TO: Mayor and City Council
THROUGH: Steve Powers, City Manager
FROM: Peter Fernandez, PE, Public Works Director
SUBJECT:
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Proposed Fees and Charges for Utility Service Rates (Wastewater, Water, and Stormwater)
Ward(s): All
Councilor(s): All
Neighborhood(s): All
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ISSUE:
Shall Council adopt Resolution No. 2018-79, with exhibit, establishing fees and charges for utility service rates (wastewater, water, and stormwater) effective January 1, 2019, and January 1, 2020?
RECOMMENDATION:
recommendation
Adopt Resolution No. 2018-79 with exhibit, establishing fees and charges for utility service rates (wastewater, water, and stormwater) effective January 1, 2019, and January 1, 2020.
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SUMMARY AND BACKGROUND:
Council has been committed to providing adequate funding for the City’s wastewater, water, and stormwater systems (collectively referred to as the Utility) to meet the current, growing and changing needs of our community, and to comply with state and federal regulations. Council has adopted the rate increases necessary to operate and maintain the systems, complete important capital projects, and preserve the financial stability of the Utility. As a result of careful planning and annual rate adjustments, the City has been able to make the required investments, navigate economic challenges, and address emerging operational needs without urgent or exorbitant rate increases. The Utility Fund remains financially secure, even as the overall trend in water consumption continues to decline.
Council has used a cost of service model to set utility rates since 2002. Salem provides utility services to customers in several classifications and areas, inside and outside of its city limits. Under a cost of service methodology, the costs to provide treated drinking water, remove and treat wastewater, and collect, treat, and convey stormwater are assigned to the appropriate groups of customers in proportion to the services they use. Projections about anticipated water consumption, wastewater volumes, and impervious surfaces creating stormwater runoff are made to estimate the unit demand for each service type. Rates are set to recover the cost of these service units and are then charged to customer accounts based on the level of services received.
Cost of Service Goals and Objectives
An updated Cost of Service Analysis (COSA) was adopted by Council in August 2012 to implement the stormwater utility inside Salem city limits. Stormwater rates were separated from wastewater rates over a period of four years through 2016. The COSA has been updated again in 2018, including a focus on stormwater revenue and expenditures now that the system is more mature. Utility rates proposed for 2019 and 2020 are based on current technical data and policy discussions that emerged as part of the COSA development. The objectives for Salem’s cost of service methodology are as follows.
1. Provide adequate revenue for routine operations and maintenance as well as capital investment.
2. Encourage revenue stability by recovering a greater share of revenue from fixed charges, which are less sensitive to changes in demand and weather patterns.
3. Support rate stability by adopting annual increases and by smoothing or transitioning changes in the rate structure over time.
4. Promote equity between customers and classes by using a cost of service model.
5. Follow standard industry approaches and create a defensible and transparent rate structure.
6. Reflect the community policy framework structured to benefit the economy.
7. Develop a rate structure that is precise and based on data that is reasonably managed.
Financial Planning Goals
Management targets are established to guide financial planning and modeling for the City and the Utility. These targets are designed to achieve the long-term goals of maintaining efficient operations, controlling costs, reducing debt, and increasing capital funding. Best management practices are also used to establish financial reserves for operations, rate stabilization, and debt. These financial planning goals are used to evaluate various rate scenarios and determine which best meets the needs of the Utility.
In 2014, Council adopted Financial Policy C-14 for the Utility Fund to guide forecasting and rate proposal development. The Policy establishes operating and debt reserve levels, debt coverage ratios, a capital funding strategy, and basic parameters for rate proposal development. The Policy was revised in 2016 to establish an ongoing COSA and rate proposal cycle. Future COSA updates are to be developed every four years and will provide more frequent opportunity to address specific equity issues and potential changes in policy goals. Rate proposals are based on the policy framework of the COSA and are presented to Council every other year. The biennial rate proposal establishes the revenue slope for each system (water, wastewater, and stormwater) in the Utility for each of the two years.
