HomeMy WebLinkAboutPH 1 WTR RATE STUDY 01-03-83NDA
Dec. 15, 1982 Inter-Corn
TO:
FROM:
S UBJ ECT:
HONORABLE MAYOR AND CITY COUNCIL
BILL HUSTON, CITY MANAGER
WATER SERVICES FINANCIAL REVIEW AND Pd~TE 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 Engineering's original recommendation.
BH:dmt
CITY OF TUSTI~
WATER SYSTEM FINANCIAL REVIEW AND RATE STUDY
SUPP~-~-MENTAL
INTRODUCTION
An enl,dneering report entitled 'City of Tustin Water System Financial Review
and Rate Study," dated October 2Z, 1982, was presented to the City Council in
workshop session on November 16, 198Z. While no formal action was taken by
the City Council at that time, a number' of concerns and several constructive
suggestions were expressed which constitute the basis for this supplemental
report.
The engineering report reviewed the financial history 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 deli,~eation of the City's debt
obligations including the system's acquisition cost, the assumption of former
Tustin Water Works bond debt and a negative cash flow obligation to the City's
General Fund. 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 contained in the proposed rate structure, however, would prefer to see
at least some of this debt obligation treated as a surcharge superimposed on
regular 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-frame between rate adjustments to alleviate long-term
assumptions related to future City wages and provision for pass-throagh adjust-
ment of costs that are beyond City control Pass-through cost adjustments
generally include energy and purchased water supply, however, if labor cost
increases were also included in the pass-through provision, regular 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.
PLANNING MODIFICATIONS
In conformance with the suggestions outlined above, particularly the desire for
rate adjustment to accurately reflect City wage rates at July 1, the revenue
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plans presented herein reflect the City's current 1987.,-83 budget for operation
and maintenance as presented on Table 3-5 (pa~e 3-9) in the October engineer's
report.
~n addition to the use of current 198Z-83 operation and m~-tenance budget
fi~mres, two plans for debt surcharges are presented. Plan A provides for a
surcharge that represents a sinking 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~mlar acquisition
debt payment of November 1983 as shown on pa~e Z-10 in the engineer's report.
In both cases the surcharge represents 75 percent of the ~-,~ual sinking fund
amount with the remaining 25 percent allocated to commodity rates in accord-
ance with the October engineering report rate structure recommendations.
COST
Based on the previous discussion, the totai ~'lai cost recover~ requirement is
$4,148,954 divided approximately 60 percent for operation and maintenance and
40 percent for capital related expenditures. Over 31 percent of the total annual
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
COST SUMMARY
OPERATION AND MAINTENANCE
Customer Service Expense
Other O&M
TOTAL O&M
$ Z09,475
Z,Z93,348
SZ,50Z,SZ3
CAPITAL
Capital Tmprovements
Acquisition Debt (Nov. 1983)
Tustin Wastewater Bonds (Z yr
Developer Refunds
Negative Cash-Flow Interest
TOTAL CAI~ITAL
$ 351,700
459,931
641,500
110,000
83,000
$1,646,131
TOTAL ANNUALIZED COST
$4,148,954
aincludes interest and the accumulation of $900,000 principal due Sanuar~
9, 1985 (two 7ears).
RATE STRUCTURE
The recommended structure for both rates and surcharge provisions are
described as follows:
Customer Service Expense is equally divided between all customers
regardless of use or meter size and is included in a bimonthly
"service availability charge."
Seventy-five precent (75%) of the annual 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 ~lm3 included in the "service
availability charse."
Seventy-five percent (75%) of the debt obligations earmarked to
surcharges are allocated to customers in the same ma~er as capital
exp~,se in 2,, above.
Remaining costs inclu~{,~g other operation and m21ntenance expense
and ?-5 percent of capital cost (not included in either the surcharge
or service availability charge) are allocated to commodity rates.
Commodity rates are -,~iform including a bimonthly lifeline rate for
the first 600 cubic feet of consumption.
AL-z-mtNATIVE DEBT SURCgA.RGES
Plan A includes the payment of interest on outstandln~ Tustin Water Works
Bonds, $191,$00/year and principal accumulation of $450,000 per year for a total
of $641,500 ~,-~ually in calendar 1983 and 1984. The $900,000 bond principal
payment is due Sanuar~ 9, 1985. Allocation of 75 percent of this a~,2! cost
among the total capacity ,mits served by the City (see Table 5-2 in the
engineering report) results in a surcharge of $2.85 bimonthIy per capacity
The multiple residential surcharge would be $2.28 per residential unit.
Plan B includes the surcharge cost allocation demonstrated in Plan A plus the
inclusion of the November 1983 acquisition payment. The acquisition debt
payment scheduled for November 1983 includes $147,826 for principal and
$312,105 of interest (total $459,931). An allocation of 75 percent of this ~,,,,,~1
cost among all capacity traits plus the bond debt allocation shown in Plan A
results in a surcharge of $4.89 bimonthly per capacity unit. The multiple
residential .surch~-ge would be $3.92. per residential unit.
