MEMORANDUM
To: City Commission
From: Mike Wildgen, City Manager
Ed Mullins, Finance Director
Debbie Van Saun, Asst. City Manager
Re: Shulenburger letter of 12/08/04
Date: December 13, 2004
We are in receipt of Provost Shulenburger’s letter of December 8th and acknowledge the University of Kansas staff’s previously expressed concerns regarding the financial impact to the University of any water and wastewater rate increases. We also acknowledge that throughout the Commission’s discussion of water and wastewater rate increases, we’ve been careful to point out that in order to maintain these systems and provide for system reliability, regulatory compliance, and future growth (including KU’s growth), revenue must be available.
In this response, we would like to address the concept raised in the letter of assigning a separate rate for KU that recognizes its responsibility for “ownership, operation and maintenance that is consistent with other wholesale water service providers”.
Background Information. The University of Kansas is a water customer with two main master meters, one for the main campus and one for the campus located west of Iowa. Multiple accounts representing smaller meters for a variety of KU facilities are billed currently as “commercial class” customers. Over the years, the majority of KU’s usage has been billed through these two main master meters utilizing the lowest rate block in the current declining rate block structure. If the campus buildings had been separately metered, it’s doubtful many of these facilities would have qualified for this rate, since it requires usage over 500,000 gallons per month. One of the characteristics of the master metering system is that the University own and maintain their own distribution system on the main campus.
KU’s Water Distribution System. Acknowledging that the University owns and maintains their own distribution system is not to say that the University doesn’t benefit from improvements to the City’s water distribution system that surrounds the campus. In particular, the ability for the City of Lawrence to provide fire protection services to the University is directly related to these improvements and the City’s investment in maintaining this infrastructure system. For example, a new City waterline was installed in 2003 on Jayhawk Blvd. that was designed to support fire protection on campus. City staff from the Utilities and Fire/Medical departments located fire hydrants in appropriate locations along the new waterline to accomplish that goal. And while it is accurate that KU has their own distribution (piping) system on the main campus, in case of a fire event on campus, the Fire/Medical department will connect first to a fire hydrant on the City’s distribution system, if location and accessibility allows, because the City’s system is more reliable (i.e. contains sufficient water storage to fight a fire).
Another point raised in the letter was the cost per year to KU ($100,000) to maintain the four pumping systems and the 13 miles of water piping. The pumping system is necessary due to the terrain of the main campus and the corresponding requirement for pressures higher than that normally maintained in the City’s distribution system. The City’s development policy outlines the financial responsibility as follows:
“The City will provide water service at the pressures existing in the water system. Any customer requiring pressures higher or lower than normally maintained in the system, or abnormal quantities of the water for fire protection or other special purposes, shall provide the additional equipment required, such as pressure reduction devices or additional pumping and storage facilities within his property…”
We raise this point only to acknowledge that the University is paying for the pumping facilities because that is what is required of all our customers. Thus, the “unique” factor for KU can be limited to the internal piping system only. We are unsure how much of the $100,000 can be attributed to maintaining the piping system.
If KU were to be pulled out of the commercial class and treated as a separate class, the higher applicable demand factors may cancel out the cost reduction realized by maintenance of their distribution piping. Discussion of this demand factor issue is provided in more detail below.
Water Rate Increases. All water customers have enjoyed five years of no rate increases, including the University of Kansas. The Provost has calculated a fiscal impact to KU in the future that assumes an industrial class designation. It is the City’s analysis of KU’s consumption data that although the quantity mirrors that of a large industrial user, the usage of this large quantity does not mimic the usage patterns of a large industrial customer.
A more detailed analysis of the University’s demand characteristics is necessary, but looking at one year (2003) of usage indicates KU’s demand may be greater than that which is currently applied to KU and the other commercial class user group for the purposes of determining a uniform volume rate for that class. If KU were to be treated as a separate customer, we would need to ask Black & Veatch to look at monthly usage data for KU over the past five years to determine the maximum day and maximum hour demand factors for rate design purposes.
It is important to point out that the existing declining block rate structure recognizes differences in peak demand characteristics and is not based on any recognition of quantity discounts.
