City Manager's Office  Cityo of  Matthew Brower City Manager 916-434-2449  Lincoln  atlewowelmonagp  Memorandum  TO: FROM: DATE:  Ad Hoc Water Rate Committee Matt Brower, City Manager  Steve Ambrose, Support Services Director  6/29/17  SUBJECT: Volumetric Rate Proposal  During Council's second work meeting, held on Monday, June 26, 2017, dedicated to discussing the Ad1 Hoc Water Commiteincmendtion, thel LIFT group proposed ar new rate structure for the City's consideration. Acopy Council asked staff to assess thei rate: structure and be prepared to share findings during Council's third work Part of staff's assessment includes seeking an opinion from the Ad] Hoc Water Rate Committee. A meeting ofthe Committee has been established forl Friday, June 30, 2017, at 2:00 p.m. in City Hall. Ani invitation was extended to  ofthe proposal is attached to this memorandum. meeting ont the topic slated for Thursday, July 6, 2017. thel LIFT group to send ar representative.  Below is staff'si initial assessment oft thel LIFT group's volumetric rate proposal.  Water Rate Structures  Water rate-setting is a complex undertaking that involves numerous. local determinations. There is no one-size-fits- all approach to rate-setting. In fact, water utilities in the state of California and throughout the United States utilize av variety ofwater rate structures, including: Flat/Fixed; Volumetric with uniform, inclining or declining blocks; Water Budgets; and seasonal rates. InaLos Angeles' Times article dated April 20, 2015, experts estimate that "66% to 80% ofCalifornia water providers use: some type oftiered rates." A2 2015 water rate study by the American' Water Works Association, estimates that 72% ofv water rate structures in California encompass! inclining volumetric blocks or tiers; whereas, 20% encompass: a uniform rate. Based on conversations with representatives of] Regional Water Authority (RWA), very few water utilities utilize a uniform volumetric rate with no fixed component. When asked why uniform volumetric rates with no fixed components are not widely used, representatives of Public 1) Revenue: instabiliy--volumetric water ratesi inherently have more volatility due to seasonal use, environmental issues such as prolonged drought, changing customer demands, and regulatory mandates. 2) Budgeting and) Rate Change Risk: Due tot thei inherent volatility of relying on volumetric: rates to meet revenue demands, budget forecasting becomes more critical and therei is al risk oflarger rate changes. 3) Credit Rating Agencies: Fitch rating agency suggests water rates should have ai minimum ofa 30% fixed component;. Moody's establishes that volumetrici rates are okay, ifther utility has adequate offsetting  Financial Management (PFM) and RWA alluded to the: following reasons:  reserves; and S&P focuses on water rate affordability.  1Page    4) Reserves: Water utilities that relay solely on volumetrici rates require larger fund reserves. Speaking with representatives ofPCWA, NID,RWA, PFM, and City of Roseville, it seems that reserve targets would 5) Customer Expectations: Water customers tend toj prefer water bills that! have little variability from one season to ther next. A rate that is entirely volumetric would resulti in large fluctuations in monthly amounts  need tol bei in excess of75%. based on seasonal water use.  Lincoln Water System requirements.  Fixed base charges are levied regardless of water consumption andt typically based on meter size. Thei meter sizei is used to estimate the demand that each customer can place ont the City's water system. As significant portion oft the water system's design andi int turn, the water utility'soperating and capital costs are related to meeting the capacity Thei fixed monthly service charge recognizes the factt that even when a customer does not use any water the City incurs fixed costs related to maintaining the ability tos serve the connection and for reservation oft the purchased capacity. Costsi include the purchase of water, staffing, customer service, system maintenance andi repairs. The largest expenditure item (56%) for the City's water operations is the purchase oft treated water froml PCWA. PCWA is currently updating their rates and have notified the City of thei intent to establish a structure that is based on' 70% The. Ad Hoc Water Rate Committee' 's top priority for a water rate structure was financial stability. Without: an adequate fixed base charge, financial stability would be reduced andi the City'sr risk ofi inadequate cash flow and long-term funding would be significant. The graph below shows the four year history by month of the total water  revenue collection through fixed rates from the City. Ad] Hoc Water Rate Committee Preference for] Financial Stability  consumption by the City's customers.  