HomeMy WebLinkAboutOB 2 WTR RATE STUDY 12-20-82DATE ].5, Inter-Corn
TO:
FROM:
SUBJECT:
HONORABLE MAYOR AND CITY COUNCIL
BILL HUSTON, CITY MANAGER
WATER SERVICES FINANCIAL REVIEW AND RATE STUDY
Attached is a report which includes an analysis of a surcharge which could
be enacted to fund the cost of retiring bonded indebtedness assumed from
the Tustin Water Works and the acquisition price. The City Council
directed staff to analyze the financial impact of a surcharge in lieu of
refinancing the principal payments due on the assumed debt beginning in
1985. The report includes two options with regard to a surcharge and a
modification of Montgomery EngineePing's original recommendation.
BH:dmt
~J.-~.-~ OF -ruSTIN
WATER SYSTEM FINANCIAL REFIEW AND I~ATE STUDY
SUPPLEMENTAL REPORT
INTRODUCTION
An en~dneerin~ report entitled "City of Tustin Water System Financial Renew
~d Rate Stud~," dated Octobe~ ZZ~ 1982, w~ p~es~ted to the Cit7 Co~cil in
woe~hop session ~ November 16, 198Z. ~le no ferm~ acti~ w~ t~en ~
the City Co~l at t~t time, a number of conce~ ~d sever~ corrective
su~estio~ were e~=e~ w~ co~titute the b~ f~ ~ su~lement~
~eport.
The en84.neering report reviewed the financial histor~ of the City's Water
Department since the City assumed operating responsibility on November 1,
1980. Five-year financial projections, alternative water pricing considerations, a
water rate structure, and specific rate recommendations adequate for the next
two-year period were included in the October report.
An important aspect of the report is a clear delineation of the City's debt
obligations including the system's acqu/sition cost, the assumption of former
Tustin Water Works bond debt and a negative cash flow obligation to the City's
General Fun& These obligations represent a substantial portion of total Water
Department cost until they are finally retired~ and the recommended rate
structure included a debt retirement increment that assumed some refinancing
of existing debt.
Several members of the Council have expressed support for the general
'principles contel-ed in the proposed rate structure, however, would prefer to see
at ]east some o£ this debt obligation treated as a surcharge superimposed on
rest/ar rates rather than refinance the debt as it comes due.
Other Council expressions noted during the workshop session, included the desire
for a shorter time-fr~,-e between rate adjustments to a/leviate long-term
assumptions related to future City wages and provision for pass-throu~h adjust-
ment of costs that are beyond City control. Pass-through cost adjustments
generally include enerl~y and purchased water supply, however, if labor cost
increases were also included in the pass-throu~h provision, re/,~tlar formal rate
adjustments could continue to take place at January 1 each year. Mid-winter
rate adjustments are highly desirable from a customer relations point of view.
REVENUE PLANNING MODIFICATIONS
In conformance with the suggestions outlined above, particularly the desire for
rate adjustment to accurately reflect City wage Fates at July 1, the revenue
$-1
pl~,,-- pl'esented he~-ein reflect the City's current 1982-83 budget for operation
and maintenance as presented on Table 3-5 (pa~e 3-9) in the October ensineer's
report.
In addition to the use of current 1982-83 operation and n~i-tenance budget
figures, two pl~-~ for debt surcharges are presented. Plan A provides for a
surcharge that represents a si~king fund for the retirement of Tustin Water
Works Bonds only, on schedule without refinancing. Plan B provides a surcharge
that includes the Tustin Water Works Bond retirement and the re~flar acquisition
debt payment of November 1983 as shown on page 2-10 in the en~eer's report.
In both cases the surcharge represents 75 percent of the ~,~,~ua/ sinking fund
amount with the remal,~i,~$ 25 percent allocated to commodity rates in accord-
ance with the October enKineering report rate structure recommendations.
COST RECOVERY REOUIItEMENTS
Based on the previous discussion, the totaJ 2n-ual cost recover7 requirement is
$4,148,954 divided approximately 60 percent for operation and maintenance and
40 percent for capital related expenditures. Over 31 percent o£ the total
cost is direct debt service. The following table presents a summary of the costs
that are used herein to determine rates and charges for the respective revenue
plans.
COST SUMMARY
OPERATION AND MAINTENANCE
Customer Service Expense
Other O&M
TOTAL O&M
$ 209,475
Z,Z93,348
SZ,50Z,823
CAPITAL
Capital Improvements
Acquisition Debt (Nov. 1983)
Tustin Wastewater Bonds {Z ye ~,,-,ual)a
Developer Refunds
Negative Cash-Flow Interest
TOTAL CAPITAL
$ 351,700
459,931
641,500
110,000
83,000
$1,646,131
TOTAL ANNUALIZED COST
$4,148,954
aIncludes interest and the accumulation o£ $900,000 principal due January
9, 1985 (two ]rears).