Wastewater Rate Increases. As noted in the Provost’s letter, there is only one proposed wastewater rate. The City currently has only one wastewater rate. The increases proposed for wastewater rates were included in the August, 2004 Black & Veatch Rate Study and provided again as an attachment to the November 9th City Commission agenda materials on the subject (table 11). Both of these sources of information have been available for months on the City’s web-site, which is where we typically direct interested parties for detailed information on City Commission agenda items.
System Development Charges. While we acknowledge that the one-time outlays for system development charges for new water and/or wastewater services has a financial impact on the University, the City Commission has indicated by their approval of these charges that they are utilizing them to recover the investment in treatment plants, water mains, major sanitary sewer lines and other “backbone facilities” required to serve these new customers without placing the financial burden on the existing customers.
Wholesale Water Customer Rates. The rates that have been approved for the City’s wholesale water customers (rural water districts and Baldwin City) consist of a uniform volume charge that takes into consideration wholesale water contracts that guarantee a minimum purchase amount to partially reduce the risk of serving these customers. Furthermore, these rates do not include any costs related to the maintenance or investment in small water mains serving retail customers, costs for municipal water usage, public fire protection related costs, or any costs related to the purchase of raw water from the Clinton Reservoir. In 2005, the wholesale water customer rate will be $2.25 per thousand gallons. It is assumed that KU would not want that rate, since it is higher than the commercial class uniform volume rate of $2.05 per thousand.
The wholesale customers have three main differences with KU: (1) they are outside city customers that could potentially be served by another water provider and as such they pay a higher rate of return to partially recover the risks to serve these customers; (2) their rates are based on higher demand factors that generally represent a mixture of residential and commercial customers, and (3) they will typically have or be required to have adequate system storage to help meet their maximum hour and public fire demand requirements. Since KU peaks off of the City's system, they could potentially have a maximum hour requirement greater than the current wholesale customers. Also, without their own storage, they should be charged a portion of the City's public fire protection costs.
Conservation Efforts. The Provost’s letter mentions on-going water conservation efforts by the University and the City assumes that those efforts are taking place, particularly in light of the financial concerns surrounding the State legislature’s failure to fund building operations since 2000. We also acknowledge KU’s cooperation with the City in reducing water consumption when peak demand periods necessitate cooperation between all of our large users.
Additional Information. Staff did a quick phone survey of the other Big 12 university cities to gain an understanding of how they deal with various service issues for their university customers. In summary:
10 of the 12 cities surveyed provide both water and sewer services to their respective university. The City of Columbia provided sewer service, but not water service to the University of Missouri. The City of College Station did not provide water nor sewer service to Texas A & M University because the University has its own water/wastewater treatment plants, collection system and distribution system.
Of the 10 cities providing water service, 5 provide special water rates to the universities. Of these 5 universities, 3 maintain their own distribution systems separate from their city’s distribution system.
We also surveyed Emporia, Hays, Pittsburgh and Wichita Kansas to get a sense of how other Kansas university communities handle these same issues. Again, in summary:
All four cities provide water and sewer service to their respective university.
None of the four cities provide special water rates to the universities nor do any of the universities have their own distribution system separate from their city’s distribution system.
Commission Direction. In order for KU to be considered for a wholesale water customer rate for the master meter(s), Black & Veatch would need to determine the University’s demand factors and utilize that information, along with the costs related to the maintenance and investment in their internal piping system for the main campus, to determine the rate. If these calculations result in a rate that is lower than the proposed uniform volume rate for the commercial class or the declining block rates under consideration, there would be an impact (higher rate) for other customers, due to the need to provide revenue in 2005 that will cover the costs to maintain and operate the water and wastewater systems and complete the proposed capital improvement projects. Additionally, a study may indicate it is appropriate to consider billing the dormitories on the campus at the multi-family rate (which is $2.31 per thousand in 2005 as opposed to the commercial rate of $2.05 per thousand) since the usage/demand associated with dormitories more closely matches our other multi-family customers.
Of course, if a study of a special KU rate is undertaken, decisions regarding a water and wastewater rate structure for 2005 should be postponed until after that study is complete. Fiscal note – this study falls outside the scope of the services heretofore contracted for with Black & Veatch.