what’s new in water rates - pnws-awwa.org pm utility 0… · what’s new in water rates? • new...

2013 Pacific Northwest Section AWWA—Spokane, WA

Principles of Water Rates, Fees, and Charges

What’s New in Water Rates:

Insight into AWWA’s Newly

Published M1 Manual

Presented by:

Paul Matthews, Tualatin Valley Water District

Tom Gould, HDR Engineering

2

M1 – A Foundation to Build On

• M1 Manual provides the theory and methodologies

of establishing cost-based water rates and fees

• Sound cost-of-service process

• Functionalize-Allocate-Distribute (FAD)

• Provides a basis for rate design

• Support for staff and public officials

Starting Point for Developing a Sustainable

Long-Range Financial and Rate Plan

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. .

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3

What’s New in Water Rates?

• New M-1 Manual is an update to the 5th Edition

published in 2000

• A number of sections had major updates to

reflect changing and current industry thinking

Affordability

Water-Budget Rate Designs

System Development Charges

Outside-City and Wholesale Rates

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How Can M1 Manual Help?

• Long-range revenue requirement forecasting

• Customer consumption analysis

• Cost-of-service methodologies

• Conservation rate designs

• Price elasticity in water demand forecasting

• Fixed charges for revenue requirement recovery – revenue stability

The M1 Manual is a powerful reference and resource that addresses:



Affordability:

Challenges & Opportunities

6

Affordability – Current Issues

• Utilities design rates to be cost-based

• Affordability and low-income issues are now impacting both customers and the utility • Can be addressed through non-rate and rate

programs

• Specific circumstances may require special rates

How should a utility systematically best address this policy and technical issue?

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Different and Varying

Definitions of Affordability

• The ability of the poorest households to afford their water and wastewater bills

• The ability of the average household to afford their water and wastewater bills

• The ability of the community to bear the total costs of providing water and wastewater infrastructure and services

• The ability of the community to afford these costs as measured by the USEPA or other relevant regulatory agency

. .

. .

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It’s an Important Policy Decision

• Affordability is likely to become more relevant

and important

• Affordability and low-income programs are a

policy decision of the governing body

• Differing viewpoints

• Water is an “essential need” and should be

addressed via an affordability/low-income program

• Not the role of a water utility to address society’s low-

income or affordability issues

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General Considerations

• Rates/bills are typically increasing at a level

which exceed general inflation

• Appropriately designed programs can benefit

both the customer and the utility

• Late payments, shut-off notices, service terminations,

bad debt write-offs

• As bad debt increases, the cost to other ratepayers

rises

10

Common Affordability Programs

• Programs to working with the customers:

• Arrearage forgiveness

• Leak detection assistance

• Fixture repairs

• Crisis vouchers

• Safety net concepts

• Budget billing (average monthly bills)

• Alliances with community service organizations

• Targeting conservation outreach and education

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Water Rate Affordability Programs

• Different approaches or options

• Discount on the full bill

• Discount on the variable (consumption) portion

• Discount on the fixed (minimum) portion

• Percentage of income (sliding scale)

• Fixed credits

This chapter of the M1 manual discusses in detail the advantages and disadvantages of each approach:

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Other Key Chapter Items

• Historical perspectives

• Income verification

• Administrative considerations

• References to other leading research and

discussion on the topic

• Case example calculations

• Securing support for the program from utility

leadership and stakeholders



Water Budget

Rate Structures

Water Rate Structures

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FLAT RATE: $xx / month regardless of usage

Pros: Revenue stability, easy to understand

Cons: Inequitable, no conservation signal, not affordable for essential use

Revenue Mechanism

. .

. .

UNIFORM RATE: $xx / ccf

Pros: Revenue stability, administrative ease, easy to understand

Cons: Weak conservation, not affordable for essential use

Revenue Mechanism

Price Information


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. .

. .

SEASONAL RATE: $ xxx / ccf in Summer, $ x/ccf in Winter

Pros: Promote water conservation in the summer, easy to administer

Cons: Revenue instability, not affordable for essential use

Revenue Mechanism

Price Information

Behavior Change


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. .

. .

INCLINING TIERED RATE:

Pros: Promote conservation, affordable for essential use, easy to administer, easy to understand

Cons: Penalize large users

Revenue Mechanism

Price Information

Behavior Change


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. .

