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Home My WebLink About07222024 City Council Work Session Laydown - Rate StudyJuly 22, 2024 City of Seward Water and Sewer (4iIity Rate Stud Pre/iminary ,fr esu/ts GovRates Utility, Financial, Rate, and Management Consultants for Governments www.govrates.com CR iu MSRB-REGISTERED MUNICIPAL ADVISOR Why We Are Here Eft- 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 2 Utility Overview 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 3 Revenue Requirements Multi -Year Projections Operation and Maintenance Expenses Capital Improvement Program Funding Through Rates Debt Service 1 Coverage Requirements Administrative Transfers and Reserve Allowances Annual Revenue Requirements 6B 4 Public Health and Safety Issue: Reinvestment in Utility System 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 A way, But Will Be More Expensive to Address in the Future eftr 5 Public Health and Safety Issue: Reinvestment in Utility System (cont.) Old Water and Sewer Mains Break Frequently Cause Service Interruptions, and Utility Workers Often Have to Rip Up Roads to Address 7 Public Health and Safety Issue: Reinvestment in Utility System (cont.) Revenues Under Existing Water and Sewer Rates Do Not Cover Depreciation Expense, or Annual "Wear and Tear" on System Audited Actual 2022 Operating Results Description Operating Revenues —.111=11 MEW $ 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 Sustainability Issues Depreciation Expense Does Not Consider Replacement Cost in Today's Dollars eftdr) 7 Critical Capital Needs Water System Known Critical Capital Needs Through Fiscal Year 2029 Description Estimated Cost Assumed External Through FY 2029 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 Replace Water Lines - Elm Street Other Capital Needs Total Water System Multi -Year Capital Program 476,000 50% Loan Forgiveness 400,000 100% ARPA Fundi ng 415,000 $ 6,196,000 Sewer System Known Critical Capital Needs Through Fiscal Year 2029 Description Estimated Cos Assumed External Through FY 2029 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 SMIC Lower Lift Station Engineering and Construction Other Capital Needs Total Sewer System Multi -Year Capital Program 330,000 300,000 839,100 $ 7,066,600 eft, r 8 Issue: Substantial Operating Expense Increases 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 Prepa redness Due to Regulatory Environment, Utility Costs Normally Increase at a Higher Rate Than the CPI This N% 9 Issue: Substantial Operating Expense Increases (cont.) - Annual Inflationary Rate Adjustments Have Not Kept Up With Utility Cost Increases Sustainability Issue Should Consider Revising Existing Indexing Methodology Utility Operating Expense Increases Vs. Rate Increases 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% Cumulative Water and Sewer Consumer Price Index Rate Adjustments Since 2019 7.9% [*] Does not include depreciation expense. Permanent Increases in Costs Must Ultimately Be Passed Through to Customers Through Rates v r% 10 Issue: Inability to Access Capital Markets ' 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 Could Require Much Higher Rate Adjustments -GR 11 Water Revenues Under Existing Rates Are Insufficient to Address System Needs Amount ($ thousands) $2,500 1 $2,000 $1,500 $1,000 $500 $0 Water System Existing Revenues vs. Revenue Requirements 2024 20/5 2026 2027 Deposits to Working Crap ital- Additioual Ca pital Funding Capital Funded from Rates Operating Expenses 2028 Iran leis Out - Payment -in -Lieu -of -Taxes Net Debt Service ..Proj ested Rev-euu es -Under Existing Rates 2029 -CR Sewer Revenues Under Existing Rates Are Insufficient to Address System Needs Amount ($ thousands) $3,000 $2,500 $2,000 $1,500 $1,000 $500 1 Sewer System Existing Revenues vs. Revenue Requirements 2024 2025 2026 2027 2028 2029 Deposits to Working Capital -Additional Capital Funding Capital Funded from Rates Opera ting Expenses Ira nders Out - Payment -in -Lieu -of -Taxes Net Debt Service Proj ected Reveua es Under Existing Rates 11' *No 13 Projected Need for Revenue Adjustments - Water and Sewer Are Separate Enterprise Funds Different Rate Adjustment Needs for Each Fund Summary of Recognized Water and Sewer User Rate Revenue Adjustments Year Effective