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Home My WebLink About06102024 City Council Laydown - Water Sewer Rate Study PresentationCity of Seward Water and Sewer Utility Rate Study June 10, 2024 GovRates Utility, Financial, Rate, and Management Consultants for Governments www.govrates.com Update Why We Are Here 2 City's Last Formal Water and Sewer Rate Study Was Completed in 1993, or 31 Years Ago Current Rate Study Began in 2019 But Has Experienced Delays Due to:•COVID-19•City Management Changes Have Been Evaluating Revenue Sufficiency and Existing Rate Structures Have Recognized Need to Fund Replacements of Aging Infrastructure and Modernize Water and Sewer Rate Structures Utility Overview 3 Provides Essential Service on a Continuous Basis•Public Health and Safety – Primary Objective•Highly Regulated (Alaska Department of Environmental Conservation / EPA)•Permits Require Satisfactory Operating Performance‒Possible Fines or Consent Orders (and Associated Legal Expenses) for Non-Compliance or If Infrastructure Failures Cause Pollution Enterprise Funds: Operations Primarily Funded Through User Rates and Fees Capital-Intensive "Businesses" of City Revenue Requirements 4 Multi-Year Projections Public Health and Safety Issue: Reinvestment in Utility System 5 Utility Infrastructure Is Often "Out of Sight, Out of Mind" Capital Needs Are Primarily Replacements or Rehabilitations of Utility Assets That Have Reached or Exceeded Useful Service Lives Renewal and Replacement Needs Will Not Go Away, But Will Be More Expensive to Address in the Future 6 Old Water and Sewer Mains Break Frequently•Cause Service Interruptions, and Utility Workers Often Have to Rip Up Roads to Address Public Health and Safety Issue: Reinvestment in Utility System (cont.) Public Health and Safety Issue: Reinvestment in Utility System (cont.) 7 Revenues Under Existing Water and Sewer Rates Do Not Cover Depreciation Expense, or Annual "Wear and Tear" on System Description Water Sewer Operating Revenues 1,656,638$ 1,276,338$ Less Operating Expenses Not Including Depreciation (1,111,138) (952,764) Less Existing Debt Payments (156,844) (72,633) Less Transfers Out (178,076) (145,699) Amounts Available for Pay‐As‐You‐Go Capital Investment 210,580$ 105,242$ Annual Depreciation Expense Based on Historical Investment 415,894$ 349,339$ Audited Actual 2022 Operating Results Sustainability Issues•Depreciation Expense Does Not Consider Replacement Cost in Today's Dollars Critical Capital Needs 8 Description Estimated Cost Through FY 2029 Assumed External Funding Distribution Piping Upgrades 3,000,000$ Replace Lowell Canyon 200K Gallon Tank with a New 500K Gallon Tank 1,905,000 80% Loan Forgiveness Hypochorite Generator ‐ SMIC ‐ Design and Construction 476,000 50% Loan Forgiveness Replace Water Lines ‐ Elm Street 400,000 100% ARPA Funding Other Capital Needs 415,000 Total Water System Multi ‐Year Capital Program 6,196,000$ Description Estimated Cost Through FY 2029 Assumed External Funding Wastewater Lagoon Sludge Removal (Every 10 Years) 3,000,000$ $2M Grant Funding Disinfection for Effluent at Both Lagoons 1,400,000 50% Grant Funding Fine Bubble Aeration 650,000 Lowell Point Lagoon Blower Replacement 547,500 Replace Infrastructure Past Useful Life 330,000 SMIC Lower Lift Station Engineering and Construction 300,000 Other Capital Needs 839,100 Total Sewer System Multi ‐Year Capital Program 7,066,600$ Water System Known Critical Capital Needs Through Fiscal Year 2029 Sewer System Known Critical Capital Needs Through Fiscal Year 2029 9 Utilities Have Limited Control Over Many Operating Costs (e.g., Electricity, Chemicals, Repair Parts and Supplies, etc.)