MONROE CITY COUNCIL. Agenda Bill No

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1 MONROE CITY COUNCIL Agenda Bill No TITLE: Discussion: Utility Rates (Postponed from August 18, 2015) 1 DATE: DEPT: CONTACT: PRESENTER: ITEM: 08/18/2015 Public Works Brad Feilberg Brad Feilberg Unfinished Business #4 08/25/2015 Discussion: 07/28/2015; 08/11/2015; 08/18/15; 08/25/2015 Attachments: 1. Rate Design Memo 2. July 28, 2015, PowerPoint Presentation (FCS Group) 3. Utility Bill Comparison DESCRIPTION/BACKGROUND Mr. Gordon Wilson, FCS Group, presented the results of the Utility Rate Study at the July 28, 2015, City Council Meeting. In order to implement, or not implement, the recommendation several policy decisions are required: 1. Water: a. Base water bill on meter size only (not the number of units). b. Reduce the stability of revenue by reducing the revenue received from the monthly base charge from 68 to 55.6 percent. c. Reduce fire suppression system standby charges. d. Increase revenue by 7.5 percent overall, annually, through Sanitary Sewer: a. Eliminate volume rates for single family and multi-family customers. b. Equalize the outside-city multiplier to 1.5 for all customers. c. Setting the fixed monthly charge for multi-family customers at 0.7 ERU per unit. d. Reducing the usage allowance for non-residential customers from 10 ccf to 5 ccf per month over three years. e. Treating mixed non-residential/residential customers as non-residential. 3. Stormwater: a. Increase revenue by 4 percent per year through On August 11, 2015, the City Council requested more information regarding the proposed increases to the aggregate water, sewer, storm bill which is included as Attachment 3. IMPACT BUDGET N/A, at this time. TIME CONSTRAINTS Policy direction needed by August 25, 2015, to allow time to amend the Monroe Municipal Code as necessary to implement new utility rates by January 1, REQUESTED ACTION Discussion and direction regarding policy options. 1 NOTE: Slight modifications were made to for the August 25, 2015, Council Meeting. Page 1 of 42

2 ATTACHMENT 1 Project Memorandum To: Brad Feilberg, Public Works Director Date: July 14, 2015 Dianne Nelson, Finance Director City of Monroe, Washington From: Gordon Wilson, Project Manager Tage Aaker, Project Consultant RE: Utility Rate Design Alternatives and Recommended Rates A. INTRODUCTION In May of 2014, the City of Monroe contracted with BHC Consultants to create a combined comprehensive plan for the City s water, sewer, and stormwater utilities. As part of this project, BHC Consultants contracted with to prepare a financial forecast for each utility and write the financial chapter of the comprehensive plan. The financial chapter (Chapter 12) was submitted to the City as part of the larger comprehensive plan document in April There were two follow-up tasks that were included in our contract with BHC Consultants in behalf of the City of Monroe. One was an update to the City s connection charges or systems development charges, which is the subject of a separate memorandum. The other task is the subject of this memo: to develop rate design alternatives and recommended rates, with the goal of improving equity among the different groups of customers. The financial chapter addressed the overall level of rate increases that are needed in each utility. However, it did not examine how the actual rates should be developed; instead, it simply assumed across-the-board implementation of the rate increases. In this memo, we discuss alternative ways of calculating utility charges, and we recommend a multi-year rate schedule that improves the current rate design. We also show the impact of the recommended changes in rate design on a typical customer in each class, along with a snapshot of the City s projected utility rates in comparison with other jurisdictions. Chapter 12 of the comprehensive plan described the major assumptions and financial policies incorporated into each utility s revenue requirement forecast, so this memo does not repeat that discussion. Instead, we begin with the overall rate increases needed by each utility in future years. Exhibit A-1 summarizes the recommended system-wide rate increases for each utility, as found in Chapter 12 of the comprehensive plan. The water utility is projected to need a 7.5% increase per year through The sewer utility s existing rates are sufficient through 2021, and the stormwater utility is projected to need a 4% increase per year through Exhibit A-1: Projected Overall Rate Increases per Utility Utility Water Sewer Stormwater The water utility s forecast extends through 2023 to match the near-term study period identified in the comprehensive plan. The Department of Health had informed the City that they will shortly be moving to a 10-year planning period for water systems, so as an interim measure, the City selected an 8-year horizon for the water plan, while maintaining the standard 6-year time horizon for both sewer and stormwater. Page 2 of 42

3 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 The following sections focus on each utility in turn, addressing the following subjects: Summary of the existing rate structure; Discussion of rate design issues, if any; Description of rate design alternatives, including a rate schedule for each alternative; Identification of our recommended alternative; Impact of recommended rates on sample customer bills for each utility; and Comparison of the City s monthly residential charges with those of other regional jurisdictions. Department of Corrections rates are subject to separate contracts and are excluded from this analysis. Because we did not see any issues with the current rate structure for the stormwater utility, most of this discussion is focused on the water and sewer utilities. B. WATER UTILITY B1. EXISTING RATE STRUCTURE The City s existing water rate structure is comprised of a monthly fixed charge per unit which includes a usage allowance of up to 400 cubic feet, plus a volume charge for usage that exceeds the allowance. A volume charge on excess consumption helps encourage water conservation by the utility s customers. The monthly fixed charge increases with the meter size. The City defines a unit as any of the following: Each single family residence, Each unit in multiple-unit residential buildings, Each residential unit in a commercial building, Each mobile home in a mobile home park, Each occupied travel trailer or motor home. Outside-City customers are charged 1.5 times the standard in-city rates (MMC ). A low-income senior discount of 3 is available to single-family residences or other residences with a single water meter per unit primarily occupied by someone at least fifty-five years old, with annual household income of 5 or less of the area median income for Snohomish County, as published by the Washington State Office of Financial Management (MMC ). A 3 discount is also available to qualifying disabled persons. The low-income senior and disabled discount rates are available only upon application, which is required to be updated annually by the customer (MMC ). Exhibit B-1 summarizes the City s current rate schedule for inside-city customers. Exhibit B-1: 2015 Water Rates and Meter Multiples (Inside City) Meter Size Monthly Rates Meter Multiples Fixed Monthly Charge: 0.75 $ $ $ $ $ $ $ $ Usage over 4 ccf $2.75 per ccf Page 3 of 42 Page 2 of 19

