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Water Rate Setting February 23, 2006 Sanjay Gaur Senior Project Manager

Water Rate Setting February 23, 2006 Sanjay Gaur Senior Project Manager. 27368 Via Industria, Suite 110 Temecula, California 92590 Phone: (951) 587 – 3571 Email: sanjayg@muni.com.

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Water Rate Setting February 23, 2006 Sanjay Gaur Senior Project Manager

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  1. Water Rate SettingFebruary 23, 2006Sanjay GaurSenior Project Manager 27368 Via Industria, Suite 110 Temecula, California 92590 Phone: (951) 587 – 3571 Email: sanjayg@muni.com

  2. “….a significant amount of buried infrastructure—the underground pipes that make safe water available at the turn of a tap—is at or very near the end of its expected life span……Most utilities have not faced the need to replace huge amounts of this infrastructure because it was too young. [But] today a new age has arrived. We stand at the dawn of the replacement era.” American Water Works Association (2001)

  3. Water rate design challenges • Entering the Replacement Era • Lack of Grant Funding • Full Cost Service

  4. Overview of rate setting process The goal is Equitable and Fair Rates

  5. Rate setting principles • Cover full cost of service • Easy to understand and administer • Follow cost-causation principles • Fair and equitable

  6. Overview of determining required revenue Forecast Projections of Demand O&M, Capital Budget, Debt Service, and Reserves Revenue Requirements

  7. Cost of service • One customer category • Fixed variable

  8. Cost of service • Multiple customer categories • Cost Allocation is the distribution of revenue requirements to customer categories based on the following criteria: • Volume Cost – Cost associated with the normal delivery of water • Peaking Cost – Cost associated with the delivery of water during peak conditions • Customer Cost – Cost associated with individual customers • Special Categories – Special classes created due to general social welfare derived from service; such as fire protection costs

  9. Consumption Costs for Base Load Demands Consumption Costs for Peak Capacity Demands Non-Consumption Costs Residential Non- Residential Residential Non- Residential Residential Non- Residential Residential Cost of Service Non-Residential Cost of Service Cost of service Revenue Requirements (O&M + Debt Service + Capital + Reserves)

  10. Residential: System Demand: $ Peak Demand $ Base Time $ Peak System Demand Commercial: $ Base $ Peak Demand $ Base Time Time Cost causation Those who cause the cost, pay the cost

  11. Classification of expenses

  12. Classification procedures • Source of Supply • Generally provides two cost components • Volume (commodity) • Peaking (capacity) • Common method: average month to peak month use Example: average month = 812,376 CCF, peak month = 1,126,374 CCF Therefore: 72% = volume (812,376/1,123,374) 28% = peak (100% – 72%)

  13. Classification procedures • Transmission: • Generally sized to meet peak requirements • Treatment: • Chemicals – Volume • Pumping: • Electricity – generally 100% Volume

  14. Fire Protection Capacity (Peaking) Customer Classification procedures • Distribution: • Distribution mains – three cost components: • Customer • Capacity • Fire Protection • Minimum system theory:

  15. Classification procedures • Distribution: • Meters and Services – generally considered Customer-related

  16. Rate design • Fixed Charge: • Based on hydraulic flow of meter • Consumption Charge: • Three types: • Decreasing Block • Uniform Block • Increasing Block

  17. Criteria for rate development • Rate Design addresses the following four criteria: • Financial Sustainability – Has volatility of revenue decreased? • Social Responsibility - Is it equitable to all customer classes? • Environmental Soundness – Does it reflect the scarcity of water? • Administrative Ease - Is it easy to administer and simple to explain?

  18. Decreasing block rate Unit rate of water declines as consumption increases

  19. Uniform rate Constant unit price at any volume used

  20. Increasing block rate Unit rate of water increasing as consumption increases

  21. Comparison of water rate structures

  22. Overview O&M + Transfers + Debt Service + Cash Financed Capital + Reserve Requirements = Revenue Requirements No. 1 • Revenue Requirements • Classify System Costs • Allocate to Customer Classes • Design Rates No. 2 No. 3 System Demand $ Peak $ Base No. 4 Time Costs/Sales = Rates

  23. Recommendations • Index rates for automatic increase • Facility & Equipment Reserves • Based on Depreciation • 90-Days Operating Reserve

  24. How to Develop an Effective Communications Outreach ProgramBrian JewettDivision Manager 27368 Via Industria, Suite 110 Temecula, California 92590 Phone: (951) 587 – 3568 Email: brianj@muni.com

  25. What are the key considerations? • People undervalue water • A consistent and structured outreach program builds credibility • Start now! • Rate setting and billing practices can also affect customer reactions

  26. Water, water, everywhere, but not a drop to drink

  27. Do your stakeholders value water? • Know your customers • Explain, in layperson terms, and personalize, the benefits of adequate water service and spending on capital projects • Coordinate your message with community values/interests

  28. Facing your (customers) is more difficult than bathing a leper

  29. How do you build credibility? • Formulate and repeat consistent messages to your customers/stakeholders, e.g. “Gee, our water quality is the highest rated in the state!” • Develop communications plan • AWWA suggests a 9 step process to plan development • Celebrate and publicize successful projects

  30. Procrastination is like a credit card; it’s a lot of fun until you get the bill

  31. How do you plan beyond the current crisis? • Always review your budget and rate calculations • Consider timing of other events, e.g. election silly season, other revenue measures, income tax/property tax payments • Budget annually for outreach programs • Plan your next rate increase well in advance (NO, not months, but YEARS!)

  32. What people don’t understand, they will not value; what they don’t value, they will not support

  33. How do you affect customer acceptance through billing practices and rate structures? • Distinguish charges from other charges on multi-use bills • Include outreach/information pieces in bill • Consider special rate structures (watch for Prop 218 considerations!) • Ensure rate calculations are included on bill and can be easily understood (conduct the neighbor test—if Bozo the Clown next door can understand this, anyone can)

  34. How does Proposition 218 affect water rate implementation? • Are increased water charges subject to Prop 218 noticing requirements? • Fresno case says “yes” • Property-related utility fees to be “proportional” to use • Utility fees may contribute to City’s General Fund - only if cost of municipal services are properly allocated (cost allocation plan)

  35. How does Proposition 218 affect water rate implementation? • Legal consideration • Mail notification to every parcel on Public Hearing • The verdict on 218 is not final • Bighorn case

  36. Sources: • American Water Works Association • San Diego County Water Authority • MuniFinancial

  37. Questions & Answers

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