent with Option 1, to reflect projected reductions in flow due to the State mandated consumption reduction. Table 318 Existing and Proposed Rates Option 2 (Keep Existing Rate Structure and Increase Rates 5% per year) Existing Proposed FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Rate per 100 CF Applicable to Usage above 500 Rate per 100 CF Applicable to Rate per 100 CF Applicable to Rate per 100 CF Applicable to Rate per 100 CF Applicable to Ra te Code Description 1st 500 CF CF Fixed Charge All Usage Fixed Charge All Usage Fixed Charge All Usage Fixed Charge All Usage Inside Residential Flat Rate $ NA $ NA $ NA $ NA $ NA Outside Residential Flat Rate NA NA NA NA NA Inside Light Commercial Outside Light Commercial Inside Heavy Commercial Outside Heavy Commercial Inside MultiFamily Outside MultiFamily Inside Sewer Only NA NA NA NA NA Outside Sewer Only NA NA NA NA NA Combined Inside Res/Light NA NA NA NA NA Combined Outside Res/Light NA NA NA NA NA Comb Inside Res (2) / Light NA NA NA NA NA Harbor Light Commercial Harbor Heavy Commercial Harbor MultiFamily Page 27

31 3.2.1 Customer Impact of Proposed Sewer Rates A summary of the impact to the monthly sewer bill for a selection of Inside Residential customers, under Rate Options 1 and 2, is presented below in Table 319. Note that the proposed rates for Option 1 result in approximately 50% of the Inside Residential customers receiving a decrease in their monthly bill. Table 319 Customer Impact Analysis Inside Residential Customers (21101) Option 1 Option 2 Monthly Flow (CCF) Annual Bills Issued Cumulative % of % of Customers Customers Existing Bill Proposed Bill $ Change % Change Existing Bill Proposed Bill $ Change % Change % 9.7% $ $ $ (26.46) 37% $ $ $ % % 17.9% (19.32) 27% % % 29.9% (12.18) 17% % % 43.2% (5.04) 7% % % 55.5% % % % 64.5% % % % 72.2% % % % 77.5% % % % 82.8% % % % 86.6% % % % 89.0% % % % 91.3% % % % 93.2% % % % 94.4% % % % 95.1% % % % 95.6% % % % 97.1% % % % 97.8% % % % 98.5% % % % 98.7% % % % 98.7% % % % 99.0% % % % 99.1% % % % 99.3% % % % 99.5% % % % 99.5% % % Page 28