Utility Rates 201Raleigh, NC

February 23, 2010

Ron Thomas

Jacobs JJG

Rate DesignOk, we know what we need, how do

we get it?

What approaches are fair, safe, logical?

How can we change from where we are?

And how do we get our Council to make a change?

And how do we keep our jobs?

Rate Study Components

Cost Allocations

Rate Design

Revenue Requirements

Check

How did we get here?

RecapBase Max Day Max Hour Meters Bills Fire Protection Total

O&M $ 4,761,540 $ 1,909,462 $ 1,932,287 $ 826,585 $ 468,777 $ 413,292 $ 10,311,943

Capital 5,348,846 1,919,589 1,199,993 95,869 39,945 39,945 $ 8,644,188

$ 10,110,386 $ 3,829,051 $ 3,132,280 $ 922,454 $ 508,722 $ 453,238 $ 18,956,131

Allocated Costs Billable Units Unit Costs

Residential $ 11,397,943 6,430,654 $ 1.77

Commercial $ 3,184,163 2,229,274 $ 1.43

Industrial $ 1,936,424 1,541,405 $ 1.26

Irrigation $ 553,188 236,109 $ 2.34

Base Charge $ 1,884,413 47,515 $ 3.30

Common Issues Will our rates generate enough revenue?

Are these rates fair?

How different are these rates from what we have now?

Can we implement these rates?

What will the Mayor say?

How will this impact Anytown?

So What's the Problem?

Existing Percent

Model Change Change Change

Residential 1.77$ 1.45$ 0.32$ 22%

Commercial 1.43$ 1.45$ (0.02)$ -1%

Industrial 1.26$ 1.45$ (0.19)$ -13%

Irrigation 2.34$ 1.45$ 0.89$ 61%

Base Charge 3.31$ 2.00$ 1.31$ 66%

Review of the Global Rate Setting Principles Rates should be cost based and equitable and set at

such a level that they meet the full revenue requirements of the utility.

Rates should be easy to understand and administer

The process of allocating costs should conform to generally accepted rate setting techniques.

2/24/2010 7

Financial Planning Assure Financial Viability

Utilize as a Capital Planning Tool

Use as a Strategic Planning Tool

Use as a Basis to Develop and Minimize Rates

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Capital Budgeting - Key Issues Financial Planning Process – Balancing the Equation

Revenue = O&M + Debt + Rate Funded Capital

Capital and Debt Often Drive Rates

Need for Strategic Capital Planning

Typical Result is a Capital Improvement Plan

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Why are Rate Studies Important? Avoids Interclass and Intraclass Rate Subsidies -

Fairness

Avoids “Rate Shock”

Tracks Costs and Provides Accurate Price Signal (Price = Costs)

Helps Manage Revenue Stability

Legal Considerations

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Objectives When Setting Rates Revenue Stability and Sufficiency Continuity in Rate Philosophy Cost-Based Equitable Ability to Pay Simplicity (Administrative and Customer

Understanding) Defendable Legal and Regulatory Constraints

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Review of the Global Rate Setting Principles Rates should be cost based and equitable and set at

such a level that they meet the full revenue requirements of the utility.

Rates should be easy to understand and administer

The process of allocating costs should conform to generally accepted rate setting techniques.

2/24/2010 12

Utility Basis vs. Cash Basis

Cash Basis

Utility

Basis

+ O&M Expenses + O&M Expenses

+ Tax/Transfer Payments + Tax/Transfer Payments

+ Debt Service + Depreciation Expense

+ Capital Projects Funded from Rates + Return on Rate Base

= Total Revenue Requirements = Total Revenue Requirements

Where Rate Base =

+ Original Cost of Plant

- Accumulated Depreciation

= Net Plant in Service

+ Working Capital

- Contributions in Aid

= Rate Base

2/24/2010 13

Utility Basis vs. Cash Basis Pros and ConsUtility Basis

Stable over time.

Common for Investor Owned Utilities

Requires return calculation

Return can look like a profit from customers perspective

2/24/2010 14

Utility Basis vs. Cash Basis (cont.)Cash Basis

Simple

Conforms with budget process

Problem of “lumpy” funding of capital improvements

2/24/2010 15

2/24/2010 16

Depreciation Definition: A decrease or loss in value, because of age,

wear, or market conditions.

Funding of depreciation would provide a reserve to proactively replace depleting assets.

Implementation Gyrations Costs don’t match up with rates

Historic protection of customer classes

Setting rates by voter profile

Residential vs. all others

Inside vs. outside

Funding Options Revenue Bonds – must have the ability to repay.

Grants – subject to availability and qualifications.

Rate Increase.