The recommended structure for both rates and surcharge provisions a. re
described as follows:
S-Z
Customer Service Expense is equally divided between all customers
regardle~ of use or meter size and is included in a bimonthly
"service availability charge."
Seventy-five precent (75%) of the =--ual capital expense not funded
from other sources (or the surcharge) is allocated to the unit
capacity of respective meter size or units served in the case of
multiple residential property and is also included in the "service
availability charge."
Seventy-five percent (75%) of the debt obligations earmarked to
s~rcharges are allocated to customers in the same manner as capital
expense in 2, above.
ltem~irting costs incluJ~ng other operation and maintenance expense
and 25 percent of capital cost (not included in either the
or service availability charge) are allocated to commodity rates.
Commodity rates are uniform including a bimonthly lifeline rate for
the first 600 cubic feet of consumption.
ALTERNATIV~ DEBT SURCHARGF~
Plan A includes the payment of interest on outstanding Tustin Water Works
Bonds, $191,500/year and principal accumulation of $450,000 per year for a total
of $641,$00 anv-~lly in calendar 1983 and 1984. The $900,000 bond principal
payment is due January 9, 1985. Allocation of 75 percent of this ~--ual cost
among the total capacity -,~ts served by the City (see Table 5-2 in the
engineering report} results in a surcharEe of $2.85 bimont_hly per capacity --~t.
The multiple residential surcharge would be $Z.~8 per residential u-{t.
Plan B includes the surcharge cost allocation demonstrated in Plan A plus the
inclusion of the November 1983 acquisition payment. The acquisition debt
pa~,-.ent scheduled for November 1983 includes $147,826 for principal and
$312,105 of interest (total $459,931). An allocation o£ 75 percent of this annual
cost arnon~ all capacity --its plus the bond debt allocation sho,en in Plan A
results in a surcharge of $4.89 bimonthly per capacity unit. The multiple
residential surcb~-ge would be $3.9Z per residential
$-3
SURCHARGE SUMMARY
The bimonthly debt surcharges for each plan are shown as follows:
Classification
(Service Size) Plan A Plan. B
Multi-Res/Unit $ Z. 28 $ 3.92
Meters
5/8x3/4'- 2.85 4.89
3/4" 4.28 7.34
1~ 7.13 1Z.23
1½" 14.25 ~t.45
2" 2Z.80 39.12
3" 42.75 73.35
4" 71.25 122.25
6" 142.50 ~44.50
COST Arx-OCATION TO SERVICE CHARGES
The cost allocation process to determine regular service charges is the same as
provided for in the October engineering report excepting for use of the 1982-83
budget figures and removal of costs associated with the surcharges. Due to the
different surcharge pl~- there are also two separate "service availability
charge" plans. Customer service expense equally allocated to all meters served
is identical for each plan and is calculated as follows:'
Customer Service Expense =
$209,475 $15.18
13,804 meters -- 6 billings
= $Z.53 per meter service bimonthly
Baaed upon the previous discussion relating to retirement of bonds on schedule,
total capital requirements include scheduled improvements to the water system
$351,700 (1982-83 budget), acquisition debt $459,931 (November 1983), Tustin
Wate~ Works Bond debt $641,500 (Z year ~,~nual), developer refunds $110,000
(1982-83 budget), and interest on the nesative cash flow in the City's general
fund of $83,000 (added to prevent an accumulating deficit).
The demand increment portion of the service availability charge is determined
by the ~,~ual capital cost times 0.75, divided by total capacity ,,,~its as shown in
Table 5-2 in the engineer's report. The bimonthly charge is computed by dividing
the annual charge by billing frequency. The computation for each plan is
presented as follows:
Plan A
Capital Requirement x 0.75
Less Surcharge Revenue
I~em=~ing Demand Requirement
= $1,Z34,598
= (481,iZ5)
= $ 753,473
Service Availability Charge Demand Increment =
$7B3,473 $26.71 = $4.46/cap unit bimonthly
Z8,Z09 GUs= 6 billings
Plan B
Capital Requirement x 0.75-
Less Surcharge Revenue
Remaining Demand Requirement
= $1,Z34,598
= (8Z6,073)
= $ 408,5Z5
Service Availability Charge Demand Increment =
$408,525 $14.49
= SZ.4Z/cap ,,nit bimonthly
18,109 CUs- 6 billings
SERVICE CHARGE SUMMARY
The bimonthly re~atlar service availability charges for each plan are shown in the
following tables--
PLAN "A' SERVICE AVAr~.ABr~.rTY CHARGES
Total
Meter Customer Demand Service
Size Service Increment Charge
5/8x3/4" $Z.53 $ 4.46 $ 6.99
3/4" Z.53 6.69 9.ZZ
1" Z.53 11.15 13.68
1~" 1.53 ZZ,30 14.83
Z" Z.53 35.68 38.Z1
3" Z.53 66.90 69.43
4" Z.53 111.50 114.03
6" 1.53 ZZ3.00 ZZ5.53
The bimonthly service charge for service where more than one
residential ,,_~it is served by a meter includes:
a single customer service charge of $2.53 per meter plus a
demand charge of $3.57 per unit.
