Final Report Water and Sewer Rate Model Town of Denton, MD

Transcription

1 Final Report Water and Sewer Rate Model Town of Denton, MD January 30, 2014 MCET Water and Sewer Rate Model for Denton, MD Page 1

2 Table of Contents Water and Sewer Rate Model Study Town of Denton, MD January 30, 2014 Page Table of Contents. 2 Purpose of Study.. 3 Introduction. 4 Executive Summary and Recommendations. 5 Description of Rate Model Description of Systems Water System.. 10 Sewer System Demographics. 11 System Users and ERUs 12 Water Usage, gpd/user and gpd/eru 14 Adequacy of Rates and Revenues References and Source Information MCET Water and Sewer Rate Model for Denton, MD Page 2

3 Water and Sewer Rate Model Study Town of Denton, MD Purpose of Study In October 2013, the Town of Denton requested MCET s assistance to update the Town s water and sewer rate model. MCET originally developed a rate model for the Town in Since then, the Denton Utility Commission developed another model. This study developed a new rate model using the best of both rate models. MCET is pleased to submit to the Town of Denton an updated water and sewer rate model for use by Town officials. This document represents the results of our modeling effort and the adequacy of service rates to cover the cost of providing water and sewer service to the Town s customers. The study should provide a clear path for the Town to ensure the future financial health and stability of the Town s water and sewer systems. The assistance provided by the Town staff, particularly Scott Getchell, Director of Public Works and Karen Monteith, the Town s Clerk-Treasurer, was essential in the completion of this study. The dedication provided by Town staff during this study process should be acknowledged and was vital to the success of the study. Thank you for the opportunity to work with and for the Town of Denton on this study. MCET Water and Sewer Rate Model for Denton, MD Page 3

4 Introduction Water and sewer Enterprise Funds must each be self-supporting. The cost of operating and maintaining the water system must be supported by water fees and charges collected from water customers. Likewise, the cost of operating and maintaining the sewer system must be supported by sewer fees and charges collected from sewer customers. Service rates for the Town include Base Fees and Usage Charges. Ten (10) years (FY 2004 FY 2013) of rates and charges are available. Fixed Base Fees ($/Quarter/ERU) are determined on an Equivalent Residential Unit (ERU) basis. Variable Usage Charges ($/1,000 gallons) are determined based on metered water consumption. Annual Financial Statements (provided by the Town s Finance Department) report audited information on revenues, expenses, and cash balances. Ten (10) years of Annual Financial Statements (FY 2004 FY 2013) are available. Annual charges for services (Base Fee and Usage Charge revenues combined) are shown in a line item on the Statement of Revenues, Expenses, and Changes in Fund Position for both Water and Sewer Funds. Operating expenses, debt, and capital expenses are shown separately. The Statement of Cash Flows shows revenues and expenses on a cash basis. System Users (billing accounts) and ERUs are used for trending the number of customers in the system. Ten (10) years (FY 2004 FY 2013) of customer information is available. Users are identified in the Management s Discussion and Analysis (MDA) in the Annual Financial Statements. The Town assigns ERUs to users based on criteria provided in rate ordinances (Water Ordinance 645; Sewer Ordinance 646). The number of active ERUs for any year is calculated by dividing annual Base Fee revenues by four times the Base Fee Rate (Number of ERUs = annual Base Fee Revenue/(4 x Base Fee rate, $/quarter)). Metered water data is provided by the Town s Department of Public Works. Fourteen (14) years ( ) of water consumption data is available. Water consumption data is used to determine water usage per User (gpd/user) and per ERU (gpd/eru). For modeling purposes, water consumption in gpd/eru is preferred over gpd/user for the Town of Denton. MCET Water and Sewer Rate Model for Denton, MD Page 4

