Handout 8: Rate Structure Adjustments Introduction The purpose of this handout is to describe briefly rate structures, legal notions of fairness in ratemaking applicable to this stormwater discussion, our roadmap forward, options for rate relief that we will discuss during Meeting 3, and our method for looking at the effects of various options upon the ratepayers. The existing Stormwater Management Service Charges (SWMS Charges) are designed to recover the annual stormwater cost of service. This cost is a given within our discussions. This cost is recovered from ratepayers in a manner designed to promote fairness or equity within the bounds of both common sense and legal tests of rate making adequacy. This handout will summarize: Components of a typical rate structure (review from Handout 2) Concepts of fairness and legal tests (review from meeting 1 presentation) Specifics about the PWD rate structure (review from Handouts 2 and 5) Our approach to looking at allocation of costs within the rate structure framework and according to our concepts of fairness Rate Structure Components Recall from Handout 1 and the review at our first meeting that utility funding is based on an independent revenue stream (derived from utility rates and charges) that is dedicated, with respect to the Department, to specific purposes such as water treatment, wastewater treatment, solid waste management, and stormwater management. Utility rates and charges constitute the vast majority of the Department s revenue. A methodology for calculating utility rates, based generally on a customers demand for various utility services, is appropriately identified in order to establish a fair basis for allocation of utility revenue requirements. In this context, the framework that describes how much each property pays is called the rate structure. For our purposes, the rate structure developed for a particular utility is divided into four components: 1. Program cost allocation 2. Basic rate methodology 3. Modification factors 4. Secondary funding methods Component #1 Program Cost Allocation Program cost of service development is normally a straight forward accounting of the existing and future costs that will need to be paid for by the stormwater enterprise fund. It rarely gets more complicated than needing to allocate city support costs (e.g., charges from other City departments for procurement, auditing, legal and treasury services) to the fund and determine who owns the system and how it is to be accounted for within public rights of way. In PWD s case, the issue is more complex due to the fact that parts of the conveyance system and treatment facilities are utilized for sanitary sewer and stormwater services; and that historically stormwater management costs have simply been accounted for within the rest of the unified utility and then allocated as a part of costs of operating the overall sanitary sewer system. If both stormwater management and sanitary sewer services are paid for on the same basis, this is a non issue. But if stormwater management is funded in a manner, or on a basis, June 9, 2011 PWD CAC Handout 8 Final 3JUN11 V3.docx 1
different from sanitary sewer service there is a need to split the program in two and where that dividing line occurs is a subject of some difference of philosophy, opinion and practice around the country. Component #2 Basic Rate Methodology The basic rate methodology defines the basis for the rate that users will be paying. As you know PWD is transitioning from a meter based to a parcel area based system of stormwater charges. The meter based system of charges was devised many years ago as an equitable way of recovering stormwater related program costs in the absence of readily available data to support other approaches to stormwater cost recovery. The original CAC looked at this issue and made the recommendation that the charge should not be water meter size based but based on a more scientifically defensible approach: the charge should be based on a combination of gross area (20%) and impervious area (80%). This allocation between gross area and developed area was predicated on the notion that impervious area, on average, discharges about 70 90% more runoff peak, volume and pollution than open space. As we ve discussed, most stormwater fees around the country use some measure of impervious and gross area as the basis for the charge. 1 The reason is simple and intuitive: the size of your parcel and what you do to it in terms of development determine the peak, volume and pollution coming off of it into streams, pipes and other downstream public drainageways. Component #3 Modification Factors Every basic rate methodology paints all properties with a large brush that recognizes some basic core differences among properties (e.g., size, land cover, meter size, etc.), but cannot distinguish or address anomalies wherein something about the property and/or the basic rate methodology s handling of it seems to lack sufficient fairness. Thus rate modifiers have been developed to enhance equity or to increase simplicity without undue loss of equity (fairness). Handout 2 described credits, incentives, and discounts. Some additional rate modifiers include: Simplified residential rates flat rates, tiers, etc. since individually measuring and keeping up with the large number of essentially similar properties is not worth the cost. Rate surcharges or reductions that recognize a category of property that is situated or configured in a way that cannot be properly recognized within the basic rate methodology: o o In some cities properties adjoining streams pay a surcharge as the primary beneficiaries of flood control activities while in other cities such properties enjoy a fee reduction because of their limited use of the public system In some places land uses that discharge stormwater pollution of an unusual nature are charged a surcharge for increased monitoring and cleanup costs Green space recognition open space placed in a conservation easement is credited or recognized. Exemptions specific properties or classes are exempted from the fee for specific reasons. Component #4 Secondary Funding Methods Secondary funding methods are employed to shift program or capital construction costs that directly and specially benefit a specific property or activity away from general ratepayers and assign such costs to those specific beneficiaries. Some common secondary funding methods include: 1 2010 Stormwater Utility Survey, Black and Veatch June 9, 2011 PWD CAC Handout 8 Final 3JUN11 V3.docx 2
