Memorandum
City of Lawrence
Department of Utilities
TO: Dave Corliss, City Manager
Debbie Van Saun, Assistant City Manager
FROM: Dave Wagner, Utilities Director
Ed Mullins, Finance Director
DATE: July 9, 2007
RE: Recommended Water and Wastewater Rates for 2008
The Utilities and Finance Departments recommend adjustments to water and wastewater rates for 2008 to reflect the cost of utilities services. Our recommendations are based on the Report on Revenue Requirements, Costs of Service, and Rates for Water and Wastewater Service (Report) provided by Black & Veatch to the City on August 2, 2004, analyses of the projected costs of services, updated project timing and cost estimates, and recent consultations with Black & Veatch staff.
Background Information
Our community’s viability depends—at its most basic level--on clean drinking water and the safe return of waste waters to the environment. Ongoing maintenance, system enhancements through automation, and capital improvements are keys to ensuring the capacity, reliability, quality and efficiency needed to deliver on water and wastewater needs, now and in the future. As originally set forth in the 2003 Water System Master Plan and Wastewater Master Plan, there are major capital improvements to services in planning or construction stages, including:
· the Clinton Water Treatment Plant Phase II Expansion Project,
· the transmission line project from the Kaw River Treatment Plant to the southeast (providing redundancy to North Lawrence, increased reliability to the Harper Water Tank, and growth opportunities to areas south of the Wakarusa River), and
· the Wakarusa Wastewater Reclamation Facility.
The updated list of capital improvements was used to develop our rate recommendations is attached.
Effective in 2005, the City Commission adopted a uniform water rate structure, which provides that within each customer class there is a uniform charge regardless of volume used. Added to this rate is a monthly service charge based on meter size and location inside or outside of City limits. Wholesale water rates for Baldwin City and Rural Water Districts (RWD) 1, 2, 4, 5 and 6 of Douglas County and RWD 13 of Jefferson County are also established.
Annual Revenue Requirements
The City’s investment and operational costs for providing water and wastewater services and infrastructure improvements are substantial. Both cash and debt financing structures are used, the latter of which typically incorporate substantial time horizons reflective of the usable life of financed infrastructure. These costs are to be recouped through revenues derived from water and wastewater service rates.
The Report contains a detailed financing plan for ensuring that water and wastewater rates are sufficient to meet annual revenue requirements for the period 2005 through 2009. Based on capital improvement plans in effect in 2003, this plan anticipated annual revenue increases of 4% and 9% for water and wastewater rates, respectively, with allocable costs to be recovered from customer classes consistent with services provided. The rate model was designed to be flexible in incorporating new cost data for optimal accuracy in assessing the required rate of return on City investment and recoupment through adjusted rates. Earlier this year, staff reported that rates were calculating out to 7% for water and 9% for wastewater. After adjusting projects and debt payment schedules, recent efforts have resulted in revisions to earlier projections. We are now recommending rate increases of 5% for water and 6% for wastewater in 2008 for our non-contract, inside the city limits customers. Additionally, we are recommending increases to our wholesale (contract) customers and outside the city limits customers.
Rate Structures and Conservation
Municipal water rates may be variously structured to reflect underlying cost of service principles as determined appropriate by the governing body. These rate structures include flat rates, declining rates, uniform rates, seasonal rates, inclining rates and excess use rates. It is important that any rate structure provides a predictable revenue stream in order to be confident of maintaining bond coverage requirements. Relevant factors to be considered in selecting the appropriate rate structure include:
· Financial stability, i.e., is the volatility of revenue increased or decreased?
· Social equity, i.e., is the rate structure equitable within its customer class?
· Environmentally sound, i.e., does the rate structure reflect the scarcity of water?
· Administratively manageable, i.e., can the utility explain the rate structure to its citizens and administer the program?
In response to Commissioner Highberger’s question regarding the effect of the current uniform rate structure on customer conservation efforts, we have only two years of usage (2005 and 2006) from which to draw conclusions and would prefer to provide the City Commission with an analysis this fall after one more irrigation season is completed. The customers most negatively affected by the new structure are the large residential irrigators who no longer benefit from a declining average cost of water as they use more and more water in the second lower priced block rate designed for commercial users. Our plan is to select a handful of large residential users to track their monthly usage patterns and compare them to monthly rainfall and average temperatures, using data from the year before the change and the three years after the change.
Rate Comparisons and Fee Waiver Policy
The attached spreadsheet shows water, wastewater, and system development charges of area and regional utilities. A topic of recent discussion was the City’s policy on waiving water and sewer fees, specifically waiver of the tap and meter fee for water services and the water and wastewater system development charges for affordable housing units. A staff memo is attached providing information on this topic.
Recommendations
Staff recommends increases for water and wastewater services as shown in the attached table. We also provide a table comparing typical monthly bills under existing and proposed 2008 rates for residential, multifamily, commercial and industrial customers.
Staff requests City Commission consideration and input regarding these proposed water and wastewater service increases so that the appropriate authorizing ordinance may be adopted, with implementation effective January 1, 2008. Additionally, direction is requested regarding a waiver policy.