4 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 B2. ISSUES WITH CURRENT RATE DESIGN Double-count in Fixed Charges for Multi-Unit Customers For the water utility, the biggest issue with the City s current rate design is the double-count in how the monthly fixed charges are scaled up for multi-unit customers. Single-family customers are relatively uniform in their demand characteristics; however, both commercial and multi-unit customers vary widely in their potential demand on the system. For that reason, there needs to be a way to scale up the fixed charges for commercial and multi-unit accounts, so that large customers with a sizeable potential demand pay more than smaller customers such as a single-family residence or a small commercial building. For commercial customers, the most common way to scale up the fixed charges is to charge more for larger meter sizes, under the theory that potential water demand is constrained by the amount of water that can flow through a meter. Potential water demand is what creates a capacity requirement for the system, so a customer with a larger meter is imposing higher costs on the system than a customer with a smaller meter. A table of meter multiples is used to express the charge for larger meters in relation to the charge for the smallest meter. For Monroe, the smallest meter is a 5/8 x 3/4 meter, so that serves as the basic unit for meter multiples. Exhibit B-1 shows the current meter multiples for Monroe as well as the increasing monthly fixed charges to customers with larger meters. For multi-unit residential structures such as apartment complexes, there are two potential ways to scale up the monthly fixed charge: through the meter multiples (just like with commercial buildings), or by multiplying the charge associated with the smallest meter size by the number of dwelling units in the building. The double-count in Monroe s current rate design comes from the fact that both methods are now used to scale up the charge to multi-unit customers, rather than choosing one or the other method. For any given multi-unit residential customer, the basic fixed charge for a 5/8 x 3/4" meter is multiplied by the meter multiple, and then it is multiplied again by the number of dwelling units. That is the double-count in the scale factor, and it leads to multi-unit customers being charged too much relative to their potential demand on the system. To be consistent with the most common industry best practice, we recommend that the City s fixed monthly charge use only the meter multiples, applying the resulting charge per account rather than per unit. For example, under the current rate design, a multi-family building with a two-inch meter serving 20 units would be charged the two-inch meter charge multiplied by twenty. Under our recommended correction, this account would receive one fixed monthly charge scaled to a 2-inch meter, the same as what a commercial building would be charged. While the current rate design contains an error that should be fixed, fixing it is not easy. Monroe has a lot of multi-unit accounts, so the multi-unit customers have been providing a considerable subsidy to the single-family and commercial accounts. If the rate structure is changed so that multi-unit customers pay less, then the other two groups of customers will have to pay more. Even though the other customers have been benefitting from an inequitable situation, they are not aware of that fact, so eliminating the subsidy will just look to them like a very steep rate increase. How can we correct the double-count but also soften the impact on other customers, particularly single family customers? The most equitable approach is to increase the reliance on the volume charge, which favors those smaller customers who use less water and puts more of the total bill under customers control. Section B3 on the next page explores this approach and shows the varying degrees to which costs could be shifted from the fixed charge to the volume charge without causing a revenue stability problem. First, though, there is one other rate design issue that deserves a brief comment. Page 4 of 42 Page 3 of 19

5 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 Fire Protection Standby Charges The City staff raised a question about the fire protection standby charge, which is currently a flat rate equal to the smallest fixed meter charge. The fire protection standby charge applies to a limited number of customers those with sprinkler systems. In many utilities, these types of charges are set as a percentage of the normal fixed monthly charge, with the percentage being the result of a cost allocation into different functions. The functions of water service typically include categories such as customer costs, base demand costs, peak demand costs, storage costs, supply costs, fire protection costs, and meters and services costs. Much of a functional allocation is based on a detailed categorization of utility assets. This study did not include a functional allocation. The functional allocation is mainly used to arrive at a cost allocation to customer classes, but in Monroe, water rates are applied uniformly to all customer classes based only on meter size. So there would have been no analytical benefit to the regular water rates from performing a functional analysis. As a result, we cannot use that allocation as a basis for determining the percentage of system costs that is relevant to the fire protection standby charge. However, according to City staff, at the time the original fire protection standby charge was set as equal to the 5/8 x 3/4" meter fixed charge, nearly all of the sprinklered buildings had dedicated fire lines that were 6 in diameter. (The largest fire lines are still 6, but there are now some with fire lines that are 4 or smaller.) If we look at the current $22.92 standby charge in relation to the monthly fixed charge for a 6 meter, the standby charge represents about 9.1% of the monthly fixed charge for a meter the same size as the fire line. This 9.1% factor could be applied to all of the standby accounts based on the size of their fire lines. We suggest this as a way to calculate a reasonable fire protection standby charge. It makes sense that the fire protection charge be a subset of the standard fixed charge for a given size service line, since we are dealing with a type of service that requires the ability to serve water but almost never any actual water consumption. With this approach, the current rate would still apply to a sprinklered customer with a 6 inch fire line, but the charge would be scaled up or down in accordance with the relative size of the fire line, rather than being a flat charge for all sprinklered customers. For each customer, the fire protection standby charge would consist of 9.1% of the monthly fixed charge for a meter the same size as the fire line serving the sprinkler. B3. WATER RATE DESIGN ALTERNATIVES We modeled three alternatives to the current rate design, which are presented below. Each of the alternatives assumes that beginning in 2016, the City will eliminate the double-count for multi-unit customers by administering a fixed charge per account, not a fixed charge per unit. The question examined in the alternatives is the tradeoff between the desire to soften the impact on single-family customers and the desire to protect the stability of the revenue stream. The alternatives in the following sections present a range of revenue-neutral scenarios, characterized by their percentage of revenue estimated to be recovered from the fixed charge. The 68% fixed revenue scenario corresponds to the City s current structure, which generates 68% of its revenue from the fixed charge and 32% from the volume charge. The 4 fixed revenue scenario represents the minimum degree of reliance on fixed charges. Our recommended 55.6% fixed revenue scenario strikes a compromise between the bookends of 4 and 68% by increasing the fixed charge by 7.5% and then raising the volume charge as needed to generate the 2016 revenue requirement. Page 5 of 42 Page 4 of 19

6 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 A brief discussion of each scenario follows below. 68% Fixed Revenue: This option keeps the current revenue profile, where 68% of revenue comes from the fixed charge. This rate structure provides very good revenue stability. In general, we recommend that at least 4 of total revenue should come from the fixed charge, though we occasionally see clients with fixed revenue as low as 3 of the total. Monroe is currently well above our suggested minimum. The City has a usage allowance, meaning that customers pay for 4 ccf regardless of whether they actually use that much water. Water systems with a usage allowance should and typically do have better-than-average revenue stability. However, if fixed charges continue to be 68% of total revenue, then correcting the multi-unit subsidy would require that the system generate additional revenue solely from increases to the fixed charge. This would affect single family and small commercial customers proportionately the most, since fixed charges are a larger share of their monthly bill when compared to larger customers. 4 Fixed Revenue: This is the minimum level of revenue from fixed charges that we typically recommend, based on industry standard practice. By relying more on the volume charge, the impact to small customers could be softened at the expense of major impacts to larger users. However, reducing fixed revenue to 4 would mean less revenue stability for the water utility. In addition, water utilities that rely heavily on volume charges are typically those with no usage allowance included in the fixed charge. For a utility with a usage allowance to achieve only 4 of its revenue from fixed charges would be unusual. The whole idea of a usage allowance is based on the idea that part of the revenue that would normally be variable is treated as though it is fixed, just to strengthen revenue stability. If an allowance still results in heavy reliance on volume charges, that seems to defeat the purpose of the usage allowance, and it would lead to exceptionally high volume rates over $5 per ccf. 55.6% Fixed Revenue (Recommended): This is a middle option. In this option, the overall percentage increase of 7.5% is applied to the fixed charge, and then the volume charge is increased as needed to make up the foregone revenue caused by eliminating the multi-unit subsidy. The result of this approach is that about 55.6% of revenue comes from the fixed charge. This option helps mitigate the most severe impacts to single-family and small commercial customers that would result from correcting the multi-unit double-count problem. But it would leave the percentage of revenue generated by fixed charges well above the minimum 4 guideline, which is appropriate given Monroe s usage allowance. It would result in a higher volume rate, so apartment complexes that use a lot of water would not save as much money as they would under the 68% fixed revenue scenario, since some of their savings from the elimination of the double-count would be offset by higher volume charges. However, the volume rate would not be as dramatically high as it would under the 4 fixed revenue scenario. The degree of reliance on fixed versus volume charges is a judgment call for the City. We do believe that a reasonable and appropriate percentage of revenue from fixed charges will fall somewhere between 68% and 4. But the specific target percentage can vary, depending on the City s priorities and values. It is important to recognize the tradeoff. The more the single-family rate impact is softened, the less stable the revenue stream will be; the more stable the revenue stream, the more that single-family and other small customers will see a steep rate increase in We recommend the 55.6% fixed revenue option because we believe it strikes a reasonable balance between competing objectives. The following sections show the rate schedules and customer impacts for each scenario, starting with the two bookend options 68% fixed revenue and 4 fixed revenue and then moving to the recommended 55.6% fixed revenue option. Page 6 of 42 Page 5 of 19