Date Water Water System Adjustment Sewer Sewer Syst e m Adjustment 2025 January 15, 2025 5.5% 9.5% 2026 January 15, 2026 5.5% 9.5% 2027 January 15, 2027 5.5% 9.5% 2028 January 15, 2028 5.5% 9.5% 2029 January 15, 2029 CPI = Consumer Price Index 5.5% 9.5% Combined Adjustment CPI Adjustment Already Adopted Per Tariff 2.0% 2.0% 2.0% 2.0% 2.0% Additional Adjustment Recognized 5.8% 5.9% 5.9% 5.9% 6.0% Total Combined Adjustment 7.8% 7.9% 7.9% 7.9% 8.0% ekr 14 Water System Projected Financial Position With Rate Adjustments J' ds Amount ($ thousands) $2,500 $2,000 $1,500 $500 $0 Summarized Revenue Requirements Analysis - Water System 1 1 2024 2025 2026 2027 1 2028 2029 D posits to Working Capital -Additional C.a pital Funding Ira nster.s Out - Payment in-Lieo-of-Iaxe.s C'apttal Funded from Rates Net Debt Sersire Operating Expenses Projected Revmuestinder Proposed Rates Projected Revenues -Ender Existing Rates Unrestricted Ending Cash Balances $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 2024 Major Renewal and Replacement Fund -One Year Days Cash an Hand 2029 Operating and tiaiotenance Fund (Walking Capital) 1600% 1400% 1200% 1000% 800% 600% 400% 200% 0% All -In Debt Service Coverage - Net Revenues Only ■ 2024 2025 2026 2027 2028 2029 Calculated Debt Service Coverage -Target Debt Service Coverage (200%) Important to Maintain Healthy Cash Position Given Current Market Volatility in Operating and Capital Costs and Possible Customer Responses to Rate Plan �n 15 Water System Projected Financial Position With Rate Adjustments (cont.) ' Revenues After Payment of Operating Expenses, Debt Service, and Transfers Out Are Still Lower Than Annual Depreciation Expense (Annual "Wear and Tear" on System) • Long Term Plan to Improve Margins for Capital Reinvestment and Promote Sustainability Projected Water System Operating Results Description 2025 2026 2027 2028 2029 Operating Revenues $ 1,765,162 $ 1,857,937 $ 1,951,837 $ 2,051,037 $ 2,155,637 Less Operating Expenses Not Including Depreciation (1,312,343) (1,379,556) (1,450,778) (1,539,206) (1,606,031) Less Debt Payments (195,336) (195,336) (195,336) (38,492) (38,492) Less Transfers Out (141,213) (148,635) (156,147) (164,083) (172,451) Amounts Available for Pay -As -You -Go Capital Investment $ 116,271 $ 134,411 $ 149,576 $ 309,257 $ 338,664 Projected Annual Depreciation Expense $ 429,510 $ 442,395 $ 455,667 $ 469,337 $ 483,417 16 Sewer System Projected Financial Position With Rate Adjustments Amount ($ thousands) Summarized Revenue Requirements Analysis - Sewer System $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 2024 2025 2026 2027 2028 2029 Deposits to Working Cap ital_additional Capital Funding Transfers Out - Paa'ment in -Lien -of -Taxes C'.apital Funded from Rates Nat Debt Service nnnnn� Operating Expenses Projected Revenues -Under Proposed Rates Projected Revalues -Under Existing Rotes $3,000 $2,500 ° $2,000 $1,500 0 $1,000 $500 $0 2024 Unrestricted Ending Cash Balances 2025 0 SIaj or Renewal and Replacement Fund -One YearDays Cash an Hand 2026 2027 2028 2029 Operating and 'Maintenance Fund (Walking Capital) 600% 500% 400% 300% 200% 100% 0% All -In Debt Service Coverage - Net Revenues Only 1 1 2024 2025 2026 2027 2028 2029 Calculated Debt Service Coverage -Target Debt Service Coverage (200%) Important to Maintain Healthy Cash Position Given Current Market Volatility in Operating and Capital Costs and Possible Customer Responses to Rate Plan .fin 17 Sewer System Projected Financial Position With Rate Adjustments (cont.) ' Revenues After Payment of Operating Expenses, Debt Service, and Transfers Out Are Still Lower Than Annual Depreciation Expense (Annual "Wear and Tear" on System) • Long Term Plan to Improve Margins for Capital Reinvestment and Promote Sustainability Projected Sewer System Operating Results Description 2025 2026 2027 2028 2029 Operating Revenues $ 1,457,584 $ 1,593,684 $ 1,742,784 $ 1,905,984 $ 2,084,684 Less Operating Expenses Not Including Depreciation (1,251,158) (1,312,507) (1,377,462) (1,446,277) (1,519,231) Less Debt Payments (72,632) (72,633) (72,633) (121,363) (121,364) Less Transfers Out (116,607) (127,495) (139,423) (152,479) (166,775) Amounts Available for Pay -As -You -Go Capital Investment $ 17,187 $ 81,049 $ 153,266 $ 185,865 $ 277,314 Projected