•Driven By Global Market Forces Pay Study to Help Retain Existing Staff•Nationwide Issues With Filling Positions and Keeping Employees•A Well-Trained, Experienced, and Sufficient Utility Staff Is Critical for Effectively Running Utility 24 Hours Per Day and 365 Days Per Year, for Maintaining Level of Service, and for Emergency Preparedness Due to Regulatory Environment, Utility Costs Normally Increase at a Higher Rate Than the CPI Issue: Substantial Operating Expense Increases 10 Annual Inflationary Rate Adjustments Have Not Kept Up With Utility Cost Increases •Sustainability Issue•Should Consider Revising Existing Indexing Methodology Issue: Substantial Operating Expense Increases (cont.) Permanent Increases in Costs Must Ultimately Be Passed Through to Customers Through Rates Description Actual 2019 Budgeted 2024 Increase Water System Operating Expenses [*] 1,032,225$ 1,213,001$ 17.5% Sewer System Operating Expenses [*] 688,444 1,158,423 68.3% Combined 1,720,669$ 2,371,424$ 37.8% 7.9% Utility Operating Expense Increases Vs. Rate Increases [*] Does not include depreciation expense. Cumulative Water and Sewer Consumer Price Index Rate Adjustments Since 2019 11 Current Financial Sustainability Issues Could Negatively Affect Ability to Debt Finance Critical Capital Needs•Lenders Want to See That All Rate Adjustments Needed to Make Debt Payments Have Already Been Adopted 100% Pay-As-You-Go Funding of Critical Capital Needs Would Require Much Higher Rate Adjustments Issue: Inability to Access Capital Markets 12 No Other Surveyed Alaska Utility Has Declining Price Blocks for Metered Service•"The More You Use, the Lower the Price" Does Not Promote Water Conservation•To Be Consistent With the Practices of Other Alaska Utilities, Proposed Multi-Year Plan to Gradually Transition to Single Volumetric Rate for All Usage Issue: Outdated Rate Design Usage Rate Per 1,000 Gallons Usage Rate Per 1,000 Gallons 0 to 50,000 gallons $6.57 0 to 10,000 gallons $9.02 50,001 to 550,000 gallons 5.25 10,001 to 50,000 gallons 7.22 550,001 to 1,550,000 gallons 4.02 50,001 to 100,000 gallons 5.99 1,550,001 to 3,550,000 gallons 3.29 100,001 to 200,000 gallons 5.40 Above 3,550,000 gallons 1.68 Above 200,000 gallons 2.67 [*] Based on metered water use. Current Volumetric Charges for Metered Water Consumption Current Volumetric Charges for Sewer Service [*] 13 Current Equivalent Residential Unit (ERU) Methodology for Unmetered Nonresidential Customers Considered Unnecessarily Complicated and May Not Reflect True Demand for Service•Proposed Plan to Require All Nonresidential Customers to Have Metered Service (More Equitable Approach) Issue: Outdated Rate Design (cont.) Description Amount Restaurants and/or Bars Basic Charge Per Unit 2.0 ERU PLUS Per Every 8 Seats in Excess of 8 Seats 0.5 ERU Sample Existing ERU Methodology for Unmetered Nonresidential Service 14 Current Minimum Charges By Meter Size Not Recommended By American Water Works Association (AWWA) •Proposed Plan to Have Monthly Base Charge for Each Meter Size and (Ultimately) a Single Volumetric Rate for All Usage Issue: Outdated Rate Design (cont.) From AWWA Manual of Practice 1 (M1): Principles of Water Rates, Fees, and Charges, the Utility Industry's Leading Reference for Water Rate Design: "In some instances, legal challenges have been threatened by users of systems with usage allowances. The challenges result from the argument that the customer is charged for a certain amount of water regardless of whether the amount of water is used. Under this line of reasoning, the minimum charge can be argued to violate cost-of-service principles. To avoid legal challenges, a utility may determine that it is best suited by not including a usage allowance." Moving Forward… 15 Proposed Rate and Financial Plan to Be Presented to City Council Within Next Few Months QUESTIONS AND DISCUSSION