7 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 a) Fixed Revenue Recovery of 68% Exhibit B-2 shows the rate table if fixed rates continue to account for 68% of total revenue, while Exhibit B-3 shows the percentage of customers who would see increases (or decreases) of a given magnitude in For instance, Exhibit B-3 shows that 3 of single-family customers would see a 20-3 rate increase, while 36% of multi-unit customers would receive a 10-25% rate decrease. Exhibit B-2: Rate Schedule that Targets 68% Fixed Revenue Recovery Monthly Rate Schedule Existing Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Water Utility Annual Across the Board Increases (%) 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% Inside-City Water Rates Fixed Monthly Charge per Account for up to 4 ccf/month: 5/8" x 3/4" meter $22.92 $30.09 $32.35 $34.78 $37.38 $40.19 $43.20 $46.44 $ meter $30.43 $39.95 $42.95 $46.17 $49.63 $53.36 $57.36 $61.66 $ meter $34.99 $45.94 $49.39 $53.09 $57.07 $61.35 $65.95 $70.90 $ meter $42.66 $56.01 $60.21 $64.73 $69.58 $74.80 $80.41 $86.44 $ meter $51.82 $68.04 $73.14 $78.63 $84.52 $90.86 $97.68 $ $ meter $60.74 $79.75 $85.73 $92.16 $99.07 $ $ $ $ meter $ $ $ $ $ $ $ $ $ meter $ $ $ $ $ $ $ $ $ Volume Rate per ccf above 4 ccf/month $2.75 $2.70 $2.91 $3.12 $3.36 $3.61 $3.88 $4.17 $4.49 Fire Protection Standby Charge/month: 5/8" x 3/4" fire line $22.92 $2.75 $2.96 $3.18 $3.42 $3.67 $3.95 $4.24 $ fire line $22.92 $3.65 $3.93 $4.22 $4.54 $4.88 $5.24 $5.63 $ fire line $22.92 $5.12 $5.50 $5.92 $6.36 $6.84 $7.35 $7.90 $ fire line $22.92 $7.29 $7.83 $8.42 $9.05 $9.73 $10.46 $11.25 $ fire line $22.92 $30.09 $32.35 $34.78 $37.38 $40.19 $43.20 $46.44 $49.93 Wholesale (other than DOC) per ccf $2.00 $2.15 $2.31 $2.48 $2.67 $2.87 $3.09 $3.32 $3.57 Outside-City rates are 1.5 times inside-city rates. Qualifying disabled and low-income senior single family residential customers receive a 3 discount. Monthly Standby Fire Protection Charge is based on fire line diameter, equal to 9.14% of fixed monthly charge for the corresponding meter size. Exhibit B-3: Customer Impacts for 68% Fixed Revenue Recovery >10 Increase 68% Fixed: All Customers >10 Increase 68% Fixed: Single Family Increase Increase Impact to Monthly Average Charge: 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 3% 2% 2% 12% 2 28% 3 Impact to Monthly Average Charge: 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 2% 13% 23% 3 31% 25-5 Reduction 2% 25-5 Reduction > 50 % Reduction 1% > 50 % Reduction 68% Fixed: Non-Residential 68% Fixed: Multi-Unit >10 Increase >10 Increase Increase Increase Impact to Monthly Average Charge: 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 1 9% 12% 12% 17% 4 Impact to Monthly Average Charge: 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 36% 25-5 Reduction 25-5 Reduction 4 > 50 % Reduction > 50 % Reduction 24% Page 7 of 42 Page 6 of 19

8 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 b) Fixed Revenue Recovery of 4 Exhibits B-4 and B-5 show the same information for the 4 fixed revenue scenario: a rate table and a chart showing the distribution of rate impacts, grouped in bands. Compared with the 68% scenario, the results of this scenario are more favorable to single family customers, less favorable to multi-unit customers, and more extreme in both directions to non-residential customers. Exhibit B-4: Rate Schedule that Targets 40 % Fixed Revenue Recovery Monthly Rate Schedule Existing Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Water Utility Annual Across the Board Increases (%) 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% Inside-City Water Rates Fixed Monthly Charge per Account for up to 4 ccf/month: 5/8" x 3/4" meter $22.92 $17.73 $19.06 $20.49 $22.03 $23.68 $25.46 $27.37 $ meter $30.43 $23.54 $25.31 $27.21 $29.25 $31.44 $33.80 $36.34 $ meter $34.99 $27.07 $29.10 $31.28 $33.63 $36.15 $38.87 $41.78 $ meter $42.66 $33.01 $35.48 $38.14 $41.00 $44.08 $47.38 $50.94 $ meter $51.82 $40.09 $43.10 $46.33 $49.81 $53.54 $57.56 $61.88 $ meter $60.74 $46.99 $50.52 $54.31 $58.38 $62.76 $67.47 $72.53 $ meter $ $ $ $ $ $ $ $ $ meter $ $ $ $ $ $ $ $ $ Volume Rate per ccf above 4 ccf/month $2.75 $5.05 $5.43 $5.84 $6.28 $6.75 $7.25 $7.80 $8.38 Fire Protection Standby Charge/month: 5/8" x 3/4" fire line $22.92 $1.62 $1.74 $1.87 $2.01 $2.16 $2.33 $2.50 $ fire line $22.92 $2.15 $2.31 $2.49 $2.67 $2.87 $3.09 $3.32 $ fire line $22.92 $3.02 $3.24 $3.49 $3.75 $4.03 $4.33 $4.66 $ fire line $22.92 $4.29 $4.62 $4.96 $5.34 $5.74 $6.17 $6.63 $ fire line $22.92 $17.73 $19.06 $20.49 $22.03 $23.68 $25.46 $27.37 $29.42 Wholesale (other than DOC) per ccf $2.00 $2.15 $2.31 $2.48 $2.67 $2.87 $3.09 $3.32 $3.57 Outside-City rates are 1.5 times inside-city rates. Qualifying disabled and low-income senior single family residential customers receive a 3 discount. Monthly Standby Fire Protection Charge is based on fire line diameter, equal to 9.14% of fixed monthly charge for the corresponding meter size. Exhibit B-5: Customer Impacts for 4 Fixed Revenue Recovery >10 Increase 4 Fixed: All Customers >10 Increase 4 Fixed: Single Family Increase Increase Impact to Monthly Average Charge: 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 1% 3% 5% 4% 6% 6% 14% 14% 18% Impact to Monthly Average Charge: 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 2% 5% 4% 6% 7% 16% 15% 19% 25-5 Reduction 27% 25-5 Reduction 26% > 50 % Reduction 1% > 50 % Reduction 4 Fixed: Non-Residential 4 Fixed: Multi-Unit >10 Increase >10 Increase Increase Increase Impact to Monthly Average Charge: 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 8% 3% 5% 2% 3% 7% 8% 11% 16% Impact to Monthly Average Charge: 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 1% 4% 2% 3% 4% 4% 8% 19% 25-5 Reduction 38% 25-5 Reduction 31% > 50 % Reduction > 50 % Reduction 24% Page 8 of 42 Page 7 of 19