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PLAN "B" SERVICE AVAILABFr.ITY CHARGES
Total
Meter Customer Demand Service
Size Service Increment Charge
5/8x3/4" $Z.53 $ Z.4Z $ 4.95
3/4" ~-. 53 3.63 6.16
1" 1.53 6.05 8.58
1~4" Z. 53 1Z · 10 14 · 63
Z" Z.53 19.36 Z1.89
3" Z.$3 36.30 38.83
%" Z. 53 60 · 50 63.03
6" Z · 53 121 · O0 123 · 53
The bimonthly service charge for service where more than one
residential ,,nit is served by a meter includes:
a single customer service charge of $2.53 per meter plus a
demand charge of $1.94 per ,m~t.
COMMODITY C]~u%.RGES
The Cites 1982-83 operation and maintenance budget is $2,50Z,823. Customer
service expense is $209,475 collected with the service availability charge,
leaving $Z,293,348 plus the remalnl-g Z$ percent of capital expense (~i11,$33) to
be collected with commodity rates. Commodity related cost recover~
requirements under both Plan A and Plan B is $Z,?04,881. The October
engineer's report a!_~o ind/cates that water sales of $,000,000 consumption ,,-its
per year can be expected.
Assuming that each meter service consumes the lifeline quantity at the rate of
$0.30 per 100 cuft, 497,052 consumption ,,-its would be used at a revenue yield
of $149,115. Remaining consumption would necessarily have to recover
rem;t/-i~ cost as follows:
($2,704,881 - $149,115)
(5,000,000 ° 497,042) = $0.57/100 cuft
RATE AD4-USTMENTS
The adoption of either Plan A or Plan B prov/des for an equitable rate structure
and correspona~-~ rates at present cost. Both p]a,~s generate the same amount
of total revenue and both plans retire $900,000 of Tustin Water Works bonds due
in January of 1985 without refinancing. At that time the surcharges could be
reduced to a level that would still accommodate the rem~i-i~g outstanding bonds
and the negative cash flow (General Fund deficit).
It should be noted, however, that the acquisition debt service used to develop
either the Plan B surcharge or the service availability charge ired water rates in
Plan A include only the interest a~d principal for the November 1983 payment.
Followins that payment date, a different acquisition repayment schedule will be
in effect and either rates or the surcharge or both will require readjustment.
PA~-TI~ROUGHADJUSTMI~I'rs
Automatic administrative pass-through adjustment of commodity rates for
energy, purchased water, and possibly labor, provides assurance that the revenue
pla~ will m-l-rain fiscal continuity. Using 1982-83 as a base }'ear, purchased
water ($1,125,300) represents 42 percent of the commodity rate revenue
requirement. EnersT for pumping water ($356,400) represents slightly over
13 percent of the commodity rate revenue requirement. Demonstrating the
pass-through effect of a 10 percent increase ($112,530) in the cost of purchased
water, as an example, would be accomplished as follows:
$112,530
(5,000,000 - 497,05Z) -- $0.025/100 cu it
In the above example, water use in excess of the lifeline rate would increase
2.$ cents per 100 cu ft. Purchased water and energy are important and
substantial costs t~t are completely beyond the City's control. Immediate
recovery of such cost increases as they occur, will provide financial stability for
the City's Water Department.
SUMMAI~Y
A s~_~_m_mary presentation of the applicable rates and charges for each plan that
includes debt surcharges is presented on Table 1 and Table 2. Comparison of the
results shown in Tables 1 and 2 with the recommended rates in the October
engineer's report would not be a proper comparison because of the difference in
base costs used. The October report plan included substantial refinancing of the
$900,000 of Tustin Water Works bonds in January of 1985, a financing plan for
acquisition debt, and all other costs were averased for a two-year period with no
interim rate adjustments necessary. Since the two plans developed in this
supplemental report are based on the current budget and assumed automatic
labor, power, and purchased water cost increases, it would appear necessary to
modify the engineering report recommendations using the same base for
comparative purposes.