5 Executive Summary and Recommendations Rate increases in FY 2010, FY 2011, and FY 2013 were very timely in reversing the decline of cash balances and creating financial conditions that increased cash balances. TABLE 1 Summary of Denton Water and Sewer Rates, FY 2009 FY 2013 Service Rates Fiscal Year Water Base Fee, $/ERU/Quarter Usage Charge, $/1,000 gallons Meter Replacement Fee, $/Quarter (For water meters < 1-inch) Sewer Base Fee, $/ERU/Quarter Usage Charge, $/1,000 gallons MCET Water and Sewer Rate Model for Denton, MD Page 5

6 Current Water Fund rates (Base Fee - $25/quarter/ERU and Usage Charge - $3.45/1000 gallons) are adequate until FY The model is indicating Water Fund cash balances greater than targeted levels (cash balances equal to six months of operating and debt expenses), even at current low growth (low connection fee revenue) levels. Sewer Fund operating and debt expenses are roughly twice those of the Water Fund. Consequently, sewer rates should be about twice that of water rates. The Sewer Fund Usage Charge ($6.41/1,000 gallons) is adequately priced, but the Base Fee (also $25/quarter/ERU) is under priced. A Sewer Fund Base Fee rate increase can be delayed until FY 2017, if annual transfers from the Water Fund to the Sewer Fund are increased to pay down the outstanding inter-fund liability. The liability shown on the FY 2013 Financial Statements is $352,657. Along with avoiding sewer rate increases before FY 2017, an early pay down of the liability will provide additional time to collect and analyze WWTP operating costs data and the expense impact on Sewer Fund cash balances. If the inter-fund transfer is not increased with pay off by FY 2017, the Sewer Fund may need to raise its Base Fee rate sooner, incrementally from the current rate of $25/quarter/ERU to as high as $50/quarter/ERU or depend on growth related connection fee revenues to maintain adequate cash balances in the Sewer Fund. MCET Water and Sewer Rate Model for Denton, MD Page 6

7 Description of Rate Model The rate model consists of input and output worksheets. Input worksheets are used to load information into the model. Output worksheets are used to calculate and analyze data needed for expense coverage and rate adequacy determination purposes. The model has six Input worksheets, which include: 1. Customer Base: Input Worksheets a. Number of users or billing accounts User counts are reported in Annual Financial Statement MDAs; used for determining unit user costs, $/User/year b. Number of ERUs Derived from Base Fee revenues; used for determining annual costs per ERU, $/ERU/year c. Number of water meters Provided by Public Works; used as a check in determining current number of ERUs 2. Rainfall Provided by Public Works; used to correlate high and low water consumption unit flow data (Typically, more water is used during dry weather conditions than in normal and wet weather conditions) 3. Water Consumption Provided by Public Works; used with number of system Users and ERU data to determine unit flows; gpd/user and gpd/eru (Again, gpd/eru is preferred) 4. Wastewater Flows Provided by Public Works; used to determine wastewater unit costs, $/MG treated, $/TG of water consumed, and $/User/year or $/ERU/year 5. Annual Financial Statements Provided by Finance; used to determine audited revenue, expense, and cash balances for the Water and Sewer Funds 6. Actual-to-budget Revenues Provided by Finance; used to split revenues between different revenue sources for modeling Water and Sewer revenues; customer service charges (Base Fees and Usage Charges) were combined in budgets before FY 2012; Base Fee revenues and Usage Charge revenues were reported separately beginning in FY Output worksheets include an Interface worksheet, a Rate Adequacy worksheet, and eight (8) supporting summary and trending worksheets. The Interface worksheet has been provided as a convenience for Town users to test various what if scenarios. Six (6) variables can be changed at the model Interface : MCET Water and Sewer Rate Model for Denton, MD Page 7