Combination of all of the above.

Old Fashioned WisdomDeclining Block

As A Surrogate for Customer Class Rates

Existing Percent

Recomm. Rates Change Change

First Black 0 - 10k $ 1.74 $ 1.45 $ 0.29 20%

Second Block 10k - 50k $ 1.66 $ 1.45 $ 0.21 14%

Third Block 50k + $ 1.40 $ 1.45 $ (0.05) -3%

Irrigation $ 2.40 $ 1.45 $ 0.95 66%

Base Charge $ 3.31 $ 2.00 $ 1.31 66%

Common Objectives Revenue sufficient

Implementable

Equitable

Not burdensome

Forward looking

Increasing fund balances

Competitive

Objectives In Conflict Revenue sufficient vs. affordability

Implementable vs. revenue adequacy

Equitable vs. consistent with existing rates

Not burdensome vs. revenue sufficiency

Forward looking vs. implementability

Increasing fund balances vs. affordability

Competitive vs. revenue sufficiency

Prioritization Revenue sufficiency

Bond covenants

Long term needs

Implementable

Relative to existing rates

Relative to political realities

Equity, affordability, conservation

Start with what you have Get a sense of the percentage increase needed

Is an across-the-board increase appropriate?

Confidence in your existing rates?

Known issues?

Compounding can cause distortions

Project Your Cost

Projection of Costs

Anytown Water System

Test Year -

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014Projection

Basis

Labor:

Salaries and Wages 9,680,000$ 10,164,000$ 10,672,200$ 11,205,810$ 11,766,101$ 2

Overtime 370,000 388,500 407,925 428,321 449,737 2

Retirement 690,000 724,500 760,725 798,761 838,699 2

FICA 770,000 808,500 848,925 891,371 935,940 2

Group Insurance 1,960,000 2,058,000 2,160,900 2,268,945 2,382,392 2

Worker's Compensation 140,000 147,000 154,350 162,068 170,171 2

Employment Security Commission 10,000 10,500 11,025 11,576 12,155 2

Other Benefits-Disability Insurance 140,000 147,000 154,350 162,068 170,171 2

Subtotal: Labor 13,760,000$ 14,448,000$ 15,170,400$ 15,928,920$ 16,725,366$

Supplies & Maintenance:

Printing and Office Supplies 150,000$ 154,500$ 159,135$ 163,909$ 168,826$ 3

Safety Equipment and Supplies 100,000 103,000 106,090 109,273 112,551 2

Equipment Maintenance 60,000 61,800 63,654 65,564 67,531 5

Vehicle Operations & Maintenance 340,000 350,200 360,706 371,527 382,673 2

Const. Equipment Ops & Maintenance 100,000 103,000 106,090 109,273 112,551 1

System Operations & Maintenance 2,100,000 2,163,000 2,227,890 2,294,727 2,363,569 1

Building & Grounds Maintenance 550,000 566,500 583,495 601,000 619,030 1

Treatment & Filter Supplies 1,130,000 1,163,900 1,198,817 1,234,782 1,271,825 1

Lab Supplies 210,000 216,300 222,789 229,473 236,357 1

Subtotal: Supplies & Maintenance 4,740,000$ 4,882,200$ 5,028,666$ 5,179,526$ 5,334,912$

Outside Services:

Utilities 2,320,000$ 2,412,800$ 2,509,312$ 2,609,684$ 2,714,072$ 1

Telephone 290,000 301,600 313,664 326,211 339,259 2

Uniforms 60,000 62,400 64,896 67,492 70,192 2

Legal 100,000 104,000 108,160 112,486 116,986 3

Consulting Services 350,000 364,000 378,560 393,702 409,450 3

Audit 20,000 20,800 21,632 22,497 23,397 3

Fees and Support Services 200,000 208,000 216,320 224,973 233,972 3

Postage and Delivery 160,000 166,400 173,056 179,978 187,177 3

Advertising 2,000 2,080 2,163 2,250 2,340 3

Other Outside Services 610,000 634,400 659,776 686,167 713,614 1

Subtotal: Outside Services 4,112,000$ 4,276,480$ 4,447,539$ 4,625,441$ 4,810,458$

Education & Training Expenses:

Education & Training 150,000$ 151,500$ 153,015$ 154,545$ 156,091$ 2

Meals & Lodging 20,000 20,200 20,402 20,606 20,812 2

Transportation 10,000 10,100 10,201 10,303 10,406 2

Membership & Dues 60,000 60,600 61,206 61,818 62,436 2

Employment Expenses 50,000 50,500 51,005 51,515 52,030 2

Employee Programs 60,000 60,600 61,206 61,818 62,436 2

Company Training Programs 70,000 70,700 71,407 72,121 72,842 2

Safety Training & Programs 60,000 60,600 61,206 61,818 62,436 2

Subtotal: Education & Training 480,000$ 484,800$ 489,648$ 494,544$ 499,490$

Other Company Expenses:

Property and Liability Insurance 160,000$ 164,800$ 169,744$ 174,836$ 180,081$ 5

Public Relations & Information 100,000 103,000 106,090 109,273 112,551 2

Contingency 40,000 41,200 42,436 43,709 45,020 2

Bad Debt Expense 140,000 144,200 148,526 152,982 157,571 4

Government Transfers (b) 850,000 875,500 901,765 928,818 956,682 4

Subtotal: Other Company Expenses 1,290,000$ 1,328,700$ 1,368,561$ 1,409,618$ 1,451,906$

Sales Projections

Projection of Sales

Anytown Water System

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Unit Sales

Residential 6,430,654 6,880,800 7,018,416 7,158,784 7,301,960

Commercial 2,229,274 2,385,323 2,433,030 2,481,690 2,531,324

Industrial 1,541,405 1,649,303 1,682,289 1,715,935 1,750,254

Irrigation 236,109 252,637 257,689 262,843 268,100

Base Charge 47,515 50,841 51,858 52,895 53,953

Rate Projections

Projection of Rates

Anytown Water System

Current FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Residential $ 1.45 $ 1.70 $ 1.82 $ 1.85 $ 1.89 $ 1.93

Commercial 1.45 1.70 1.82 1.85 1.89 1.93

Industrial 1.45 1.70 1.82 1.85 1.89 1.93

Irrigation 1.45 1.70 1.82 1.85 1.89 1.93

Base Charge 2.00 3.31 3.54 3.61 3.68 3.76

Percentage Adjustment 17% 7% 2% 2% 2%

Selling is part of doing Achieve Customer Understanding, Trust

and Approval Reach out to the kids

Reach out to the elected officials

Public workshops

Partnering Process Seek Input

Incorporate stakeholder feedback

Ensure communication - web page, bill stuffers

Steps to Structural Change Meter equivalency ratios

Bill tabulation data

Consumption by Monthly Amount

-

100,000

200,000

300,000

400,000

500,000

600,000

700,0000 4 8

12

16

20

24

28

32

36

40

44

48

CCF / mo.

To

tal Resid

Comm

Industrial

Cumulative Consumption By Monthly Amount

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

0 3 6 9

12

15

18

21

24

27

30

33

36

39

42

45

48

51 +

Monthly

Cum

ula

tive

Resid

Comm

Industrial

Rate Structures Declining Block

Inclining Block

Uniform

Excess Use

Seasonal

“Cost of Service”

Fixed and Variable Charges Everything is fixed.

Everything is variable.

High fixed charge promotes revenue stability

High variable charges promote water conservation

Minimum Fixed – meter reading, postage, administrative costs, etc.

Declining Block Rates Charge less for usage in higher blocks.

Was very popular several years ago.

For example:

Consumption between 0 and 10,000 gallons in a month is billed at $2.50 per thousand gallons

Consumption between 10,000 and 20,000 gallons is billed at $2.25 per thousand gallons

Consumption over 20,000 gallons is billed at $1.75 per thousand gallons

Inclining Block Rates Charge more for usage in higher blocks

For example:

Consumption between 0 and 10,000 gallons in a month is billed at $2.50 per thousand gallons

Consumption between 10,000 and 20,000 gallons is billed at $3.00 per thousand gallons

Consumption over 20,000 gallons is billed at $4.00 per thousand gallons

Use care with increasing blocks Crude increasing blocks, (some as low as 8,000

gallons per month), can penalize large families.

Increasing blocks for commercial can penalize large businesses. If a large business is not more demanding on a water system than a group of smaller customers, such blocks can work against basic equity.

Uniform Unit Charges Major Advantages

Generally easy to implement, administer, and update

Are understandable and accepted by most customers

Major Disadvantages

Does not fully allocate system costs associated with peak/seasonal demand to usage which creates the peaks

May only marginally achieve conservation objectives

Excess (Individualized) Rates Rates that increase when usage goes above an

established “allotment”

Reflect individualized allotments for each customer

Often using 3 winter months to capture indoor usage

Effective, requires good billing data.

Water Conservation Mandated conservation efforts becoming more

common

Good practice in water-short regions

Good practice in terms of public relations

Conservation Rates A conservation rate structure must:

Focus on the most price-elastic uses of water, and

Provide a price signal sufficient to

Catch the attention of customers

Cause them to care