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SURCHARGE SUMMA/{Y
The bimonthly debt surcharges for each plan are shown as follows:
Classification
(Service Size) Plan A Plan B
Multi-Res/Unit $ Z. Z8 $ 3.9Z
Meters
5/8x3/4" 2.85 4.89
3/4" 4.28 7.34
1" 7.13 1Z.Z3
1~" 14.25 Z4.45
Z" 22.80 39.1Z
3" 4Z.75 73.35
4" 71.Z5 1ZZ.Z5
6" 14Z.50 Z44.50
COST AT-r~)CATION TO SERVICE CHARGF. S
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 ~Uocated to all meters served
is identical for each plan and is calculated as follows:-
Customer Service Expense =
$Z09,475 = $15.18
13,804 meters 6 billings
= $Z.53 per meter service bimonthly
Based 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
Water Works Bond debt $541,$00 (l year ~-nual), developer refunds $110,000
(1982-83 budget), and interest on the negative 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 2-nual capital cost times 0.75, divided by total capacity units as shown in
Table 5-2 in the engineer's report. The bimonthly charge is computed by dividing
the annual ch~ge by billing frequency. The computation for each plan is
presented as follows:
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Plan A
Capital Requirement x 0.75
Less Surcharge Revenue
Remaining Demand Requirement
= $1,Z34,598
= (481,1Z5)
= $ 753,473
Service Availability Chaxge Demand Inc~ement =
$753,473 $Z6.71 = $4.46/cap ,,-it bimonthly
Z8,Z09 CUs= 6 bi~llngs
Plan B
Capital Requirement x 0.75
Less Surcharge Revenue
Remai-l-g Demand Requirement
= $1,Z34,598
= (8Z6,073)
= $ 408,5Z5
Service Ava/lability Charge Demand Increment =
$408,5Z5 $14.49
-- SZ.4Z/cap ,,-~t bimonthly
Z8,Z09 CUs- 6 billings
SERVICE C~&RGE SUMMARY
The bimonthly regular service availability charges for each plan are shown in the
following tables:
PLAN "A" SERVICE AV.~TT.ABT[ffTY CHARGES
Total
Meter Customer Demand Service
Size Service Increment Charge
5/8x3/4" $Z.53 $ 4.46 $ 6.99
314" Z.53 6.69 9.ZZ
1" Z.53 11.15 13.68
1~" Z.53 ll.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" Z.53 ZZ3.00 ZZ5.53
The bimonthly service charge for service where more than one
residential unit is served by a meter includes:
a single customer service charge of $Z.53 per meter plus a
demand charge of $3.57 per ,,-it.
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PLAN "B" SERVICE AVAILABILITY CHARGES
Total
Meter Customer Demand Service
Size Service Increment Charge
5/8x3/4" $Z.53 $ Z.4Z $ 4.95
3/4" Z.53 3.63 6.16
1" Z.53 6.05 8.58
1%" Z.53 1Z.IO 14.63
Z" Z.53 19.36 Z1.89
3" Z.53 36.30 38.83
4" Z.53 60.50 63.03
6" Z.53 1Z1.00 1Z3.53
The bimonthly service charge for service where more than one
residential unit is served by a meter includes:
a single customer service chh-ge of $Z.53 per meter plus a
demand charge of $1.94 per ,,nit.
COMMOD~-z-~' CHARGES
The City's 198Z-83 operation and maintenance budget is SZ,50Z,SZ3. Customer
service expense is $109,475 collected with the service availability charge,
leaving SZ,Z93,348 plus the remainiug Z5 percent of capital expense ($411,533) to
be collected with commodity rates. Commodity related cost recovery
requirements under both Plan A and Plan B is $Z,704,881. The October
engineer's report also indicates that water sales of 5,000,000 consumption ~uits
per year can be expected.
Assuming that each meter service consumes the lifeline quantity at the rate of
$0.30 per 100 cuft, 497,057. consumption n_nits would be used at a revenue yield
of $149,115. Rem~inlng consumption would necessarily have to recover
remaining cost as follows:
($Z,704,881 - $149,115) = $0.57/100 cu it
(5,000,000 - 497,047.)
RATE ADJ~STMKNTS
The adoption of either Plan A or Plan B provides for an equitable rate structure
and corresponding rates at present cost. Both plan.~ generate the same ~motlnt
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 remaining 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 cha~ge and water rates in
Plan A include only the interest and principal for the November 1983 payment.
Following that payment date, a different acquisition repayment schedule will be
in effect and either rates or the surcharge or both will req-i-e readjustment.
PASS-THROUGH AD3USTMENTS
Automatic administrative pass-throu~h adjustment of commodity rates for
energy, purchased water, and possibly labor, provides assurance that the revenue
plan will m,i,t~i, fiscal continuity. Using 1982-83 as a base yea~, purchased
water ($1,125,300) represents 4Z percent of the commodity rate revenue
requirement. Ener~7 for p-roping water ($35(3,400) represents slightly over
13 percent of the commodity rate revenue requirement. Demonstrating the
pass-throu~h effect of a 10 percent increase ($112,530) in the cost of purchased
water, as an ez-mple, would be accomplished as follows:
$112,530
(5,000,000 - 497,052) = $0.025/100 Cuft
In the above example, water use in excess of the lifeline rate would increase
2.5 cents per 100 cu ft. l:h~rchased water and energy are important and
substantial costs that are completely beyond the City's control. Immediate
recovery of such cost increases as they occur, will provide £inanciai stability for
the City's Water Department.
