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City of Detroit
Water and Sewerage
Department
Wholesale Customer Rates Meeting
Water Supply System
Meeting #3 – Allocated FY 2010-11
Revenue Requirements to Customers
December 17, 2009
TFG
THE FOSTER GROUP
Customer Rate Season Schedule
• This is the second of a series of meetings
 10/13 –Capital Improvement Program Presentation
 11/19 – Units of Service, Preliminary SYSTEM
Revenue Levels
 12/17 – Preliminary Cost Allocations to
Customers
 1/21/2010 – Preliminary Individual Rate Proposals
 2/24/2010 – BOWC Public Hearing
 3/ /2010 – City Council Public Hearing
 7/1/2010 – Effective Date for Rates
• Parallel meetings of TAC Work Groups
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TFG
THE FOSTER GROUP
Information Portals
• DWSD web site
 www.dwsd.org
 Customer Information / “Wholesale Customers
Season Rate Schedule”
• eroom
 For information contact Teresa Newman
 [email protected]
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TFG
THE FOSTER GROUP
Today’s Agenda
• Updated Preliminary Revenue Requirements
(And System Revenue) for FY 2010-11
• Preliminary FY 2010-11 Cost of Service
Allocations to Customers
• Explanation of Rate Model Application to
Determine Cost of Service Allocations
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TFG
THE FOSTER GROUP
The 3 Fundamental Steps in
the Water Rate Methodology
• Revenue Requirement Projections
How Much Money is Needed?
• Cost of Service Analysis
From Whom Should the Money be
Collected?
• Design of Recommended Rates
How Should DWSD Services be Priced?
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TFG
THE FOSTER GROUP
Utility Rate “Equalizer”
Liberal
Conservative
Utility Capital Financing Strategies
Utility Revenue Requirement Levels
Utility Cost of Service Allocation Approaches
Utility Rate Design Methodologies
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TFG
THE FOSTER GROUP
Water Rate Methodology –
Cost of Service Continuum
Reasonable
Simple
Equitableness
Precise
Complexity
Complex
• DWSD Rate Fundamental Principle:
“Use best available, verifiable
information to establish water and
sewer rates”
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TFG
THE FOSTER GROUP
FY 2010-11 Water
Supply System Revenue
Requirement Update
TFG
THE FOSTER GROUP
Annual Flow Volumes Rate Planning Challenge
• Annual Sales Volumes in new
contracts do not reflect recent
reduction in in actual sales
volumes
• Continuing to adhere to contract
volumes may necessitate
modifications in the rate
development process
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TFG
THE FOSTER GROUP
Updated Water Supply System FY
2010-11 Revenue Requirements
• Projected Revenues have decreased
Reflects information from recently
finalized amendments (6 as of 12/11)
• Projected Cash Basis Revenue
Requirements have been increased
Reflects DWSD’s intention to establish
working capital in event more
amendments produce similar revenue
reduction
• Budget request finalized – meets
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target established for planning TFG
THE FOSTER GROUP
Water Supply System Preliminary
Revenue Level – November Version
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TFG
THE FOSTER GROUP
Water Supply System Preliminary
Revenue Level – Updated Projection
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12/17/09
TFG
THE FOSTER GROUP
Preliminary Water Rate Level –
Increase Drivers
3.8%
5.1%
0.6%
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Revenue Base
O&M
Capital
TFG
THE FOSTER GROUP
DWSD FY 2010-11 Combined
Water / Sewer Revenue Req’t
8%
21%
Labor
Purchased Svcs
Utilities/Chemicals
10%
Other O&M
Debt Service
DS Coverage
45%
12%
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4%
TFG
THE FOSTER GROUP
DWSD Combined Water /
Sewer Revenue Req’t
FY 2010-11
FY 2003-04
8%
13%
21%
25%
10%
12%
33%
45%
12%
12%
5%
4%
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Labor
Purchased Svcs
Utilities/Chemicals
Other O&M
TFG
THE FOSTER GROUP
DWSD W&S Rev Req’t / Water
Sales Comparison ($ millions / mgd)
900
800
700
600
Water Sales
DS Coverage
500
Debt Service
Other O&M
400
Utilities/Chemicals
Purchased Svcs
300
Labor
200
100
0
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FY 2003-04
Cost / MGD
FY 2003-04
$1.24
FY 2010-11
FY 2010-11
TFG
$1.92
THE FOSTER GROUP
Preliminary Allocation of FY
2010-11 Water Supply
System Revenue
Requirements to Customers
TFG
THE FOSTER GROUP
Preliminary Revenue
Requirements to Customers
• Costs have been allocated to
customers in the rate model following
existing methodologies and protocol
• Utility Basis Allocation
• Consistent Application of “Contract
Method” Water Rate Method
Reflects modification to units of service
for Deduct Meter Customers
• RESULTS ARE PRELIMINARY
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TFG
AND ARE MAY CHANGETHE FOSTER
GROUP
Utility Basis Characteristics
• Required by Michigan Public Act 89