Table 3 presents a modification of the engineering report recommended rates
reflecting the 1982-83 budget figures, as used in Plan A and B excepting for debt
service: The debt service accumulation recommended in the original report is
ret21~e~ which would require the refinancing of most of the $900,000 Tustin
Water Works bonds due in January 1985. The Table 3 alternative also uses a
service availability charge without debt service surcl~_a~ges.
As pointed out in the October engineering report, the expected annual revenue
from the City's present rates is $3,440,595. This amount is inadequate to
S-7
recover costs ~nder any of the alternative plans. Table 4 presents & summar~
compazison of expected gross revenue and respective cost a. tlocation to the
various rate structures including the City's present rate structure.
The cost accounting and cost allocation methodoloi, j~ used herein and detailed in
the October Report, are based on sound and defensible principles widely used in
modern water rate desiffn by municipal water suppliers. The results represent
fai, and equitable allocation of cost between the various customer categories
regardless of which demonstrated plan is finally selected by the Council. The
differences between these plans are policy determinations related to the
financing of current outstanding obligations and the time-frame between rate
adjustments.
A decision was made in 1980 that began a Cit~ water supply enterprise. The
most important result of this study is a recommendation that the City Council
adopt financial polices that will assure continued good service to the public by
establishing and m~int~inlng the fiscal health of the wate~ utility enterprise.
Adoption of the rate structure in principal, provisions for pass-through cost
adjustments~ scheduled a~,~ual financial reviews~ established policy for debt
retirement {long or short), and the eventual establishment of a schedule of
'development fees' to fund facilities made necessary because of growth, will ail
combine to assure a solid fiscal basis for the water utility enterprise.
TABLE 1
BIMONTHLY WATER SERVICE RATES AND SPECIAL CHARGES
PLAN A
FIXED CHARGES (Other Than Multi-Residential)
Meter Service Debt Total
Size Availability Service Fixed
(Inches) Ch~-ge Surcharge Charges
5/8x3/4 $ 6.99 $Z.85 $ 9.84
3/4 9 · ZZ 4. Z8 13 · 50
1 13 · 68 7 · 13 Z0 · 81
l~i 7.4 . 83 14.7.5 39 · 08
7. 38.Z1 ZZ.80 61.01
3 69.43 4Z.75 llZ. 18
4 114.03 71 · Z5 185 · Z$
6 ZZS. 53 14Z. 50 368 · 03
FIXED CHARGES MULTI-RESIDg~NTIAL
a. Service availability charges will be the accumulated total
of $2.53 for each meter plus $3.57 per unit.
b. Debt surcharge will be SZ.Z8 per u.lt.
COMMODITY RATES
First 600 cuft ~ $0.30 per 100 eu ft
Over 600 cult ~ $0.57 per 100 cult
S-9
TABLEZ
BIMONTHLY WATER SERVICE RATES AND SPECIAL CHARGES
PLAN B
FIXED CHARGES (Other Than Multi-Residential)
Meter Service Debt Total
Size Availability Service Fixed
(Inches) Cha~ge SurchaA. ge Charges
5/8x3/4 $ 4.95 $ 4.89 $ 9.84
3/4 6.16 7.34 13.50
1 8.58 1Z.Z3 Z0.$1
Di 14.63 Z4.45 39.08
Z Zl.89 39.1Z 61.01
3 38.83 73.35 llZ. 18
4 63.03 IZZ. Z$ 185. Z8
6 1Z3.53 Z44.50 368.03
FIXED CHARGES MULTI-RESIDENTIAL
"- Service availability charges will be the accumulated total
o£ $l.53 for each meter plus $1.94 per unit.
b. Debt surcharge will be $3,9Z per unit.
COMMODITY RATES
Fixst 600 cu it @ $0.30 per 100 ca it
Over 600 cart ~ $0.STper 100 cart
S-lO
TABLE3
BIMONTHLY WATER SERVICE RATES AND CHARGES
(Engineering Report Recommendations Modified)
FIXF~ CHARGES (Other Th~u Multi-Residential)
Meter Total
Size Customer Demand Service
(Inches) Service Inc~ement Charge
5/8x3/4 $Z.53 $ 5.55 $ 8.08
3/4 Z.53 8.33 10.86
1 Z.53 13.88 16.41
1½ Z.53 27.75 30.28
2 2.53 44.40 46.93
3 Z.53 83.25 85.78
4 2.53 138.75 141.Z8
6 Z.53 277.50 280.03
FIXF~ CHARGES MULTI-RESIDENTIAL
Service availability cha~ges for multiple residential properties
will be the total of $Z.53 for each meter plus $4.44 per ,,-it.
COMMODITY RATES
First 600 cuft ~ $0.30 per 100 cuft
Over 600cult @$0.55per lOOcuft
S-Il
N
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