SUMMA.RY
A summary presentation of the applicable rates and charges for each plan that
includes debt surcharges is presented on Table 1 and Table Z. Comparison o£ the
results shown in Tables 1 and Z with the recommended rates in the October
en~/neer'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 Sanuar~ o£ 1985, a financing plan for
acquisition debt, and all other costs were averaged for a two-year period with no
interim rate adjustments necessary. Since the two plans developed in this
supplemental report a_-e based on the current budget and assumed automatic
labor, power, and purchased water cost increases, it would appear necessar~ to
modify the engineering report recommendations using the same base for
comparative purposes.
Table 3 presents a modification of the en~/neering report recommended rates
reflecting the 1982-83 budget fi&aires, as used in Plan A and B excepting £or debt
service. The debt service accumulation recommended i.n the original report is
retained, which would require the refinancing of most o£ the $900,000 Tustin
Water Works bonds due in January 1985. The Table 3 alternative also uses a
service availability charge without debt service surcharges.
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
recover costs under any of the alternative pl~,~-~. Table 4 presents a summary
comparison of expected gross revenue and respective cost allocation to the
various rate structures includl-g the City's present rate structure.
The cost accounting and cost allocation methodology used herein and detailed in
the October l~eport, are based on sound and defensible principles widely used in
modern water rate design by m~mfcipal water suppliers. The results represent
fair 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 p]~-~ are policy determinations related to the
financing of current outstanding obligations and the time-fr2me between rate
adjustments.
A decision was made in 1980 that began a City water supply enterprise. The
most import~ut 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 maintaining the fiscal health of the water utility enterprise.
Adoption of the rate structure in principal, provisions for pass-through cost
adjustments~ scheduled ~,~,~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 all
combine to assure a solid fiscal basis for the water utility enterprise.
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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) Charge Surcharge Charges
5/8X3/4 $ 6.'99 $Z.85 $ 9.84
3/4 9 · ZZ 4. Z8 13 · 50
1 13.68 7.13 ZO.81
1½ Z4.83 14. Z5 39.08
Z 38.Zl ZZ.80 61.01
3 69.43 4Z.75 llZ. 18
4 114.03 71.Z5 185.Z8
6 ZZ5.53 14Z. 50 368.03
FIXED CHARGES MULTI-RESIDENTIAL
a. Service availability charges will be the accumulated total
of $Z.53 for each meter plus $3.57 per unit.
b. Debt surcharge will be SZ.Z8 per nnit.
COMMODITY RATES
First 600 cuft @ $0.30 per 100 cuft
Over 600'cu ft ~ $0.57 per 100 cuft
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TABLE
BIMONTHLY WATER SERVICE RATES AND SPECIAL CHARGES
PLAN B
FIXED CHARGES (Other Than Multi-Residential)
Meter Service Debt Total
Size Availability Service Fixed
(Inches) Charge Surcharge Charges
$/8x3/4 $ 4.95 $ 4.89 $ 9.84
3/4 6.16 7.34 13.50
1 8.58 1Z.Z3 20.81
1~4 14.63 24.45 39 · 08
Z 21.89 39.12 61.01
3 38.83 73.35 llZ.18
4 63 · 03 l~-Z. Z5 185 · 28
6 123 . 53 244.50 368 . 03
FIX~.~ CHARGES MULTI-RESIDENTIAL
Service availability charges will be the accumulated total
of $2.53 for each meter plus $1.94 per
b. Debt surcharge will be $3.92 per
COMMODITY RATES
First 600 cuft ~ $0.30 per 100 cuft
Over 600 cult @ $0.57 per 100 cult
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TABLE3
BIMONTHLY WATER SERVICE RATES AND CHARGES
(Engineering Report Recommendations Modified)
FIXED CHARGES (Other Than Multi-Residential)
Meter Total
Size Customer Demand Service
(Inches) Service Increment Charge
5/8x3/4 $?`.53 $ 5.55 $ $.08
3/4 Z.53 8.33 10.86
1 ?`. 53 13.88 16.41
1~. ?.. 53 ?.,7 · 75 30 · ?.8
Z 2.. 53 44.40 46 · 93
3 2,. 53 83 · 2,5 85 · 78
4 2,. 53 138.75 141.2,8
6 2,. 53 2.77 . 50 ?,80 · 03
FIXED CHARGES MULTI-RESIDENTIAL
Service availability charges for multiple residential properties
will be the.total of $Z.53 for each meter plus $4.44 per
COMMODITY RATES
First 600 cuft @ $0.30 per 100 cuft
Over 600 cult ~ $0.55 per 100 cuft
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