9 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 c) Fixed Revenue Recovery of 55.6% (Recommended) Exhibits B-6 and B-7 show the rate table and rate impact for the middle option, where fixed charges are 55.6% of total revenue. In this scenario, the fixed rate increases by 7.5% and the volume rate by 36%, so the relative impact on any given customer depends on water use. The water system has just under 6,000 accounts, so 1% in the All Customers graph roughly represents 60 accounts. Exhibit B-6: Recommended Rate Schedule, with 55.6% Fixed Revenue Recovery Monthly Rate Schedule Existing Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Water Utility Annual Across the Board Increases (%) 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% Inside-City Water Rates Fixed Monthly Charge per Account for up to 4 ccf/month: 5/8" x 3/4" meter $22.92 $24.65 $26.50 $28.49 $30.62 $32.92 $35.39 $38.04 $ meter $30.43 $32.73 $35.18 $37.82 $40.66 $43.70 $46.98 $50.51 $ meter $34.99 $37.63 $40.45 $43.49 $46.75 $50.25 $54.02 $58.07 $ meter $42.66 $45.88 $49.32 $53.02 $56.99 $61.27 $65.86 $70.80 $ meter $51.82 $55.73 $59.91 $64.40 $69.23 $74.43 $80.01 $86.01 $ meter $60.74 $65.32 $70.22 $75.49 $81.15 $87.24 $93.78 $ $ meter $ $ $ $ $ $ $ $ $ meter $ $ $ $ $ $ $ $ $ Volume Rate per ccf above 4 ccf/month $2.75 $3.74 $4.02 $4.32 $4.64 $4.99 $5.37 $5.77 $6.20 Fire Protection Standby Charge/month: 5/8" x 3/4" fire line $22.92 $2.25 $2.42 $2.60 $2.80 $3.01 $3.23 $3.48 $ fire line $22.92 $2.99 $3.22 $3.46 $3.72 $3.99 $4.29 $4.62 $ fire line $22.92 $4.19 $4.51 $4.85 $5.21 $5.60 $6.02 $6.47 $ fire line $22.92 $5.97 $6.42 $6.90 $7.42 $7.97 $8.57 $9.21 $ fire line $22.92 $24.65 $26.50 $28.49 $30.62 $32.92 $35.39 $38.04 $40.89 Wholesale (other than DOC) per ccf $2.00 $2.15 $2.31 $2.48 $2.67 $2.87 $3.09 $3.32 $3.57 Outside-City rates are 1.5 times inside-city rates. Qualifying disabled and low-income senior single family residential customers receive a 3 discount. Monthly Standby Fire Protection Charge is based on fire line diameter, equal to 9.14% of fixed monthly charge for the corresponding meter size. Exhibit B-7: Customer Impacts for 55.6% Fixed Revenue Recovery Page 9 of 42 Page 8 of 19

10 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 d) Summary of Alternatives Exhibit B-8 summarizes the three alternatives and their impact. Exhibit B-8: Summary Results of Alternate Water Rate Scenarios Water Rate Scenarios Scenarios Based on % Fixed Revenue Fixed Revenue as % of Total 68% 68% % Overall % Rate Increase % 7.5% 7.5% Rates: Fixed Monthly - 3/4" meter $22.92 $30.09 $17.73 $24.65 Volume above 4 ccf (per ccf) $2.75 $2.70 $5.05 $3.74 % Change in Rates: Fixed Monthly - 3/4" meter 31.3% -22.6% 7.5% Volume above 4 ccf (per ccf) -1.7% 83.7% 35.9% Single Family Charge (7 ccf usage): Fixed Monthly - 3/4" meter $22.92 $30.09 $17.73 $24.65 Volume above 4 ccf (per ccf) $8.25 $8.11 $15.15 $11.21 Total $31.17 $38.21 $32.89 $35.86 % Change in Single Family Charge (7 ccf usage): 22.6% 5.5% 15.1% All of these options eliminate the multi-unit subsidy, but how that change is made affects the results. If the fixed share of revenue stays at 68%, then single family customers would see a 22.6% increase, three times the overall increase of 7.5%. At the opposite extreme, reducing the fixed revenue percentage from 68% to 4 leads to a volume rate of $5.05/ccf, with a lot of revenue instability in spite of a usage allowance. However, if we allow the fixed charge to go up by the overall percentage increase of 7.5%, and then increase the volume charge to the degree needed to make up the revenue lost from correcting the multi-unit issue, then the result is a revenue mix with 55.6% fixed/44.4% variable. For a single-family customer using 7 ccf/month (the average in Monroe), that is an increase of 15.1% significant, but less severe than 22.6%. The volume rate would be $3.74/ccf a 35.9% increase, but less extreme than $5.05/ccf. The City s goals in this situation compete with each other, so the approach we recommend balances those goals. The 55.6% fixed revenue scenario does have impacts, but it avoids the most extreme disadvantages of the other scenarios. B4. WATER RATE COMPARISON Exhibit B-9 compares the City s water rates with the 2015 rates of other jurisdictions in Western Washington. The comparison assumes single family residential customers with 700 ccf/month of usage. Rates are based on each jurisdiction s website and may or may not contain city utility taxes. The median single-family charge in this survey group is the Kirkland charge, at $ The City of Monroe s rates are just below the median and will remain so even if the recommended 2016 rates (with the 55.6% fixed revenue scenario) are adopted. Exhibit B-9: Water Rate Survey Single Family Residence - Water # Jurisdiction Charge Comparison 1 Marysville $ Everett $ Bothell $ Redmond $ Monroe 2015 $ Monroe 2016 (Recommended) $ Kirkland $ Lake Stevens $ Snohomish $ Woodinville $ Duvall $ Leavenworth $ Page 10 of 42 Page 9 of 19

11 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 C. SANITARY SEWER UTILITY As we discussed in Chapter 12 of the comprehensive plan and showed in Exhibit A-1 above, the sewer utility is financially healthy enough that current overall level of rates are adequate over the sixyear forecast horizon. However, we will recommend some changes in rate structure that, if adopted, would have the effect of increasing or decreasing the sewer bills of certain groups of customers. C1. EXISTING RATE STRUCTURE The City s existing rate structure is comprised of a monthly fixed charge per unit which includes up to 1,000 cubic feet of usage and then a volume charge for usage above this allowance. A unit is defined as follows: Each single family residence, Each unit in multiple residential buildings, Each residential unit in a commercial building, Each mobile home in a mobile home park, Each occupied travel trailer or motor home. According to the Monroe Municipal Code, monthly rates and charges for sanitary service provided outside of the city limits are 2.0 times the applicable in-city charge, except that outside-city government facilities are 1.5 times the applicable in-city charge ( ). A low-income senior discount of 3 is available to single family residences or other residences with a single water meter per unit primarily occupied by someone at least fifty-five years old, with annual household income of 5 or less of the area median income for Snohomish County, as published by the Washington State Office of Financial Management (MMC ). A 3 discount is also available to qualifying disabled persons. The low-income senior and disabled discount rates are available only upon application, which is required to be updated annually by the customer (MMC ). Exhibit C-1 shows the current rate schedule for sanitary sewer service. Exhibit C-1: Existing Sanitary Sewer Rates Monthly Sewer Charges Inside City Outside City Fixed Charge per Unit* up to 10 ccf Residential/Commercial $94.51 $ Government Facilities $94.51 $ Volume Charge (per ccf over 10 ccf) Residential/Commercial $8.14 $16.28 Government Facilities $8.14 $12.21 * For residential or mixed use accounts, "unit" refers to dwelling units; for commercial/government accounts, one unit per account. By relying on a uniform fixed charge for all customers plus a volume charge for high-volume customers, this type of rate design differentiates customers only by how much sewage they discharge, not by the strength of that sewage. Instead, it is based on the simplifying assumption that both businesses and residences generate approximately the same concentration of biochemical oxygen demand (BOD) and total suspended solids. Page 11 of 42 Page 10 of 19