8 Interface Worksheet Variables 1. Base Fees and Usage Charges for each projected year, FY 2014 FY 2020 (Model is showing no Water Fund rate increases, only Sewer Base fee increases to $40/quarter/ERU in FY 2017 and $50/quarter/ERU in FY Water usage rates, gpd/eru (Model is currently using 145 gpd/eru, the most recent 5-year average under normal precipitation conditions) 3. FY 2014 Water and Sewer Fund O&M expenses (Employee and vendor) 4. Annual percent increases in projected employee and vendor expenses; different inputs for the Water Fund and the Sewer Fund have been provided (Model is currently showing Employee expense increases of 0.25% for both Funds; Vendor expense increases of 0.25% for Water and 0.50% for Sewer, respectively) 5. Number of ERUs added to the system for each projected year, FY 2014 FY 2020 (Model is currently showing 5 new ERUs/year) 6. Pay-down period of Water Fund s $352,657 liability to the Sewer Fund and the annual transfer amount (Model is currently showing liability pay-down by FY 2017) Changes in cash balances are visible on the Interface worksheet when any model variable is changed. Following is a bar chart showing projected yearend cash balances based on modeling assumptions listed above. MCET Water and Sewer Rate Model for Denton, MD Page 8

9 The Rate Adequacy worksheet analyzes past year rates and charges for expense coverage. The primary test for rate adequacy is available cash balance. Target cash balances should be equal to or greater than six months of expenses - considered a best management practice. Maintaining cash balances is also an indicator that adequate customer revenues are collected to cover system operating expenses and debt. As cash balances rise, revenues exceed expenses; as cash balances fall, expenses exceed revenues. Again, rate increases adopted in recent years have improved current cash positions in both the Water Fund and the Sewer Fund. However, the Sewer Fund Base Fee will need to be increased to cover debt expenses, if growth (and related connection fee revenue) doesn t improve in the near future. The second test for measuring rate adequacies is expense coverage. Both rates and combined revenues can be tested for coverage. The three (3) supporting Summary worksheets include: Summary Worksheets 1. Rates and Charges Main analysis worksheet 2. Revenues versus Expenses Determines changes in cash position 3. Long Term Debt Summaries Outstanding debt on capital projects a. Water Fund debt schedules three (3) debt issues b. Sewer Fund debt schedules five (5) debt issues The five (5) Trending worksheets include: Trend Worksheets 1. Cash balances 2. Rates 3. Revenues 4. Expenses a. Water expense details b. Sewer expense details 5. Unit flows, gpd/user and gpd/eru MCET Water and Sewer Rate Model for Denton, MD Page 9

10 Description of Systems Water Water for the Town of Denton is pumped from two wells drilled into the Piney Point Aquifer. Well #3, drilled in 1970, is located off of Kerr Avenue and Md. Rt. 404 (Pumping capacity gpm). Well #5, drilled in 2000, is located south of Engerman Avenue and West of Park Lane (Pumping capacity gpm). The 3-year average of water pumped from the wells was 327,000 gpd, or approximately 42% of the system s 770,000 gpd permitted capacity. The 3-year average of water metered to customers was 280,000 gpd. The unaccounted for water loss of 47,000 gpd represents a loss of only 14%. Table 2. Pumped Water and Metered Water 3-year Average (gpd) FY 2011 FY 2013 Permitted Capacity (gpd) Maximum Demand (gpd) Available Capacity (gpd) Pumped from wells 326, ,000 1,000, ,342 Metered to customers 280,062 Unaccounted for 46,596 % Loss 14% Water losses in most water systems average 20%. The Town s unaccounted for water is well below national averages. The Town has three water storage tanks, one with 100,000 gallons of capacity and two with 300,000 gallons of capacity. Sewer The Town of Denton s WWTP was upgraded to Biological Nutrient Removal (BNR) in 1999 and then to Enhanced Nutrient Removal (ENR) in The treatment plant uses an activated sludge process (Biolac) to biologically remove nitrogen. Phosphorus is removed chemically. As required by the WWTP s NPDES permit, total nitrogen (TN) and total phosphorus (TP) discharges from the plant must be less than 9,746 lbs/yr (<4.0 mg/l) and 731 lbs/yr (<0.3 mg/l), respectively. Permitted capacity of the WWTP is 0.8 MGD with a peak of 2.67 MGD. The most recent 3-year average of wastewater treated was 387,000 gpd or approximately 48% of the system s 800,000 gpd permitted capacity. Excess inflow/infiltration of 107,000 gpd represents an I/I of 27%. MCET Water and Sewer Rate Model for Denton, MD Page 10

