HELPING YOU SLEEP AT NIGHT: RATE SETTING & PROPOSITION 218

Transcription

1 22 October 2014 HELPING YOU SLEEP AT NIGHT: RATE SETTING & PROPOSITION 218 AWWA CA-NV SECTION FALL 2014 CONFERENCE BRIAN JEWETT

2 RATE STUDY ELEMENTS Revenue Requirement How much money is needed? Cost Allocation From Whom Should the Money be Collected? Rate Design How Should Water Services be Priced? Systematic Approach per AWWA M1 2

3 R E V E N U E R E Q U I R E M E N T S REVENUE AND REVENUE REQUIREMENTS FINANCIAL PLANNING Project Revenues Project Revenue Requirements Develop Capital Financing Plan Review Capital Requirements Review Pro-Forma Scenario Planning % Rev Adjustments Objective: Provide adequate funding of future utility operating and capital program needs key objective above all else Proposition 218 Considerations: Water rate revenue can pay for debt service, general expenses (admin and overhead), and to plan for future services Griffith case Base projections on reasonable assumptions and standards Overhead transfers don t be arbitrary 3

4 R E V E N U E R E Q U I R E M E N T S REVENUE AND REVENUE REQUIREMENTS Proposition 218 Considerations: What revenue sources are tied to Prop 218 compliance? rate revenues vs. misc revenues Assess appropriateness of operating and capital reserve levels and policies tie to a standard or to localized costs/needs Document, be reasonable, be consistent with industry standards and within own processes/methodologies 4

5 C O S T O F S E R V I C E COST OF SERVICE FOCUS AND KEY ISSUES COST OF SERVICE ANALYSIS Allocate Costs Develop Units of Service Distribute Allocated Costs Based on Service Requirements Unit Costs Objective: To match the costs of providing service to customer classes and to design rates to equitably recover costs General Process: Select a Test Year Allocate costs to utility functions according to cost causative parameters Estimate total customer class service requirements for each cost function Divide costs by requirements for each function to get unit costs of service Distribute costs to each customer class based on its share of total requirements for each cost function 5

6 C O S T O F S E R V I C E WATER COST FUNCTIONS AND COST CAUSATIVE PARAMETERS Separate O&M and Capital Costs into Cost Functions Source of Supply Pump Station Water Treatment Transmission and Distribution Fire Protection Distribute O&M and Capital Costs into Cost Causative Parameters Average Day Max Day Max Hour Customer Billing Adequate Fire Flow Base Costs Customer Costs Direct Costs Extra Capacity Costs 6

7 C O S T O F S E R V I C E WHY COST OF SERVICE? The fundamental question: Do cost differences exist to serve the various customer classes of service? Costs of operating the utility typically are not accounted for on a customer class-by-class basis E.g. the utility repairs a main, not a residential main Many costs are incurred for the joint benefit of all customers, while other costs may benefit only certain specific customers E.g. - pump stations for high-elevation customer group or sub-group Not all customers consume water in the same manner or require the same facilities to be served Look at long-run costs and various demand considerations, not just average system costs and demand 7

8 C O S T O F S E R V I C E COST OF SERVICE FOCUS AND KEY ISSUES Proposition 218 Considerations: Closely consider your COS factors and be able to hang your hat on each factor CUWCC BMP 1.4 & Fixed/Variable Allocations lesson from Palmdale WD If there is a benefit to all customers of certain water services, e.g. water supply procurement and management, then all customers share in the cost of the benefit, whether directly used or not see Griffith Allocation of costs does not have to be on a parcel-by-parcel basis Document, be reasonable, be consistent with industry standards and within own processes/methodologies 8

9 R A T E D E S I G N RATE DESIGN Objective: Develop rates adequate to recover the total revenue requirements Proposition 218 Considerations Tiered rates are valid assuming justification If inclining tiers or water budgets, make sure there is a cost nexus Water budget factors Water supply sources, e.g. cheapest source of water Tier 1 cost nexus? See Water Code Changes in tier breakpoints can change price of each tier do you have a basis for this change? RATE DESIGN Develop COS Rates Develop Practical Rates Review Scenario Planning Proposed Rates Implementati on Support 9

10 R A T E D E S I G N RATE DESIGN Proposition 218 Considerations Can an agency pass through certain costs onto ratepayers beyond what was noticed? How long For how long can we notice proposed rates? What if we need to change rates before 5 years have lapsed? How should an agency treat elasticity in its rate structure and what is basis? Utility economist studies Bill tabulation analysis 10

11 RATE DESIGN Customer Usage Behavior Develop historical bill tabulations for each customer class R A T E D E S I G N Examine alternatives, such as different tiers, seasonal, geographic Existing Rate Structure Verify recovery of revenue requirements Verify fairness and equity among classes Cumulative Billed Usage 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Bill Tabulation Distribution 0% ,000 10, ,000 Monthly Water Usage - Ccf Residential Commercial Industrial 11

12 C O S T O F S E R V I C E A P P R O A C H PUTTING IT ALL TOGETHER TO HELP YOU SLEEP FINANCIAL PLANNING COST OF SERVICE ANALYSIS RATE DESIGN Project Revenues Review Allocate Costs Review Project Revenue Requirements Pro-Forma Develop Units of Service Unit Costs Develop COS Rates Scenario Planning Develop Capital Financing Plan Scenario Planning % Rev Adjustments Distribute Allocated Costs Based on Service Requirements Develop Practical Rates Proposed Rates Implementation Support Review Capital Requirements FINANCIAL PLANNING AND RATE MODEL Rigorous, methodical and transparent analysis leads to defensible rates 12

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14 Brian Jewett Black & Veatch (951)