Document 7418509
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Transcript Document 7418509
Cost of Service Based
Water and Wastewater
Rates
City of Lawrence, Kansas
February 11, 2004
J. Rowe McKinley
Keith D. Barber
Current Utility Rate Status
Prior Rate Report Completed in August 1999
Water & Wastewater Rates Designed for Calendar
Years 2000 through 2004
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No Water Rate Increases
Annual Wastewater Rate Increases of 6%
System Development Charges
First Imposed January 1, 2001 at Reduced Levels
Four-Year Gradual Phase-In Period
Current Charges Probably Less than Equity Value
Introduction
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Key Issues
Project Approach
General
Water Rates
Wastewater Rates
Rate Design Methodology
System Development Charges
Policy Issues
Key Issues
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Revenue Adequacy
Optimal Multi-Year Financial Plan
Fair and Equitable Cost Allocations
Practical Rate and Billing Formats
Water & Wastewater Service Charges
System Development Charges
Septage Charges
Customer Understanding and Acceptance
Project Approach - General
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Water Rates – AWWA Principles of Water
Rates, Fees, and Charges (M1, 5th Edition)
Wastewater Rates – Water Environment
Federation (WEF) Financing and Charges
for Wastewater Systems
Guidelines presented in both manuals
have been accepted by courts and public
utility and other rate commissions
Project Approach - Water
Utility Basis of Rate Design – Permits Recognition
of Proprietary Responsibilities and Risks of Serving Outside
City Customers.
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Base – Extra Capacity Cost Allocation
Methodology
Special Considerations
Wholesale Customers
University of Kansas
Water Utility
Cost Causative Components
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Base – Average Water Use
Maximum Day – Peak maximum day
demand exerted on the system
Maximum Hour – Peak maximum hour
demand exerted on the system
Customer Requirements
Meter Reading & Billing
Meters and Services
Public Fire Protection
Water Cost of Service Concepts
Maximum Hour
Extra Capacity
Base
Annual
Average
Day
Maximum Day
Extra Capacity
Maximum Day
Extra Capacity
Treatment Plant
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Water Mains
Project Approach - Wastewater
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Utility Basis of Rate Design
Cost Allocations – Cost Causative
Excess Strength Surcharges
Septage Charges – Based on Same Volume
and Excess Strength Charges Applied to
Other Customers
Wastewater Utility
Cost Causative Components
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Volume – Average wastewater discharge
Contributed wastewater
Infiltration / Inflow (Volume Portion)
Capacity – Maximum wastewater discharge
Contributed wastewater
Infiltration / Inflow
Wastewater Strength (Contributed & I/I)
Biochemical Oxygen Demand (BOD)
Suspended Solids
Customer
Billing
Infiltration / Inflow (Customer Portion)
Policy Issue
Project Approach - Methodology
Step 1 – Revenues and Revenue
Requirements
Step 2 – Cost of Service Allocations
Step 3 – Rate Design
User-Friendly Rate Model
Revenue
and Revenue
Requirements
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Cost of
Service
Allocations
Rate
Design
Step 1
Step 1 – Revenues and Revenue
Requirements
Step 2 – Cost of Service Allocations
Step 3 – Rate Design
Provide adequate funding of future
utility operating and capital program
needs with minimum adverse impact
on overall level of customer charges
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Step 2
Step 1 – Revenues and Revenue
Requirements
Step 2 – Cost of Service Allocations
Step 3 – Rate Design
To Provide an Equitable Measure of
Costs By Class for the Subsequent
Design of Cost Based Rates of
Charge
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Step 3
Step 1 – Revenues and Revenue
Requirements
Step 2 – Cost of Service Allocations
Step 3 – Rate Design
Establish Practical Rates That
Recognize Allocated Costs of
Service by Class, and are Also
Understandable and Fair
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System Development Fees
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Purpose – Growth Pays For Growth
Basic Methodologies
System Buy-In
Incremental Cost-Pricing
Value of Service
Asset Valuation Methods
Original Cost (OC)
Reproduction Cost (RC)
Depreciation (OCLD & RCLD)
System Buy-in Methodology
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Determine Total Equity Value
Determine Available System Capacity
Divide Total Equity Value by Available
System Capacity to Determine Unit Equity
Value
Apply Unit Equity Value to Customer Usage
to Determine System Development Charge
Policy Issues
1. Capital Financing
2. Debt Service Coverage
3. Fire Protection
4. Water Rate Structure
5. System Development Charges
6. I/I Cost Recovery
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Issue 1
Capital Financing
Capital Financing Mix?