11 Table 3. Wastewater Treated 3-year Average (gpd) FY 2011 FY 2013 Permitted Capacity (gpd) Peak Capacity (gpd) Available Capacity (gpd) Wastewater Treated 386, ,000 2,670, ,189 Water to customers 280,062 Average I/I in most wastewater systems is Excess I/I 106,749 approximately 30%. The Town s %I/I is slightly below % I/I 27% national averages. Demographics Currently, Town water and sewer connections (1595) are split 79% residential and 21% nonresidential based on water meter counts. Residential connections (1256) consist of single and multi-family (apartments) facilities. Non-residential connections (339) consist of commercial, industrial, institutional, schools, churches, and governmental facilities. Because the Town of Denton is the County seat of Caroline County, a 100-resident correctional facility and 24 other Town, county, state, and federal governmental facilities are located in the Town. The Town has an historic down-town district as well as a central business district. Town growth will consist of Town infill along with suburban and mixed residential, commercial, and industrial development on the outskirts of Town. From 2010 census data, the population of Denton has grown to The number of residential housing units has increased to Following is a table comparing 2000 and 2010 Census data for the Town of Denton. Table 4. Census Data - Town of Denton Population year Increase (17) 1458 Percent Increase, % (0.6)% 49.3% Housing Units year Increase Percent Increase, % 15.8% 41.7% Housing Units Occupied Percent Occupied,% 90.2% 89.7% MCET Water and Sewer Rate Model for Denton, MD Page 11

12 System Users and Equivalent Residential Units (ERUs) Users of the Town's water and sewer system are tracked three (3) ways; (1) number of water meter connections (Currently 1595) based on meter inventory; (2) number of users (Currently 1651) based on billing accounts; (3) number of active Equivalent Residential Units (ERUs, currently 1931) based on Base Fee revenues collected. Number of water meters is inventoried by the Town's Public Works Department. Users of the system are billed by the Town's Finance Department and reported in the Management, Discussion, and Analysis (MDA) section of the Town's Annual Financial Statements. The number of system ERUs is calculated from annual Base Fee revenues. The Town assigns ERUs to each facility type user in the system as prescribed in tables attached to water and sewer rate ordinances. The Town then bills a quarterly Base Fee to each user. The actual number of system ERUs connected to the system is calculated by dividing the Base Fee Rate into Base Fee revenues collected for any particular year. Base Fee revenues can are determined from revenue data in Annual Financial Statements. Since Annual Financial Statements are available for FY FY 2013, actual system users and ERUs can be tracked for ten years. Following is a trend analysis for user accounts and active ERUs for the past ten (10) years (FY 2004 FY 2013). Note that growth and development was strong during the FY FY 2008 period, but limited after FY MCET Water and Sewer Rate Model for Denton, MD Page 12

13 As a check on current ERU levels, the number of active ERUs can be calculated from water meter counts and sizes with an adjustment for percent occupancy. ERUs for water meters larger than 3/4-inch, which represents one ERU, can be calculated based on American Water Works Association (AWWA) ERUs to meter size ratios (AWWA ERU ratio method). The number of active system ERUs based on water meter counts and sizes can then be adjusted for percent occupancy of served facilities, typically 90%. Table 5. - Number of Town Water Meters, by Size and EDU Meter Size AWWA Rated Capacity (GPM) EDUs per Meter Number of Meters FY 2013 Number of EDUs FY 2013 Comments 1 5/8-inch SF, NR 3/4-inch SF, MF, NR 1-inch SF, NR 1 1/2- inch NR 2-inch NR 3-inch Group Facilities 4-inch Group Facilities 6-inch 1, Large Group Fac s Total No. of Active ERUs derived from Base Fee revenues 1931 Active EDUs 91% 1. SF Single Family dwelling; MF Multi-family dwelling; NR - Non-residential units; Group facilities include schools, correctional, institutional, and government complexes Using Meter Replacement Fee (MRF) revenues provides a second, but partial check on the number of system ERUs. The Town charges quarterly MRFs to all system users with water meters less than 1-inch, which represents more than 95% of water meters in the system. Currently, the system has 1539 water meters less than 1-inch, which checks out with meter counts derived from MRFs. MCET Water and Sewer Rate Model for Denton, MD Page 13