12 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 C2. ISSUES WITH CURRENT RATE DESIGN Conceptual Basis for Sewer Rate Design The City s current approach to sewer rates is to rely on a standard fixed charge with a volume rate above a certain amount of usage. 2 This is a simple and reasonable approach, but there needs to be an equitable relationship between the volume of an average single family customer and that of the other two customer groups multi-unit and non-residential so that the standard charge is applied per Equivalent Residential Unit (ERU). Once again, single family customers tend to be relatively uniform in their indoor water use, so the standard fixed sewer charge can be based on the winter average consumption per single family account. That constitutes the ERU. (For sewer rates, winter average is used to avoid counting irrigation water, which does not flow into the sanitary sewer system.) Then we face the question that we discussed with water rates: how should the City scale up the sewer charges to multi-unit and non-residential accounts, which vary so widely in their average wastewater flow? How do we differentiate between a big account and a small account such as a single family home, without referring to meter size? For multi-unit customers, a flat fixed charge can be applied to the number of dwelling units (rather than accounts), which is what the City now does. However, apartment dwellers tend to use less indoor water per unit than single family residents, so the standard charge should be multiplied by a factor consisting of the winter average water use of apartment units divided by that of single-family homes. Depending on the utility, multi-family units are typically between.6 and.8 ERUs. For non-residential accounts, scaling up can occur through a usage allowance and a volume charge. With this approach, all non-residential customers pay the standard fixed charge for the amount of water that an average single family customer would consume. Then, above that level, non-residential customers pay a volume rate to scale up their charge based on how much additional water they use. So, a small business that uses the same amount of water as the average single family customer would pay just the standard fixed charge. Larger non-residential customers that use more water would pay the standard fixed charge plus a volume charge on their excess water usage. Because this approach is so similar to the City s current rate design, it would cause the least disruption to existing sewer ratepayers, and we recommend it. However, there are some changes that should be made to the City s existing rate design for this approach to be applied equitably. Volume Rates Only for Non-Residential Customers The City s sewer volume rates currently apply to all customers exceeding a usage allowance of 1,000 cubic feet (10 ccf) per month. However, in the approach we described above, the usage allowance and volume rates should apply only to non-residential customers, since single family and multi-unit customers would be be charged a flat rate that reflects their average consumption as a class. 2 The structure of sewer rates is usually different from that of water rates. With water rates, the potential peak demand is readily measurable by the relative meter size, but for sewer rates, the key variable is the average wastewater flow generated by a particular customer, and meter size is not as good a predictor of average wastewater flow as it is of potential water demand. For a water system, the system peaks come mainly from the customers choices about how much water to use (principally through irrigation during the summer), but for a sewer system, the system peaks come mainly from inflow and infiltration (I&I) during the winter months, unrelated to the customer s choices. That is why we typically allocate sewer costs to customers based on average usage rather than potential usage. Water meter size is an indicator of a given customer s potential usage. Meter size is sometimes used as a metric by sewer utilities, just because it is convenient to administer. However, it is more equitable if we can rely on measurements of wastewater flow principally, the winter average metered water usage in designing sewer rates. Page 12 of 42 Page 11 of 19

13 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 Allowance per Equivalent Residential Unit (ERU) In the rate design approach we described above, the usage allowance for non-residential customers should be set to one ERU, which is the winter average water use of single family customers as a class. With the increasing use of water-efficient indoor appliances and other water conservation measures, average single family water consumption has declined significantly across the country, and Monroe s allowance of 10 ccf is out of date. In fact, the City s current winter average flow for single family customers is just over 5 ccf per month, so non-residential sewer customers should be allowed 5 ccf of usage each month rather than 10 ccf before beginning to be charged the volume rate. The usage allowance determines how the rate burden is balanced between large and small customers. A usage allowance that is too high charges too little to large customers, while a usage allowance that is too low would charge too much to large customers. In Monroe s case, the allowance has been too high, so smaller customers (single-family, multi-unit, and smaller non-residential customers) have been subsidizing the larger non-residential customers. In order to make the sewer rates more equitable, we recommend reducing the allowance to 500 cubic feet per month. Even though sewer rates are not projected to increase over the next six years, if the allowance is reduced, non-residential customers would receive the equivalent of a one-time rate increase, because more of their usage would be billed. For those using more than 10 ccf/month, the result of reducing the allowance to 5 ccf is that they would be billed for an extra 5 ccf each month, which is equivalent to an added $40.70/month at the current volume rate of $8.14/ccf. The $40.70 increased charge is the maximum impact those who use between 5 and 10 ccf per month would see smaller increases. When water usage is 5 ccf or less (which is the case with 44% of all non-residential sewer bills), there would continue to be no volume charge. How much is the $40.70 maximum increase in percentage terms? It depends on the amount of consumption in a given month. The highest percentage impact would be for a non-residential customer who uses exactly 10 ccf in a particular month. Such a customer now pays the $94.51 fixed charge but no volume charge. However, if the usage allowance is reduced to 5 ccf, this customer would be charged $94.51 plus $40.70 for the 5 ccf above the new allowance, or a total of $ That amounts to a percentage increase of 43% for that month. For months in which this customer s usage is either greater or less than 10 ccf, then the percentage impact will be less. Based on our analysis of 2013 customer usage data, if the allowance is reduced from 10 ccf to 5 ccf, then 26% of non-residential bills would increase by more than 2, and 35% of the non-residential bills would increase by more than 1. The weighted average increase to all non-residential customers would be 7.6%. This impact is large enough that we would suggest phasing in the reduced usage allowance over three years, so that the allowance would be set at 8 ccf in 2016, 6 ccf in 2017, and 5 ccf at 2018 and beyond. The sewer financial forecast is strong enough that phasing in the change to the non-residential usage allowance will not threaten the financial position of the Sewer Fund. The main reason that the non-residential allowance should be reduced is for the sake of equity, not to generate additional revenue. As long as the adopted rates are moving toward a more equitable allocation of the rate burden across customer groups, then a phase-in over three years is a reasonable way to soften the cost impact to non-residential customers. Setting Multi-Unit Customers at 0.7 ERUs per Unit Because apartment dwellers typically use less water per unit than residents of single family homes, it is common industry practice to charge multi-family units for a fraction of an ERU ranging from.6 to.8, depending on the relative consumption between multi-unit customers and single family customers. In Monroe, average usage for multi-family units is about 7 of the single family winter average. It is therefore appropriate to charge each unit in a multi-unit customer for 0.7 ERUs, which is equivalent to reducing their per-unit fixed charge from $94.51 to $ Page 13 of 42 Page 12 of 19

14 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 Equalizing the Outside-City Multiplier The City s current sewer outside-city multiplier is 2.0 for Residential and Commercial and 1.5 for Government Facilities. We recommend that all customers have the same outside-city multiplier. In Washington, it is common for cities to have an outside-city multiplier between 1.10 and 1.5, but very few cities use a multiplier as high as 2.0. The City s water rates use an outside-city multiplier of 1.5, and we suggest that this same multiplier be used uniformly for sewer rates as well. This is assumed in the sewer rate tables shown below. According to the customer billing database, at present Monroe s only outside-city sewer customers are government facilities, so this change will not affect any existing customers and it will not change the revenue forecast, but it will bring more consistency to the adopted rate tables. C3. SUMMARY OF RECOMMENDED RATE DESIGN CHANGES In summary, the rate design changes we recommend consist of: Eliminating the volume rates for single family and multi-unit customers. Equalizing the outside-city multiplier at 1.5 for all types of sewer customers. Setting the fixed monthly charge for multi-unit customers at 0.7 ERU per unit, which is equivalent to a flat monthly charge of $ Reducing the usage allowance for non-residential customers from 10 ccf to 5 ccf per month over a three-year phase-in period, with an allowance of 8 ccf/month in 2016, 6 ccf/month in 2017, and 5 ccf/month in 2018 and beyond. Impact on Financial Forecast These recommended changes can be accommodated within the existing financial forecast without raising rates. The financial forecast presented in Chapter 12 of the comprehensive plan contained a positive net cash flow of about $619,000 per year in 2016 dollars, growing thereafter. This is enough of a financial cushion to be able to address inequities in the rate design without increasing the standard charge of $94.51 per ERU. Exhibit C-2 shows the projected revenue impact of the rate design changes. Eliminating the volume rates for single family and multi-unit customers would reduce revenue by about $92,000 per year. Charging multi-unit customers for 0.7 ERU per dwelling unit would reduce revenue by about $412,000. Setting the outside-city multiplier at 1.5 for all sewer customers would not change the revenue projection, and reducing the non-residential usage allowance from 10 ccf to 5 ccf would eventually generate an additional $88,000 once it is fully phased in. After the reduction of the usage allowance is fully phased in, the net effect of all these changes would be to reduce revenue by about $415,000, which fits within the net cash flow projected in the financial plan. The remaining net cash flow can be used for debt retirement or additional capital projects that might arise in addition to those contained in the comprehensive plan. Exhibit C-2: Impact of Rate Design Changes on Annual Financial Forecast Revenue Impact of Rate Design Changes Net Cash Flow from Financial Plan 619, , ,827 Revenue Impact of Rate Design Changes: Eliminate volume rate for SF/Multi-Unit $ (91,839) $ (91,839) $ (91,839) Charge Multi-unit at.7 ERUs/unit (411,534) (411,534) (411,534) Equalize outside-city multiplier at Reduce non-residential allowance to 5 ccf 35,249 70,499 88,124 Net revenue impact of changes $ (468,123) $ (432,874) $ (415,249) Remaining Net Cash Flow per Year 150, , ,578 Page 14 of 42 Page 13 of 19