Cash – Pay-As-You-Go
Debt
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Traditional
SRF Loan Program
System Development Charges
Issue 2
Debt Service Coverage
Based on Combined Utility Approach
Large Coverage Ratio – 140%
Lower Debt Service Coverage Requirement?
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Refinance Existing Debt
Reduce Required Coverage to 125%?
Rate Design Target Level – 130%?
Issue 3
Private Fire Protection Charges
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It is common utility practice to charge
commercial customers a private fire
protection charge for private fire
connections serving their properties
Should a private fire protection charge be
imposed by the City of Lawrence?
Issue 4
Water Rate Structure
General
Customer Charges
Volume Charges
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Uniform
Declining Block
Inverted Block
Seasonal (Conservation)
Alternative Pricing Options
Rate Structure - General
A rate structure normally consists of various
elements:
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A fixed or minimum rate for the lowest
consumption levels and to recover fixed,
customer related costs.
A charge that generally varies with the
volume consumed.
Rate Structure - General
A properly structured rate should recognize
the following rules:
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Yield total required revenue in a stable
and predictable manner.
Minimize unexpected changes to
customer’s bills.
Discourage wasteful use.
Rate Structure - General
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Promote fairness and equity among
classes of customers.
Avoid discrimination.
Maintain simplicity, certainty,
convenience, and feasibility.
Comply with all applicable laws.
Customer Charges
1. Service Charge:
Recovers customer related costs:
Meter costs
Meter reading
Billing and collecting
Customer service
Varies by size of meter
No volume allowance or costs
included
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Customer Charges
2. Minimum Bill Charge:
Recovers same costs as in Service
Charge
Varies by meter size
Includes small volume allowance and
associated cost
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Monthly Service Charge
The monthly service charge should be
determined based on the cost to read the
meter, prepare the bill, and provide other
customer related services.
Monthly rate =
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Total customer
service costs
Total number
of bills
Monthly Service Charge
Check to ensure that this minimum or fixed
monthly rate is affordable for your
community.
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Volume Charges
1. Uniform Volume Rate
2. Declining Block Rates (Lawrence)
3. Inverted Block Rates
4. Seasonal (Conservation) Rates
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Volume Charges - Uniform
1. Uniform Volume Rate
All consumption billed at same unit
rate:
All customers
Separate rate by class
Simplicity/customer understanding
are highly valued
Customer classes have similar usage
characteristics/demand
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Volume Charges - Uniform
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Customer consumption data is limited
Easy to implement
Provides revenue stability
Sends conservation signal relative to Flat
Rates or Declining Block Rates
Volume Charges – Declining Block
2. Declining Block Rates
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Varied demands by customer class
A single rate schedule applicable to
all classes
System costs decline with increasing
usage (economies of scale)
Volume Charges – Declining Block
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Requires adequate customer class
consumption records.
Provides equitable class cost
recovery.
Appears to conflict with conservation
goals.
Provides revenue stability.
Can be difficult to implement.
Volume Charges – Inverted Block
3. Inverted Block Rates
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Requires adequate customer class
consumption records.
Conservation-oriented/sends strong price
signal.
Not generally applicable to large
commercial customers.
Can result in revenue instability (requires
Rate Stabilization Reserve Fund).
Can be difficult to implement.
Volume Charges - Seasonal
4. Seasonal Rates
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Applicable where there are large
seasonal demands and associated
costs.
Conservation-oriented.
Can result in revenue instability.
Can be difficult to implement.
Volume Charges - Seasonal
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Two alternatives:
On-Peak (Higher Unit Rate)/Off-Peak
(Lower Unit Rate).
Excess Use (Usage > 1.25 x Winter
Average @ Higher Unit Rate).
Issue 5
System Development Charges
Growth Pays for Growth
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System Buy-In Methodology
Current Charges Have Not Been
Updated Since They Were Enacted In
1999
Large Increases May Be Required
Incremental Cost Pricing
Dedicated Capacity Charges?
Issue 6 - Infiltration / Inflow (I/I)
Cost Recovery
I/I Costs Must Be Recovered from
Customers
Currently Recovered:
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2/3 on Customer Basis
1/3 on Volume Basis
Should this allocation basis be changed to
lower minimum charges?
Questions / Answers
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