Development related Fees property development or re development requires special activities such as inspection, permitting, etc. that are often paid for through the use of fees. Special Assessments some capital construction projects provide a level of service in excess of that enjoyed by the general public, and those properties that specially and directly benefit are charged. Fairness Concepts We all have concepts of what is fair, fair to me and fair to others. At the next meeting we will ask you to look at a choice PWD must make and to register your ideas and preferences based on what you believe is fair. In ratemaking the idea of fairness is called equity and the courts have, over the years, developed some basic tests of equity. The goal is to design a user fee structure that reflects the character and desires of the community and has the following general characteristics: Equitable and reasonable a reasonable person would be able to look at this rate structure and feel a sense of fairness about it. Not illegally discriminatory or confiscatory the rate tracks cost causation; is not unfairly discriminatory; and is not so onerous as to deny reasonable use of the property due to the charge. Costs that are substantially related to provision of facilities and services the total program cost to be paid for is all related to the general purpose for which the fee is charged. Rational nexus a fee is charged that is related to demand/use of the stormwater systems and services for each individual property, though engineering exactitude is not required. Legal the rate structure reflects the authority inherent in state law and local authority. On top of these tests local organizations also prefer a rate structure that has inherent simplicity such that the development and maintenance of the database is not overly expensive, and the rate and charge are relatively easy to explain to a customer. The PWD Rate Structure As described in Handouts 3 and 5 the PWD rate structure is in transition from an equivalent water meter based allocation of stormwater costs to a parcel area based or gross area impervious area (GA/IA) allocation basis. The first year of this transition (or phase in) began on July 1, 2010. Twenty five percent of stormwater costs are now recovered on the basis of the parcel area based system. The second year of the transition begins on July 1, 2011 at which time 50% of stormwater charges will be allocated based upon the parcel area based system. Under the Department s current regulations, stormwater program costs are recovered 80% from IA and 20% from GA. The fairness of this division will be looked at in a subsequent meeting. The GA Rate, the IA Rate, and the Billing and Collection Charge reflect costs for all programs and infrastructure currently considered to be part of the stormwater system. In other words, every property whether residential or non residential is assessed a stormwater charge based on these specific system wide unit costs. This approach of applying a system wide unit cost in determining charges ensures that residential customers do not subsidize non residential customers and vice versa. Currently, for all residential properties, the monthly GA charge and IA charge are calculated as a flat rate charge. We will look at the fairness of this flat rate charge in another meeting. For all the non residential properties, the monthly GA charge and IA charge are calculated individually for each property. If, for example, a non residential property has a GA of 2,090 square feet and an IA of 1,060 square feet June 9, 2011 PWD CAC Handout 8 Final 3JUN11 V3.docx 3
(identical to an average residential property), then that non residential property will pay the exact same $10.99 as the monthly GA/IA charge plus the monthly billing and collection charge of $2.53, for a total of $13.52. The monthly GA charge and IA charge are calculated by multiplying a non residential property s estimated GA and IA square footage by the corresponding GA and IA rates. For the past Fiscal Year (FY) non residential properties paid 25% of their bill based on parcel area based (GA/IA) charges and 75% based on equivalent water meter size. There are many more details about the rate structure (the five aspects or a rate structure discussed above) that are not important to detail now. However, the next section illustrates our roadmap for systematically looking at the various aspects of the rate structure (current and potential options) in bite sized pieces. At the end we will have another chance to see how the pieces, and our commentary on them, may fit together into a new rate structure. Our Approach to Looking at Fairness in the Rate Structure The figure below depicts a way to look at our process in considering the overall fairness of the current rate and options for a new rate. We, in essence, are looking at how we may make appropriate adjustments or dial in to fine tune the current rate so that it might be even more equitable if that is possible like adjusting a sound system. June 9, 2011 PWD CAC Handout 8 Final 3JUN11 V3.docx 4
1. How is the stormwater program cost of service allocated among the potential rate bases? In the recent past the allocation basis was water meter size. This approach has nothing directly to do with stormwater demand and was deemed by the original CAC as inappropriate for stormwater allocation. The question now facing us is: The $124M dollar stormwater cost is transitioning toward a parcel area (GA/IA) charge plus billing & collection charge basis but is $124M an appropriate reflection of the annual stormwater management costs? Perhaps a lesser amount could be seen as stormwater and some amount shifted toward the sewer bill because some costs may truly be more sewer related. This question is covered in more detail in the next handout, #9. 2. Currently residential properties all pay the same amount based on the average property characteristics. On a straight GA/IA basis row homes would be paying too much and detached single family homes too little. Should the single family residential charge be stratified (tiered) or otherwise changed to improve fairness? 3. Currently the total program cost is split 20% based on gross area and 80% based on impervious area as recommended by the original CAC. This can create some anomalies. Is the allocation of costs between the Gross Area and Impervious Area Charge fair, and if not, how should it be changed? 4. There are several recognized special cases of properties that have been handled in a variety of ways, some ad hoc. These cases include D Permit holders, direct dischargers, stormwater only accounts, and those properties that do not discharge at all or directly outside the City s boundary. How should we apply our concepts of fairness to these special cases? 5. Credits (and Incentives and Exemptions) can be used to help handle anomalies if appropriate and are the final adjustments made. They will be targeted if appropriate toward both the aggrieved under any new rate structure and those who can take private actions to assist PWD in its program mandates. 6. Incentives see above 7. Exemptions see above Our roadmap for the next meetings will generally follow this path looking at opportunities, impacts, and options. June 9, 2011 PWD CAC Handout 8 Final 3JUN11 V3.docx 5