4 Year History of Water Consumption  500,000,000 450,000,000 400,000,000 350,000,000 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000  Monthly Consumption in Gallons  As expected, the difference in consumption levels between winter and summer months are extreme. A rate structure based on solely volumetric consumption would provide ai revenue stream that does noti match the expenditure  2Page    requirements. For much ofthey year, the City'sr rates would bei insufficient to prevent the water utility fund from under collecting. A rate structure without monthly fixed base charges would require ane estimated: reserve of75% or Each rate structure wouldi impact customers differently based ont their meter size and consumption. A rate structure without fixed monthly charges would benefit most customers during the winter months, but would bei much higher during the summer months. For example, with the proposed volumetric only rates, a customer withs a SA" meter using 5,000 gallons per monthi int the winter and 27,000 gallons per month int thes summer would havel bills of $28.00 in the winter and $145.60i in the summer. The graph below reflects the differences between the existing rate structure, the  greater. Fundingi reserves att this level would increase future monthly water rates.  Customer Impacts  proposed: rates, and] LIFT proposal.  Single Family Residential - 3/4" meter  $250.00 $200.00 $150.00 $100.00 $50.00  444444  Current  Proposed  UFT  AI key factor tol keep in mind is thati in the development of water rates the revenuel requirements are established and dor not change. The different rate structures establish who willl be required toj pay the revenues. As the graphs below indicate, ifthe City adopted ar rate structurel based only on volumetric charges, the customers with the greatest impact would be the 771 non-residential customers. Ins some cases, we would! have some: medium sized businesses  paying twice the current water rate.  Non-Residential - 3/4" meter  $250.00 $200.00 $150.00 $100.00 $50.00 $-  Current  Proposed  3/Page    Non-Residential -1" meter  $1,200.00 $1,000.00 $800.00 $600.00 $400.00 $200.00  o0 13 8 &  Current  Proposed  LIFT  (Non- Residential - 11/2" meter  $1,200.00 $3,000 5300.00 $600.00 5400.00 $00  00 a 6% A 88858E  --Proposed  LIFT  4Page    Non-Residential - 1" meter  $1,200.00 $1,000.00 $800.00 $600.00 $400.00 $200.00  Current  Proposed  UFT  Non-Residential- - 1 1/2" meter  $1,200.00 51,000.00 $800.00 $50000 $40000 $00sa  a 585 -  rent  roposed  LIFT  Attachment 4]Page    FOR CONCER  A COMMON SENSE WATER RATE SETTING METHODOLOGY FOR LINCOLN Utility rate setting is a simple process. Internal staff members can perform the task with minimal guidance from external experts in the field. The only situation that requires Consultants who specialize in rate setting is when issuance of bonds is a factor. The LIFT Group with its legal, business and engineering expertise proposes to assist your internal staff in setting the Lincoln water rates. The following few pages outline an appropriate approach that represents a rate: structure that shields the City from any revenue shortfalls while fully complying with prop 218. The proposed rates are designed to be straight forward, fair and equitable while never discriminating against any one  Preface  Proposal  individual or group of citizens residing within Lincoln's city limits. The LIFT Group offers this service as a free public service to the City.  