. .

Water Budget Tiered Rate:

Pros: Promote water efficiency, equitable, affordable for essential use, drought allocation tool, revenue stability

Cons: High administrative cost, harder to understand

Revenue Mechanism

Price Information

Behavior Change

Water Resource Management


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. .

. .

What Is a Water Budget?

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A water budget rate is a form of an increasing block rate

structure where the amount of water within each block is

individually tailored for each customer

to reflect their efficient water use.

Conservation & Efficiency

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Water Efficiency

• Reducing water waste

• Target driven

• Appropriate water use

Water Conservation

• Reducing water usage

• Rules and regulations

• Restricting water use

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.

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Conservation Rate Structures

Inclining Block Pros

+ Easy to administer

+ Sends clear conservation signal

+ Addresses affordability for basic needs

Cons

- Targets larger water users

High use = wasteful use

- Equity concerns

Penalizes large families / lots

Exacerbated during drought pricing

Water Budget Pros

+ Provides water efficiency targets

Can address equity concerns for large families / lots

+ Allocates drought penalty rates

+ Addresses affordability for basic needs

Cons

- Higher administrative costs

How is efficiency defined?

Billing system requirement

Proactive public outreach

Increases staff for customer service

Complicated—customer understanding

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. .

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Water Resource Management:

Defining Efficiency

• Water budget rate structures are typically

applied first to:

Irrigation accounts

Residential accounts

Water budgets are more challenging for

commercial customers

• Objective method in determining efficient water

use for irrigation and residential accounts

Water Budget Tiered Rate

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Outdoor Water

Budget

Tier 2 Tier 3

P1

P2

P3

Quantity Tier 1

Indoor Water

Budget

Excessive Use

(Percentage of total water

budget)

Rates

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Defining Efficiency: Outdoor Water Budget

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How Do We Define Equity?

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• Why should a larger property receive a larger water budget when others have the same meter size and paid the same SDC?

• Why should two customers with the same water usage have different bills?

• A utilities costs are largely based on the capacity required to serve customers. shouldn’t capacity requirements impact rates?

Arguments Against Water Budgets:

26

How Do We Define Equity?

• We should first focus on achieving efficiency, regardless of family size and landscape area

• Focus on allocating least expensive water to efficient customers

Arguments for Water Budgets:



System Development

Charges

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What is a System Development

Charge (SDC)?

• One-time charge paid by new connections to

finance capital facilities benefitting such

development

• Variety of names: development impact fee,

capacity fee, connection fee, capital facility fee,

buy-in fee, mitigation fee

• Certain legal requirements for establishing

SDCs (vary by state and locale)

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SDC Financial Goals and Objectives

• Maintain existing levels of utility service or possibly increase level of service (LOS)

• Ensure new growth pays its fair share for new or expanded facility capacity

• Potential to minimize future debt

• Potential to minimize rates and taxes

• Encourage disciplined capital improvement planning

• Promote inter-generational equity for system capacity – Equitably reimburse existing customers

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Limitations on the Use of SDC Revenues

• Use of SDC proceeds are generally limited by

law

• Used to pay directly for a growth-related capital

improvement project

• Pay for long-term debt directly related to a growth-

related capital project

• SDC proceeds should not be used for O&M

• Utilities should not be overly-reliant on SDC

receipts (see housing crash of 2008)

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Legal Background

• Rational Nexus Test:

1. A connection established between new development and

the new or expanded facilities needed. This establishes

the rational basis of public policy

2. Identification of the cost of the new or expanded facilities.

This established the burden to the public of providing the

facilities.

3. Appropriate apportionment of that cost to new

development in relation to the benefits it reasonably

receives – establishes the “nexus” between the fees being

paid and the benefit that new development receives

. .

.