14 Water Consumption - gpd/user and gpd/eru Water usage per User, gpd/user is calculated by dividing water consumption (gpd) by the number of Users or billing accounts in the system. The most recent 5-year water usage average was 170 gpd/user. ERU water usage is calculated by dividing water consumption (gpd) by the number of ERUs in the system. The most recent 5-year water usage average was 145 gpd/eru. As noted in the figure that follows, water usage in terms of gpd/eru is less erratic than gpd/user, since Users vary in size from a 100-resident correctional facility to a 1-occupant residential unit. The downward trend of both water usage factors reflects water conservation, but the steeper slope of the water usage per User factor reflects the influence of roughly 500 residential units added to the system in the past ten years. Water usage per ERU is the preferred unit factor, since it compensates for the mix of residential and non-residential units in the system. MCET Water and Sewer Rate Model for Denton, MD Page 14

15 Using ERUs to forecast Base Fee revenues and using water usage in terms of gpd/eru to forecast Usage Charge revenues is convenient for forecasting service revenues. The number of ERUs is the common variable for forecasting both revenue sources. If the Base Fee was a quarterly per bill charge, as is the case in some communities, then the number of Users would have been the common variable for forecasting revenues. Adequacy of Water and Sewer Charges to Cover Water and sewer service charges are designed to recover O&M expenses (employee and vendor expenses) and debt. Some capital expenses are paid for from cash balances (PAYGO or Pay-As-You-GO using cash), but most capital projects are funded through debt financing. Also, the Sewer Fund collects a Bay Restoration Fee (BRF) for the State of Maryland, which is included as a vendor expense. The BRF expense is subtracted out of Sewer Fund expenses, since it is not an expense to operate the wastewater system. During the past five years, O&M and debt expenses averaged $464,000/year and $840,000/year for the Water Fund and Sewer Fund, respectively. During that same time, annual costs averaged $240/ERU and $434/ERU, respectively for the Water and the Sewer expenses. The combined annual cost of $674/ERU is a very reasonable. The combined annual cost of $793/User is also reasonable considering most major cities charge more - New York City ($725), Baltimore and Philadelphia ($800), Boston ($850), and DC and Richmond, VA ($900). Table 6. 5-year Annual Average O&M and Debt Expenses Recent 5-year Averages FY 2009 FY 2013 ($000) Operating Expenses Water Sewer Combined Employee Expenses $255 $411 $666 Vendor Expenses Less Bay Restoration Fees - (66) (66) Total O&M $418 $699 $1,117 Debt Expenses Total $464 $840 $1,304 Unit Cost Factors ($) $/1,000 Consumed $4.54 $8.22 $12.76 $/User/year $282 $511 $793 $/ERU/year $240 $434 $674 MCET Water and Sewer Rate Model for Denton, MD Page 15

16 If revenues exceed expenses and cash balances are available to cover emergency and other unexpected expenses, then service charges are adequately priced. Typically, rate structures are designed to recover variable (vendor) expenses through water Usage Charges and fixed (employee and debt) expenses through Base Fees. For the Town of Denton, water Meter Replacement Fees are set to cover water meter repairs. Following is a table showing rate and combined revenue coverage tests for recent (FY 2009 FY 2013) water and sewer expenses (5-year average expenses). Minimum coverage ratio should be greater than 1.1, preferably greater than 1.25 to maintain cash balances for unexpected and emergency expenses. Table 7. Determination of O&M and Debt Coverage Ratios Assumptions Water Sewer Average Number of ERUs ERUs on septic Water usage, gpd/eru year average Usage Charge, $/1000 gallons $3.45 $6.41 Quarterly Base Fee, $/ERU $25 $25 FY 2014 rates Rate Coverage Test Water Sewer Usage Charge Revenue, $000/yr $352 $626 At FY 2014 rates Vendor Expenses, $000/year year averages Rate Coverage Coverage - OK Base Fee Revenue, $000/year $193 $185 At FY 2014 rates Employee Expenses, $000/year $255 $411 Debt Expenses, $000/year Less BRFs, $000/yr - (66) 5-year averages Total Fixed Costs, $000/year $301 $486 Rate Coverage Coverage not OK Revenue Coverage Test: Usage Charge Revenue, $000/yr $352 $626 Base Fee Revenue, $000/year $193 $185 At FY 2014 rates Combined Revenues, $000/year $545 $811 O&M and Debt Expenses $464 $840 5-year averages Revenue Coverage Sewer Rate needs to increase MCET Water and Sewer Rate Model for Denton, MD Page 16