Cost  The LIFT Committee  Jessica Booth I Craig Gandy I Jon Jacobs I Jerry Jackson I Ted Jones Tony Manning I Shamus McClure I Chuck Schmidt I David Stanley I Matthew Stuart  6/24/2017    ACOMMON SENSE WATER RATE SETTING METHODOLOGY FORI LINCOLN  Goals  Set a water rate that is fair to every consumer, complies absolutely with State Law  (Prop 218) and can be understood by anyone.  Procedure  1. Establish a statistical projection of annual water consumption.  2. Establish an Annual Water Budget that includes both fixed and variable cost. 3. Divide the Annual Budget by projected water consumption to arrive at cost  per 1,000 gallons.  Example  1. Assume an Annual Budget of $14,000,000 consisting of $7,000,000 in fixed cost  and $7,000,000 in variable cost.  2. Assume annual water consumption of 2,500,000,000 gallons.  3. The water rate is $5.60 per 1,000 gallons.  COMPARISON OF COMMON SENSE METHOD WITHI INDUSTRY PRACTICE  The Industry Practice  Industry practice uses a monthly service charge for the benefit of the utility at the expense of the customer. The monthly service charge is designed to recover fixed cost independently from water consumption. The monthly service charge is an antiquated practice originating prior to water meters being mandated by the State in the early 1980's. When originally implemented, it covered an initial volume of water, but through the years ith has remained and evolved so that today it covers nothing, not one single drop of water. The net result is that when these fixed costs are factored in with volumetric rates, low use consumers in fact pay more for their water than those who consume higher volumes.  The Common Sense Method  The chart and graph on thei following page show how the rates for the Common Sense approach compare with Industry Practice. The Common Sense Method removes the fixed monthly service fee and then maintains a single rate per water unit consumed independent ofc consumption. Note that low water consumers get a nice but fair benefit from the  Common Sense approach.    COST OF WATER. AT VARIOUS CONSUMPTION LEVELS Consultant Proposal (Industry Practice) VS. Common Sense Method  $400  Median Residential Demand: = 8,000 gal.  $300  Common Sense Method  $200  Consultant Proposal  $100  $0 0  5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 55000 60000  CONSULTANT PROPOSAL*  COMMON SENSE METHOD**  Consumption Level Gallons per Month 3,000 5,000 10,000 15,000 20,000 30,000 40,000 50,000 60,000  Charge $42.42 $47.70 $60.90 $74.10 $87.30 $113.70 $140.10 $166.50 $192.90  Rate per1 1,000Gal. $14.14 $9.54 $6.90 $4.94 $4.37 $3.79 $3.50 $3.33 $3.22  Charge $16.80 $28.00 $56.00 $84.00 $112.00 $168.00 $224.00 $280.00 $336.00  Rate perl 1,000 Gal. $5.60 $5.60 $5.60 $5.60 $5.60 $5.60 $5.60 $5.60 $5.60  8,000  *Charges shown are for 3/4i inch meters. Charges for larger meters would be higher. **Charges shown are. standardized for all meter sizes located in the city.  2    "Revenues derived from the fee or charge shall not exceed the funds required to provide the property related service."  Article XIII D, Section 6b of the California Constitution Proposition 218. Approved. by Voters on November 5, 1996  Ift the Common Sense Method were implemented, over 50% of current customers would see a reduction in water charges while  heavy water use would still see high cost.  Ongoing Rate Maintenance  Fact: Water is an essential commodity and use can be predicted closely. - Monthly Monitoring: Revenue should be monitored, compared with projections and reported to Council each month as an informational item. Same holds for solid waste Annual Rate Review: A five-year rate projection is fine but still should be reviewed annually by staff and corrected as necessary. An automatic inflationary adjustment One Individual: The Public Works Director should be assigned the monthly revenue comparison task and initiate necessary corrective action as necessary. Prop 218 Compliance: Citizens should be alerted when revenue is not tracking projections and especially when a rate increase may be appearing necessary.  and wastewater.  five years out is not appropriate.  3        S @  ERT  3    1  - 4 :  - 6  4 s : a 2 3 3 2  - L  4  6  1  5  I  3  8    2 -  E  - -  D  S   0 la e A 3 U a  I  S S de 3  a 3 -  I    - 2  S @ E  e la N @ 5  e 0  G e  & e 8 9  a Ln df - de - 3  oD  S  I  L 9 0  a  I  -