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Various Fee Methodologies

• Buy-In Method

Based on the value of existing facilities and capacity

Four different valuation methodologies for existing facilities

• Incremental Cost Method

Based on the value of to expand the existing system capacity

• Combined Approach

Blend of the buy-in and incremental cost methods

This chapter of the M1 manual discusses each methodology in detail and provides

a case example calculation

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Buy-In Approach Example

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Mechanism for Applying SDCs

• Different methods of applying SDCs

• Meter size and meter equivalencies (Table VI.2.-5)

• Equivalent residential units (ERU)

• Dwelling (plumbing) fixture units

• Estimated usage

• Timing of SDC assessment and collection

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Other SDC Technical

and Administrative Issues

• SDC Revenue (Debt) Credits

• Use of SDC Receipts

• Reimbursement policies

• Economic development issues

• Administrative issues

• Refunds, Redevelopment

• Accounting issues

• Restricted fund, receipts, expenditures, etc.

• When to update SDCs



Outside-City and

Wholesale Rates

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Overview of Outside-City Services

• Why included now?

• Increasingly common questions

• Legal disputes

• Limited guidance in prior editions

• Outside-city service benefits

• Shared costs

• Economies of scale

• What is cost-basis for outside-city differential

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Revenue Requirement Methodologies

• Cash

• Utility Basis

• Utility Basis with Cash Residual

• Rate Differential (Multiplier)

Advantages Disadvantages

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Cash vs. Utility Basis

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Comparison of Outside-City Approaches

Cash Basis

• Conforms to municipal budgeting

• Transparency

• Simplicity

• Limited data requirements

• Matching of revenue and cash requirements

Utility Basis

• Explicit recognition of business and other risks

• Technical justification of inside vs. outside City rate differentials

• Consistent with typical Public Utility Commission (PUC) requirements

Utility Basis with Cash Residual

• Matching of revenue recovery and cash requirements

• Explicit recognition of business and other risks

• Justification of inside vs. outside City rate differentials

Rate Differentials

• Historical precedence

• Support municipal policy objectives

• Transparency

• Simplicity

• Limited data requirements

• Lower costs

• Matching of revenue recovery and cash requirements

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Risk Factors

• Business Risk • Unforeseen events

• Tort / civil liabilities

• Customer withdrawal

• Interest Rate Risk • Long-term investments

• Financial Risk • Commitment of debt capacity

• Liquidity Risk • Commitments to fixed assets

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Outside-City Retail and Wholesale

Customer Classifications

• Necessary or desirable to separate inside- and

outside-city users?

• Differing levels of service?

• Transmission vs. distribution

• Fire protection

• Differing service characteristics?

• Essentially same considerations as for inside-

city services

Rate Equity Public Policies

Administrative Customer Service

Stakeholder Engagement

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Summary and Conclusions

• Outside-City service can convey significant benefits to all parties • Economies of scale

• Municipal returns

• Unique circumstances of individual utilities determine relative advantages of: • Alternative methods to determine revenue requirements

• Assessment of risks and return determination

• Customer classification

• Implementation requires care and attention to legal and stakeholder issues



Closing Thoughts

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Outline of Topics in the M-1

• Overview of Cost-Based Rate Making

• General Concepts for Establishing Revenue Requirements

• Revenues

• Operation and Maintenance Expenses

• Taxes

• Capital-Related Costs

• Examples of Revenue Requirements

• Cost Allocations • Allocating Revenue Requirements to Cost

Components

• Distributing Costs to Customer Classes

• Rate Design • Selecting Rate Structures

• Uniform Rates

• Decreasing Block Rates

• Increasing Block Rates

• Seasonal Rates

• Water-Budget Rates

• Fixed Charges

• Rates for Fire Protection Service

• Other Rate Issues • Outside-City and Wholesale Rates

• Standby Rates

• Drought and Surcharge Rates

• Low-Income Affordability Rates

• Negotiated Contract and Economic Development Rates

• Indexed Rates

• Price Elasticity

• Marginal Cost Pricing

• Miscellaneous and Special Charges

• Capacity and Development Charges • Connection and Customer Facility Charges

• System Development Charges

• Availability Charges

• Implementation Issues • Public Involvement in Rate Making

• Legal Considerations

• Data Requirements

• Appendices, Glossary, Other Useful Manuals

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Why You Need A Copy of the M-1

• The 6th Edition is the most comprehensive

manual on water rate setting that is available

• Discusses and addresses many of the

contemporary issues that you may currently be

working on (or struggling with)

• Culmination of the voluntary efforts of the

AWWA Rates and Charges Committee

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