17 Water Usage Charge rates are priced well and cover (2.16 times) variable operating expenses. Water Base Fee rates could be increased, since coverage (0.64 times) is less than targets, but when combined with the strong water Usage Charge revenues, usage and base fee rates adequately cover (1.17 times) water O&M and debt expenses. Cash balances will continue to increase. Sewer Usage Charge rates are adequate to cover (1.76 times) variable operating expenses. However, Sewer Base Fee rates need to be increased; coverage is only 0.38 times. Even when combined with the sewer Usage Charge revenues, usage and base fee rates are not adequate to cover (0.97 times) sewer O&M and debt expenses. Cash balances will likely drop unless growth related revenues increase. To satisfy revenue coverage ratios of 1.25, quarterly Base fee rates must be increased. Water rates can be delayed, but sewer rates need to be increased within the next seven years depending on growth revenue. Table 8. Base Fee Rates to Provide 1.25 Coverage Revenue Coverage Test Water Sewer Comments Average Number of ERUs ERUs on septic Revenue Coverage Target O&M and Debt Expenses $464 $840 Needed Revenues, $000/year $580 $1, x Total Expenses Usage Charge Revenue, $000/yr $352 $626 Assume no change in Usage Charge Needed Base Fees, $000/year $228 $424 Needed revenues less Usage revenues Target Base Fee, $/ERU $30 $57 Base Fee Revenues/(4 x ERUs) MCET Water and Sewer Rate Model for Denton, MD Page 17

18 References and Source Information A. Town of Denton Water Ordinance 645, effective 9/13/2012 B. Town of Denton Sewer Ordinance 646, effective 9/13/2012 C. Annual Financial Statements for Town of Denton, FY 2004 to FY 2013, Enterprise Fund Exhibits D. Annual Operating Budgets for Town of Denton, FY 2009 to FY 2013 E. Town of Denton s, 1997 Comprehensive Plan, Chapter 5 - Community Facilities Element F. Town of Denton s, 2010 Comprehensive Plan, Chapter 5 - Water Resources Element G. Debt Schedules: 1. MDE s $2,332,577 loan for WWTP construction (2005) 20 years, $127,972/year (Sewer Fund) 2. MDE s $53,500 loan for WWTP-ENR (2010) 20 years, $3,175/year (Sewer Fund) 3. Rural Development loan of $140,000 (2007) 20 years, $7,568/year (Sewer Fund) 4. USDA s $623,560 loan (2011) 40 years, $26,837/year (Water and Sewer Funds) 5. $500,000 issued, Series 2008 Maryland Public Improvement Bonds, 40 years, $26,542/year (Water Fund) 6. Provident State Bank s $76,850 loan (2013) 15 years, $6,772/year (Water and Sewer Funds) H. Maryland s, 2010 Census Profile of General Population and Housing Characteristics for the Town of Denton I. AWWA s, Principles of Water Rates, Fees, and Charges, Manual of Water Supply Practices M1, 2000 J. WEF s, Financing and Charges for Wastewater Systems, Manual of Practice No. 27, 2004 K. ICMA s, Evaluating Financial Condition, A Handbook for Local Government, 2003 MCET Water and Sewer Rate Model for Denton, MD Page 18