Annual Depreciation Expense $ 359,820 $ 370,615 $ 381,733 $ 393,185 $ 404,981 18 Proposed Uniform / Across -the -Board Adjustments for Unmetered Residential Customers (About 72% of Total Customers Unmetered Residential Bill Comparison for UNLIMITED WATER USAGE Under Recognized Water and Sewer Rate Adjustments Effective Dat e Water and Sewer Bill for Single Family Residential Customer Increase in SFR Total Cost Per Gallon Customer of Water and Sewer Monthly Bill Service [1] % of Median Household Income (<4.5% Considered Affordable By EPA) [2] Existing $124.15 1.9% 2025 1/15/2025 133.86 $9.71 1.9 C 2.0% 2026 1/15/2026 144.37 10.51 2.1C 2.1% 2027 1/15/2027 155.76 11.39 2.2C 2.2% 2028 1/15/2028 168.10 12.34 2.4C 2.3% 2029 1/15/2029 181.49 13.38 2.6C 2.4% [1] Monthly bill for unlimited water usage divided by 7,000 gallons. The more water used, the cheaper the per -gallon cost. Alaska water gallons per capita per day of 90 gallons * 2.54 persons per household in Seward per U.S. Census * 30.4 days per month 7,000 gallons. [2] EPA = United States Environmental Protection Agency. Assumes annual 3% cost of living salary increases after 2024. The Cost Per Gallon of Water and Sewer Service Compared With the Per -Gallon Cost of Other Commodities Communicates the Value of This Service! NINI. IA 19 Issue: Outdated Rate Design for Nonresidential Customers lb - 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 Current Volumetric Charges for Metered Water Consumption Rate Per 1,000 Gallons 0 to 50,000 gallons 50,001 to 550,000 gallons 550,001 to 1,550,000 gallons 1,550,001 to 3,550,000 gallons Above 3,550,000 gallons $6.57 5.25 4.02 3.29 1.68 Current Volumetric Charges for Sewer Service [*] IM161 Rate Per 1,000 Gallons 0 to 10,000 gallons 10,001 to 50,000 gallons 50,001 to 100,000 gallons 100,001 to 200,000 gallons Above 200,000 gallons [*] Based on metered water use. $9.02 7.22 5.99 5.40 2.67 -CD Issue: Outdated Rate Design for Nonresidential Customers (cont.) ' 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) Sample Existing ERU Methodology for Unmetered Nonresidential Service Description Restaurants and/or Bars Basic Charge Per Unit 2.0 ERU PLUS Per Every 8 Seats in Excess of 8 Seats 0.5 ERU .fin 21 Issue: Outdated Rate Design for Nonresidential Customers (cont.) ' 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 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." eftirl pm v% 22 Proposed Water Monthly Base Charges for Metered Service ' Based on Published AWWA Meter Capacity Relationships Description Proposed Proposed Proposed Proposed Proposed Effective Effective Effective Effective Effective January 15, January 15, January 15, January 15, January 15, 2025 2026 2027 2028 2029 MONTHLY BASE CHARGE FOR METERED SERVICE: [*] (Excludes Ship Water) 1" Water Meter or Smaller $30.00 $31.65 $33.40 $35.23 $37.17 Greater Than 1" Up to 2" Water Meter 96.00 101.28 106.88 112.74 118.94 Greater Than 2" Up to 4" Water Meter 300.00 316.50 334.00 352.30 371.70 Greater Than 4" Water Meter Ship Water Monthly Base Charge During Regular Business Hours 600.00 633.00 668.00 704.60 743.40 $114.24 $120.52 $127.15 $134.14 $141.52 Outside Regular Business Hours 228.48 241.05 254.31 268.29 283.05 [*] Unmetered customers required to be metered are proposed to be charged the following rates per ERU until switched over to metered service: Unmetered per ERU $55.08 $63.92 $70.50 $77.61 $85.30 CR 23 Proposed Water Monthly Usage Charges for Metered Service ' Five -Year Plan to Have Single Volumetric Rate for All Metered Usage • Provides Time for Larger Users to Plan Ahead and Make Any Adjustments to Consumption Description Proposed Proposed Proposed Proposed Proposed Effective Effective Effective Effective Effective January 15, January 15, January 15, January 15, January 15, 2025 2026 2027 2028 2029 MONTHLY USAGE CHARGES FOR METERED SERVICE: Charge for Consumption Per 1,000 Gallons 0 to 50,000 gallons 50,001 to 550,000 gallons 550,001 to 1,550,000 gallons 1,550,001 to 3,550,000 gallons Above 3,550,000 gallons $5.96 $5.75 $5.59 5.07 4.19 3.30 2.41 5.11 4.47 3.82 3.18 5.17 4.76 4.34 3.93 Ship Water Charge for Consumpation Per 1,000 Gallons $5.46 5.26 5.05 4.85 4.65 $5.37 5.37 5.37 5.37 5.37 Ship Water Per 1,000 Gallons $10.62 $11.21 $11.82 $12.47 $13.16 -CR 24 Proposed Sewer Monthly Charges for Metered Service Same Rate Design Concepts as Proposed Water Rates Description Proposed Proposed Effective Effective January 15, January 15, 2025 2026 Proposed Effective January 15, 2027 Proposed Effective January 15, 2028 Proposed Effective January 15, 2029 MONTHLY BASE CHARGE FOR METERED SERVICE: 11 1" Water Meter or Smaller $40.00 $43.80 $47.97 $52.52 $57.51 Greater Than 1" Up to 2" Water Meter 128.00 140.16 153.50 168.06 184.03 Greater Than 2" Up to 4" Water Meter 400.00 438.00 479.70 525.20 575.10 Greater Than 4" Water Meter Charge for Consumption Per 1,000 Gallons 0 to 10,000 gallons 10,001 to 50,000 gallons 800.00 $7.64 6.56 876.00 $7.98 7.14 959.40 $8.36 7.77 1,050.40 $8.76 8.45 1,150.20 $9.20 9.20 50,001 to 100,000 gallons 5.49 6.29 7.18 8.14 9.20 100,001 to 200,000 gallons 4.41 5.45 6.59 7.83 9.20 Above 200,000 gallons 3.33 4.61 6.00 7.53 9.20 [*] Unmetered customers required to be metered are proposed to be charged the following rates per ERU until switched over to metered service: Unmetered per ERU $78.77 $94.88 $108.62 $124.11 $141.56 CR 25 User Rate Comparison — 7,000 Gallons of Monthly Usage $250.00 $200.00 $150.00 $100.00 Rates effective June 2024 Other Utilities Water Other Utilities Sew er $50.00 - $0.00 Seward Water Seward Sewer S124.151 S133.86 el4.1° may\ o'�oim� grti p'Vy �Qa, ti��a`a J`. -`m k fiftAr 26 Rate/Bill Comparison Not a "Report Card" on How Well Utility Is Performing ▪ Some Reasons Why User Rates Differ Among Utilities Size of Existing Customer Base / Available System Growth Demographics (e.g., Customers Spread Out vs. Close Together, Types of Customers Served) Level of Capital Improvements to Meet Service Area Growth Amount of Needed Renewals and Replacements / Remaining Service Life of Assets Differences in Bond Covenants Source of Water Supply and Treatment Process Costs Plant Capacity Utilization and Assistance in Funding of Such Capacity (e.g., Grants, Impact Fees, Other Subsidization) • Time of Last Rate Review • Amount of General Fund and Administrative Fee Transfers ` 27 Rate Indexing Adjustment Clause Eft - In Absence of Formal Rate Study Recommendation or Council Action, Recommend Automatic Rate Increases for Inflationary Effects on Costs of Operation Very Common in Utility Industry and Considered a Utility Best Management Practice Implemented Without Formal Public Hearing or Analysis • Effective January 15th of Each Applicable Year • Help to Prevent Future "Rate Shock" and "Catch Up" Rate Increases • Favored By Credit Rating Agencies Since More Assurance That Rates Will Keep Up With Inflation and Less Implied Risk of Default on Debt Service Payments Proposed Indexing Provision: Greater of 3% or Change in Engineering News -Record Construction Cost Index Current Provision Linked to Urban Alaska Consumer Price Index Is Severely Lagging Utility Cost Increases eftr) 28 Requested Council Action Approve Concept of Rate and Financial Plan and Direct Staff to Prepare Rate Resolution With Finalized Rates for Future Public Hearing Recommendation to Adopt Proposed User Rates for Fiscal Years 2025 to 2029 User Rates Considered Affordable and Competitive Maintains Access to Debt Financing / Capital Markets for Financing Critical Capital Needs — When Evaluating Utility's Ability to Repay Debt, Lenders Will Only Consider Rate Adjustments That Have Already Been Adopted Staff Needs to Know Revenue Stream to Implement Multi -Year Capital Program Since Projects Usually Take More Than One Year to Complete — Funding Must Be in Place to Enable Bidding for Projects • Modernized Rate Structure iftr• 29 Requested Council Action (cont.) Recommendation to Adopt Proposed Changes to Annual Rate Indexing Provision Better Match Between Utility Cost Increases and Index Adjustments Recommendation to Adopt Proposed Special / Other / Miscellaneous Charges and Associated Policies Currently Under Review 30 Requested Council Action (cont.) Monitor Actual Results and Adjust Plan as Appropriate Review Any Customer Responses to Rate Plan Recommend Formal Rate Review After Customer Statistics for One or Two Years Under New Rates Are Available • Proactive Financial Planning Helps to Preserve Ability to Gradually Phase -in Any Rate Adjustments 31 QUESTIONS AND DISCUSSION ,.to'jlii° A