• More reliable and stable source for
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capital cost allocation
• Better “generational equity”
alignment with cost recovery and use
of assets over their useful life
• Provides fair return on investment to
Owner customers of utility
• Protects Non-Owner Customers from
potentially irresponsible financing
TFG
decisions made by Owner THE FOSTER GROUP
Utility Basis Fundamentals
• Revenue Requirements Allocated to
Customers Consist of:
 Operation and Maintenance Expense
 Depreciation Expense
 Return on Rate Base
• O&M & Depreciation Proportionally (based
•
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on use of system) Allocated to Customers
Irrespective of Ownership Status
Rate Base (Investment in Facilities) also
Proportionally Allocated
 Rate of Return for Non-Owners must be
“reasonable”
TFG
 Owner Customers pay balance
THE FOSTER GROUP
Sample Capital Cost Recovery for
DWSD Infrastructure Investment
$10
Annual Revenue Req's - millions
$8
$6
$4
$2
$0
($2)
($4)
1
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6
11 16 21 26 31 36 41 46 51 56 61 66
System Cash
Suburban Utility
City Cash
TFG
THE FOSTER GROUP
Application of Rate of Return –
DWSD 2011 (All $ figures in millions)
Net Plant Investment = $2,309.0
Detroit Retail
Suburban Wholesale
$682.8
$1,626.2
x 6.95% ROR
Total Return
$ 113.0
$132.0
$ 19.0
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$682.8
= 2.79%
System Rate of Return
$132.0 / $2,309.0 = 5.72%
TFG
THE FOSTER GROUP
Water Supply System
Rate of Return History
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8.0%
4.0%
7.0%
3.5%
6.0%
3.0%
5.0%
2.5%
4.0%
2.0%
3.0%
1.5%
2.0%
1.0%
1.0%
0.5%
0.0%
0.0%
Avg Debt Rate
Suburban ROR
MarginTFG
THE FOSTER GROUP
Rate of Return Margin Over
Average Cost of Debt
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2.00%
1.35
1.75%
1.30
1.50%
1.25
1.25%
1.20
1.00%
1.15
2004 2005 2006 2007
2008 2009
2010 2011
Margin
Margin%
TFG
THE FOSTER GROUP
Preliminary FY 2010-11 Cost of
Service Allocation to Customers
• Average Suburban Wholesale
Increase = 9.9%
• Average Detroit Retail Increase =
8.3%
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TFG
THE FOSTER GROUP
Preliminary Cost of Service
Allocations – Impact Analysis
• Most indicated changes clustered around
average
• Somewhat more volatility than FY 200910
New Contract Demands from Amended
Contracts
Impact of Change in Reflecting Deduct
Meters
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TFG
THE FOSTER GROUP
FY 2010-11 Cost of Service Allocations
Impacts to Suburban Wholesale Customers
15%
Annualized Increase
10%
5%
0%
1
6
11
16
21
26
31
36
41
46
51
56
61
66
71
76
81
86
-5%
Customers
-10%
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TFG
THE FOSTER GROUP
Next Steps
• Ongoing review of cost allocations
• Design of water rate schedules,
including implementation of fixed
monthly cost recovery
• Next meetings
January 21, 2010 – Preliminary Proposed
FY 2010-11 Water Rates
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TFG
THE FOSTER GROUP
Takeaways
• DWSD announces an increased preliminary
•
•
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estimate of Overall SYSTEM Revenue
Increase from 8.4% to 9.5%
Preliminary impacts on individual customers
have been shared
Variances primarily attributable to changes
in contract demands
Contract Negotiation “Deadlines”
Jan 15 for Jan 21 Proposals
TFG
THE FOSTER GROUP
TFG
12/17/09
THE FOSTER GROUP
Illustration of Rate “Unbundling”
Functional Cost Component
Commodity
Maximum Day Usage
Peak Hour Usage
Peak Hour Increment
Peak Hour Usage Distance
Commodity Distance-Elevation
Maximum Day Distance-Elevation
Peak Hour Usage Distance-Elevation
Peak Hour Increment Distance-Elevation
Customer A
Customer B
Service Component
Treatment Plants
Treatment Plants
NA
Reservoirs
Transmission Mains
High Lift Pumps, Booster Stations
High Lift Pumps
High Lift Pumps, Booster Stations
High Lift Pumps, Booster Stations
Billing
Meters
Primary Service Category
TREATMENT
TREATMENT
NA
STORAGE & PUMPING
PIPES & METERS
STORAGE & PUMPING
STORAGE & PUMPING
STORAGE & PUMPING
STORAGE & PUMPING
PIPES & METERS
PIPES & METERS
TFG
12/17/09
THE FOSTER GROUP
Illustration of Rate “Unbundling”
Functional Cost Component
Commodity
Maximum Day Usage
Peak Hour Usage
Peak Hour Increment
Peak Hour Usage Distance
Commodity Distance-Elevation
Maximum Day Distance-Elevation
Peak Hour Usage Distance-Elevation
Peak Hour Increment Distance-Elevation
Customer A
Customer B
Service Component
Treatment Plants
Treatment Plants
NA
Reservoirs
Transmission Mains
High Lift Pumps, Booster Stations
High Lift Pumps
High Lift Pumps, Booster Stations
High Lift Pumps, Booster Stations
Billing
Meters
Primary Service Category
TREATMENT
TREATMENT
NA
STORAGE & PUMPING
PIPES & METERS
STORAGE & PUMPING
STORAGE & PUMPING
STORAGE & PUMPING
STORAGE & PUMPING
PIPES & METERS
PIPES & METERS
TFG
12/17/09
THE FOSTER GROUP