15 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 C4. RECOMMENDED RATE SCHEDULE Exhibit C-3 shows the recommended rate schedule. Both residential and multi-unit customers would no longer be charged excess consumption charges and multi-unit customers would be charged at 0.7 ERU per unit, where the uniform rate of $94.51 is per ERU. While the stated excess volume charge of $8.14 per ccf would not change, non-residential customers would pay for more of their wastewater volume, eventually being charged for metered water consumption above 5 ccf rather than 10 ccf. In the recommended rate schedule, there is no longer a separate table for outside-city rates; instead, there is simply a statement that outside-city rates are 1.5 times inside-city rates. Because the outside-city multiplier would now be the same for commercial and government accounts, there would be no need to separate the two classes, so now they are simply shown as non-residential. In this rate schedule, the definition of a unit has changed to more clearly address the potential configurations of non-residential and mixed use buildings. For non-residential or mixed use buildings, the key defining feature is the existence of a separate water meter, because water consumption is how the charge is scaled up. If the entire building has a single meter, then it will only receive one fixed charge, but volume charges above the usage allowance will apply to all the water provided to the building. If a commercial building has more than one tenant space and they are separately metered, then each tenant space would receive a separate fixed charge, but the volume charges (if any) would apply only to excess usage for each tenant space. If a mixed use building has separate meters for the residential units, then each residential unit would pay the multi-unit fixed rate, while the commercial part of the building would be treated as any other commercial building, with a standard fixed charge, usage allowance, and volume rates for each separately metered space. Currently, if a non-profit agency owns a multi-unit residence for low-income seniors, that account is billed as a single unit for the entire building, meaning that it pays the volume rate above the usage allowance just like a commercial customer. Under the recommended rates, separate treatment for these customers is not needed and depending on water usage and the number of units might even be to their disadvantage, so that feature is omitted from this rate schedule. Exhibit C-3: Rate Schedule for Recommended Sewer Alternative Monthly Rate Schedule Existing Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Sewer Utility Annual Across the Board Increases (%) Inside City - Monthly Sanitary Sewer Charges per unit* Residential $94.51 $94.51 $94.51 $94.51 $94.51 $94.51 $94.51 Per ccf above 10 ccf/month $8.14 No volume charges after 2015 Multi-Unit $94.51 $66.16 $66.16 $66.16 $66.16 $66.16 $66.16 Per ccf above 10 ccf/month $8.14 No volume charges after 2015 Non-Residential $94.51 $94.51 $94.51 $94.51 $94.51 $94.51 $94.51 Per ccf above usage allowance $8.14 $8.14 $8.14 $8.14 $8.14 $8.14 $8.14 Usage Allowance (ccf/month) Outside-City rates are 1.5 times inside-city rates. Qualifying disabled and low-income senior single family residential customers receive a 3 discount. *Unit is defined as follows: Each single family residence. Each dwelling unit in a multi-unit residential building. Each non-residential building or mixed use building with a single domestic water meter. For non-residential buildings with more than one domestic water meter, the space served by each meter counts as one unit. For mixed use buildings with separate water meters for residential uses, residential dwelling units are each one unit at the multi-unit rate, and each non-residential space served by a separate domestic water meter is one unit. Each mobile home in a mobile home park. Each occupied travel trailer or motor home. Page 15 of 42 Page 14 of 19

16 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 C5. CUSTOMER IMPACTS OF RATE DESIGN CHANGES Exhibit C-4 summarizes the impact of the recommended rate design on customer groups, using the same format we used with the water rates. The charts are based on actual 2013 customer usage, and they assume full implementation of the reduced usage allowance for nonresidential sewer customers. The bands along the y-axis represent the percentage increase or decrease in the total bill, taking into account not only rates but also usage allowance. The percentages (and the length of the bars) refer to the percentage of customers in each class. For instance, in the non-residential chart, the fourth bar from the top says that 9% of all non-residential customers would see bills between 1-15% higher. Customers receiving neither an increase nor a decrease are included in the 0-1 Reduction band. The vast majority of single family residential customers would see no increase. A small percentage would see a decrease because of the elimination of the volume charge. Most multi-unit customers would see a 3 savings as a result of paying 0.7 ERU per unit. A few would see even greater savings because they would no longer pay a volume charge. Non-residential customers would have the most significant impacts, because the reduction of the allowance from 10 ccf to 5 ccf per month. However, about 44% of these customers are within the proposed allowance of 5 ccf/month, so they would see no impact. Exhibit C-4: Customer Charge Impacts for Recommended Sewer Alternative All Customers Single Family >10 Increase >10 Increase Increase Increase Impact to Monthly Average Charge 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 1% 1% 1% 1% 1% 1% 3% 85% Impact to Monthly Average Charge 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 3% 95% 25-5 Reduction 6% 25-5 Reduction 1% > 50 % Reduction > 50 % Reduction Multi-Unit Non-Residential >10 Increase >10 Increase Increase Increase Impact to Monthly Average Charge 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction Impact to Monthly Average Charge 2015 to % Increase 30-5 Increase 20-3 Increase 15-2 Increase 10-15% Increase 5-1 Increase 0-5% Increase 0-1 Reduction 10-25% Reduction 6% 1 1 9% 11% 11% 44% 25-5 Reduction 98% 25-5 Reduction > 50 % Reduction 2% > 50 % Reduction Page 16 of 42 Page 15 of 19

17 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 C6. SEWER RATE COMPARISON Exhibit C-5 compares the City s monthly sewer rate with the 2015 rates of other jurisdictions throughout Western Washington. The comparison assumes single family residential customers and 5 ccf per month of usage. Rates are based on the stated rates found on each jurisdiction s website and may or may not contain city utility taxes. Note that each jurisdiction has a unique set of geographic traits, system age, types of assets, and types of customers, all of which can affect the level of rates. Jurisdictions served by the King County Wastewater Treatment Division (WTD) have the WTD charges included in their rates. The City s current sewer rate for single family customers is the highest in this survey group. Over time, this position may change, as other utilities gradually raise their sewer rates and the Monroe rates stay the same over the next six years. Exhibit C-5: Sewer Rate Survey Single Family Residence - Sewer # Jurisdiction Charge Comparison 1 Marysville $ Everett $ Kirkland $ Leavenworth $ Redmond $ Bothell $ Woodinville $ Duvall $ Lake Stevens $ City of Snohomish $ Monroe 2015 $ Monroe 2016 $ Page 17 of 42 Page 16 of 19

18 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 D. STORMWATER UTILITY D1. EXISTING RATE STRUCTURE The City s existing stormwater rate structure is a monthly fixed charge per equivalent residential unit (ERU). An ERU is defined as 2,500 square feet of impervious surface area (MMC ). As with the water and sewer utilities, a low-income senior discount of 3 is available to single family residences or other residences with a single water meter per unit primarily occupied by someone at least fifty-five years old, with annual household income of 5 or less of the area median income for Snohomish County, as published by the Washington State Office of Financial Management (MMC ). A 3 discount is also available to qualifying disabled persons. The low-income senior and disabled discount rates are available only upon application, which is required to be updated annually by the customer (MMC ). D2. RATE DESIGN The City s monthly stormwater charge, which is scaled up with equivalent residential units based on impervious surface area, is consistent with industry standards. We do not recommend changing the stormwater rate structure at this time. According to Chapter 12 of the comprehensive plan, the stormwater utility is projected to need 4% annual rate increases through Because we do not recommend a change to the existing rate structure, we assume that these rate increases will be applied to the existing monthly ERU charge of $10.50 on an across-the-board basis. Exhibit D-1 summarizes the projected rate schedule. Exhibit D-1: Projected Rate Schedule per Stormwater ERU Monthly Rate Schedule Existing Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Stormwater Utility Annual Across the Board Increases (%) Monthly Rate Increase ($) $0.42 $0.44 $0.45 $0.47 $0.49 $0.51 Rate per ERU - Regular $10.50 $10.92 $11.36 $11.81 $12.28 $12.77 $13.29 Qualifying disabled and low-income senior residential single family customers receive a 3 discount. D3. STORMWATER RATE COMPARISON Exhibit D-2 compares the City s monthly stormwater rate with the 2015 rates of other jurisdictions throughout Western Washington. The comparison assumes single family residential customers, which are each one ERU. Rates are based on the stated rates found on each jurisdiction s website and may or may not contain city utility taxes. The City s current stormwater rate is at the lower end of the survey group, ranking as the fourth lowest rate out of 11 jurisdictions. That ranking will continue in 2016, even if the other cities do not increase their rates in Exhibit D-2: Stormwater Rate Survey Single Family Residence - Stormwater # Jurisdiction Charge Comparison 1 Leavenworth $ Woodinville $ Lake Stevens $ Monroe 2015 $ Monroe 2016 $ Marysville $ Bothell $ Everett $ Snohomish $ Kirkland $ Redmond $ Duvall $ Page 18 of 42 Page 17 of 19

19 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 E. CONCLUSION For the water utility, annual system-wide rate increases of 7.5% are needed. In addition to these increases, we recommend the correction of a current inequity with regard to multi-unit customers: they should pay the fixed meter charge on a per-account basis rather than per dwelling unit. Since multi-unit customers have been subsidizing other customer groups, eliminating that subsidy inevitably creates a rate impact on the other groups, and we would expect single-family customers to be particularly sensitive about the change. In order to minimize the rate impact to other customer groups without unduly hurting the system s revenue stability, we recommend applying the 7.5% system-wide increase to the fixed charge and then increasing the volume charge as needed in order to achieve the needed revenues. This will have the effect of shifting the revenue mix from 68% fixed charges to 55.6% fixed charges. This approach would mitigate the most extreme rate impacts but still leave the utility with a reasonably stable revenue stream. Under this option, the volume rate that is charged for consumption in excess of 4 ccf/month would rise from $2.75 to $3.74 per ccf. For the sewer utility, no additional systemwide revenue is needed, but we recommend changes in rate structure to improve the equity of the sewer charges. We recommend eliminating the volume charge for single-family and multi-unit customers, charging multi-unit customers for 0.7 ERU per dwelling unit, equalizing the outside-city multiplier to 1.5 times the inside-city rates, and reducing the usage allowance for non-residential customers from 10 ccf to 5 ccf/month. The stormwater utility needs annual 4% across-the-board rate increases. The stormwater utility rate structure is already aligned with industry standards, and we do not recommend any changes to it. E1. COMBINED CUSTOMER IMPACT Exhibit E-1 summarizes the impacts of the recommended rate alternatives for several sample customers. The customer assumptions are as follows: Single Family (SF): average consumption for water, winter average for sewer. Multi-Unit: 10 dwelling units, each at 7 of average SF water use; 10 stormwater ERUs. Small Commercial: Second quartile of non-residential year-round average (water) or winter average (sewer). Stormwater: 7.5 ERUs, which is half of the average per non-residential parcel. Large Commercial: Third quartile of non-residential year-round average (water) or winter average (sewer). Stormwater: 15 ERUs, which is average for non-residential parcels. This shows the one-year change from 2015 to In 2016, the single family and small commercial customers would see an overall increase of 4%, the multi-unit account a 3 decrease, and the large commercial customer an 11% increase. Exhibit E-1: Combined Bill Impacts of Sample Customers Customer Bill Impacts 2015 Charges by Utility 2016 Charges by Utility 2015 to 2016 Increase Accounts Water Sewer Storm Sample Customers Water Sewer Storm Total Water Sewer Storm Total Water Sewer Storm Total / Units ccf ccf ERUs Single Family (5/8"x3/4") $31.17 $94.51 $ $ $35.87 $94.51 $ $ % 4% 4% Multi-Unit (1") $ $ $ $1, $ $ $ $ % -3 4% -3 Small Commercial (5/8"x3/4") $31.17 $94.51 $ $ $35.87 $94.51 $ $ % 4% 4% Large Commercial (1.5") $92.74 $ $ $ $ $ $ $ % 9% 4% 11% After 2016, all of the rate increases would be across-the-board except for one change, which is that the usage allowance for non-residential sewer rates would continue to decrease through By 2018, our hypothetical small customer would see an additional $8.14 on the sewer charge above 2016 levels (for 1 ccf of billable volume), and the large commercial customer would be charged an additional $24.42 (which represents an additional 3 ccf of billable volume above the 2016 level). Page 19 of 42 Page 18 of 19

20 City of Monroe Water, Sewer, & Stormwater Rate Study July 2015 E2. CONSIDERATIONS FOR THE FUTURE This rate study has given the City a six-year rate schedule for sewer and eight-year rate schedule for water. At the end of each rate forecast horizon, the City will need to update its comprehensive system plan for each utility, which will result in a new capital improvement plan (CIP). We recommend an updated rate study at that time, since a new CIP will create the need for a fresh look at how to pay for the capital improvements. There are two rate design issues that we recommend be reviewed at the time of the next rate study, one for water and one for sewer. For the water utility, it would be worth evaluating the meter multiples used to assign a larger fixed charge for customers with larger water meters. For the sewer utility, it would be worth reviewing the relationship between the fixed charge per ERU and the volume rate per excess ccf. For both of these issues, there is the possibility depending on the results of the analysis of a further cost shift toward larger commercial customers. Customers can only absorb so much change at one time, and for that reason, we decided to focus our priorities in this rate study on the equity issues that we felt were most significant and urgent. So for water rates, we concentrated on the problem of the multi-unit double-count, and we did not review whether the meter multiples adequately capture the relative difference in potential demand between different size meters. For sewer rates, we concentrated on updating the amount of winter average water use that is implied in an Equivalent Residential Unit and then applying that updated ERU correctly to each dwelling unit for multi-unit accounts and to the usage allowance for non-residential accounts. We did not evaluate the appropriateness of the sewer volume rates that are payable above the one-eru threshold, in relation to the level of the fixed charge per ERU. Instead, we suggest that those questions be considered in the next rate study, with the possibility of further adjustments at that time. Page 20 of 42 Page 19 of 19

21 ATTACHMENT 2 City of Monroe Utility Rates July 28, 2015 Page 21 of 42

22 Purpose Comprehensive Plan for water, sewer, and stormwater service submitted in April 2015 Short-term horizon extended through 2023 for water, 2021 for sewer and stormwater Included a financial forecast with overall rate increases of 7.5% per year for water, for sewer, and 4% per year for stormwater. Two tasks following from that forecast: Review rate design and recommend water, sewer, and stormwater rates Review and update systems development charges (SDCs) for water and sewer Page 22 of 42 Page 2

23 Order of Presentation Utility Rates Water - discuss alternative rate designs to improve the equity of water rates, and present recommended rate schedule Sewer discuss an improved rate design to improve the equity of sewer rates, and present recommended rate schedule Stormwater no issues with rate design, so just present recommended rate schedule Systems Development Charges Discuss potential change to SDC methodology, and present recommended water and sewer SDCs City code currently uses the terms water capital improvement charge and waste water capacity expansion charge, but we will simply refer to SDCs, which is a generic term for this type of charge Page 23 of 42 Page 3

24 Water Current Rate Structure Monthly fixed charge per unit which includes a usage allowance of 400 cubic feet (4 ccf), plus a volume charge for usage above 4 ccf Unit is defined as one per single family home, one per non-residential building, and one for each dwelling unit in a multi-unit structure Outside-City customers are charged 1.5 times inside-city rates Fixed monthly charge increases with meter size 2015 water rate schedule: Meter Size Monthly Rates Meter Multiples Fixed Monthly Charge: 0.75 $ $ $ $ $ $ $ $ Usage over 4 ccf $2.75 per ccf Page 24 of 42 Page 4

25 Water Issue with Current Water Rate Design Double-count in fixed charges for multi-unit customers Background: single-family customers are relatively similar, but multi-unit and nonresidential customers vary widely in their potential demand on the system Question: how to scale up the fixed charges for non-residential and multi-unit? non-residential: Can be done by establishing multiples based on meter size Multi-unit: Can be done either with meter multiples (like non-residential buildings), or by counting the number of dwelling units and giving each one the monthly fixed charge associated with smallest meter (5/8 x 3/4 ) For multi-unit customers, Monroe s current rate design does both. It takes the basic charge for the smallest meter, then multiplies it by the meter multiple, and then multiplies it again by the number of dwelling units. That is the double-count in the scale factor. Page 25 of 42 Page 5

26 Water Issue with Current Rate Design As a result of the double-count, multi-unit customers are currently subsidizing single-family and non-residential customers We recommend that multi-unit customers be treated the same as non-residential Problem is easy to identify but hard to fix Monroe has a lot of multi-unit accounts, so the cross-subsidy has been considerable Eliminating an inequity means that for some people to pay less, other people have to pay more, including single family customers Generally, people who are advantaged by an inequitable situation are not aware of that fact, so correcting the inequity would just look like a big one-time rate increase in 2016, on top of the 7.5% overall rate increase How to soften the impact to single family customers and still retain the basic equity of the rate design? Adjust the percentage of revenue recovered from fixed versus volume charges By increasing volume charge, larger customers who use more water pay more (including large non-residential and large multi-unit customers); small non-residential and single family customers pay relatively less because they use less water Can t shift too much to the volume charge without creating revenue stability problem Page 26 of 42 Page 6

27 Three Scenarios Water Rate Scenarios Scenarios Based on % Fixed Revenue Fixed Revenue as % of Total 68% 68% % Overall % Rate Increase % 7.5% 7.5% Rates: Fixed Monthly - 3/4" meter $22.92 $30.09 $17.73 $24.65 Volume above 4 ccf (per ccf) $2.75 $2.70 $5.05 $3.74 % Change in Rates: Fixed Monthly - 3/4" meter 31.3% -22.6% 7.5% Volume above 4 ccf (per ccf) -1.7% 83.7% 35.9% Single Family Charge (7 ccf usage): Fixed Monthly - 3/4" meter $22.92 $30.09 $17.73 $24.65 Volume above 4 ccf (per ccf) $8.25 $8.11 $15.15 $11.21 Total $31.17 $38.21 $32.89 $35.86 % Change in Single Family Charge (7 ccf usage): 22.6% 5.5% 15.1% The system currently generates 68% of revenue from fixed charge To keep that proportion would require a 31% increase in 5/8 x 3/4 fixed charge To lower that proportion to 4 would mean a 84% increase in volume rate We recommend the middle option, a 7.5% increase to fixed charge and 36% increase in volume rate, because it balances competing goals One-time increase to average single family customer would be 15% Page 27 of 42 Page 7

28 Impact of Recommended Scenario Page 28 of 42 Page 8

29 Recommended Water Rate Schedule Monthly Rate Schedule Existing Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Jan. 1, Water Utility Annual Across the Board Increases (%) 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% Inside-City Water Rates Fixed Monthly Charge per Account for up to 4 ccf/month: 5/8" x 3/4" meter $22.92 $24.65 $26.50 $28.49 $30.62 $32.92 $35.39 $38.04 $ meter $30.43 $32.73 $35.18 $37.82 $40.66 $43.70 $46.98 $50.51 $ meter $34.99 $37.63 $40.45 $43.49 $46.75 $50.25 $54.02 $58.07 $ meter $42.66 $45.88 $49.32 $53.02 $56.99 $61.27 $65.86 $70.80 $ meter $51.82 $55.73 $59.91 $64.40 $69.23 $74.43 $80.01 $86.01 $ meter $60.74 $65.32 $70.22 $75.49 $81.15 $87.24 $93.78 $ $ meter $ $ $ $ $ $ $ $ $ meter $ $ $ $ $ $ $ $ $ Volume Rate per ccf above 4 ccf/month $2.75 $3.74 $4.02 $4.32 $4.64 $4.99 $5.37 $5.77 $6.20 Fire Protection Standby Charge/month: 5/8" x 3/4" fire line $22.92 $2.25 $2.42 $2.60 $2.80 $3.01 $3.23 $3.48 $ fire line $22.92 $2.99 $3.22 $3.46 $3.72 $3.99 $4.29 $4.62 $ fire line $22.92 $4.19 $4.51 $4.85 $5.21 $5.60 $6.02 $6.47 $ fire line $22.92 $5.97 $6.42 $6.90 $7.42 $7.97 $8.57 $9.21 $ fire line $22.92 $24.65 $26.50 $28.49 $30.62 $32.92 $35.39 $38.04 $40.89 Wholesale (other than DOC) per ccf $2.00 $2.15 $2.31 $2.48 $2.67 $2.87 $3.09 $3.32 $3.57 Outside-City rates are 1.5 times inside-city rates. Qualifying disabled and low-income senior single family residential customers receive a 3 discount. Monthly Standby Fire Protection Charge is based on fire line diameter, equal to 9.14% of fixed monthly charge for the corresponding meter size. Page 29 of 42 Page 9

30 Water Rate Comparison Single Family Residence - Water # Jurisdiction Charge Comparison 1 Marysville $ Everett $ Bothell $ Redmond $ Monroe 2015 $ Monroe 2016 (Recommended) $ Kirkland $ Lake Stevens $ Snohomish $ Woodinville $ Duvall $ Leavenworth $ This compares single family charges assuming 7 ccf/month, the Monroe average In 2015, Monroe is in the lower middle of comparison group With recommended 2016 rates, Monroe would still be below median of $39.77 Page 30 of 42 Page 10

31 Sewer Current Rate Structure Monthly fixed charge per unit which includes a usage allowance of 1,000 cubic feet (10 ccf), plus a volume charge for usage above 10 ccf Unit is defined as one per single family home, one per non-residential building, and one for each dwelling unit in a multi-unit structure Outside-City customers are charged 1.5 times inside-city rates if governmental structures, 2.0 times inside-city rates if non-residential 2015 sewer rate schedule: Monthly Sewer Charges Inside City Outside City Fixed Charge per Unit* up to 10 ccf Residential/Commercial $94.51 $ Government Facilities $94.51 $ Volume Charge (per ccf over 10 ccf) Residential/Commercial $8.14 $16.28 Government Facilities $8.14 $12.21 * For residential or mixed use accounts, "unit" refers to dwelling units; for commercial/government accounts, one unit per account. Page 31 of 42 Page 11