Salem has taken several steps to improve the Utility's financial position and debt coverage ratios by prepaying and refunding older debt at lower interest rates for savings of $9.4 million, and prepaying a Business Oregon loan, resulting in a net present value savings of $2.1 million. The Utility has not issued new debt since 2009, but an emerging need for additional water treatment processes will require an estimated $50 million in debt to be issued in 2020. Sound financial decisions to refund or prepay debt and stabilize revenue through fixed charges have allowed the City to issue the necessary Utility debt and maintain the required coverage ratios without a rate increase exceeding the previously planned overall Utility revenue slope of 3 percent.
COSA Update Process
The Cost of Service Analysis Update Policy Advisory Committee (CUPAC) is a sub-committee of the Water/Wastewater Task Force (W/WWTF) and is composed of two members of the public and four City Councilors who receive technical information and develop policy recommendations regarding issues identified during the COSA update process. CUPAC convened in May 2018 and met four times through mid-July. The technical update allocated costs associated with maintenance, operations, and capital improvements to the individual utility systems, and then within each system among various functions and customers served. Draft rates were developed, and the committee reviewed the results of the COSA and impacts of the rates, and made the following policy recommendations to the W/WWTF.
1. Increase the stormwater revenue slope to five percent for five years to realign stormwater revenues with current and projected expenditures.
2. Increase the percentage of water revenue recovered through fixed charges from the current 20 percent to 25 percent by 2020.
3. Recognize revenue from the sale of a portion of Salem’s Willamette River water rights as an asset of City of Salem-thus allocating the revenue to inside-city customers only-rather than all customers.
4. Allocate Aquifer Storage and Recovery (ASR) system costs to inside-city customers only.
5. Recognize the impact of the technical update reducing irrigation volume rates by 17 percent and take no further policy action.
6. Undertake a phased implementation of water increases for wholesale customers.
Water/Wastewater Task Force
The Water/Wastewater Task Force is composed of the members of CUPAC as well as representatives from Cities of Keizer and Turner, Marion County, East Salem Suburban Water District, Salem Area Chamber of Commerce, SEDCOR, and two members of the general public. The W/WWTF met three times in July and August 2018 to receive a status report on the cyanotoxin response, to review the rate impacts of the COSA update and associated policy decisions from CUPAC, and to review the recommended rate proposal.
The technical updates to the COSA initially resulted in substantial rate increases for wholesale water customers of between 29 and 42 percent in 2019. These increases are the result of the types of improvements anticipated in water treatment and the fact that all customers share in those costs. Rates for inside-city customers did not result in the same immediate impact due to off-setting revenue from the sale of the Willamette River water rights that reduces and delays the full rate impact of these necessary water treatment improvements. The W/WWTF recommended smoothing the increases for wholesale customers over a period of four years, equal to the remaining duration of payments from the sale of water rights. Increases greater than the 3 percent revenue slope may be necessary for Salem water customers in the future.
The W/WWTF endorsed the policy recommendations from CUPAC and unanimously recommended the following revenue slope increases by system for 2019 and 2020:
• Wastewater 2.5 percent in 2019 and 2020
• Water 3.0 percent in 2019 and 2020, and
• Stormwater 5.0 percent in 2019 and 2020.
The associated rates are based on the 2018 COSA update.
Outreach
All CUPAC and W/WWTF meetings were noticed to the public. Following the W/WWTF recommendation, the City’s website was updated with outreach materials including a bill estimator, detailed information on how to read your bill, and a news story about the proposed rate increases. In addition, over 38,000 residential and over 3,000 non-residential customers inside Salem received a postcard notification of the utility rate hearing with information about the proposed rate increase, the URL for the Utilities webpage with more information, an email address for an account analysis, and information on how to submit written testimony to the City Recorder.
At the writing of this report, ten pieces of written testimony have been received (Attachment 5) and fifteen customers have inquired about their accounts via phone or email. About half of the customers requested an estimate for a specific account, and half had other questions about their accounts or rates for septic and irrigation classifications.
FACTS AND FINDINGS:
Rate Proposal
Long-term financial planning is integral to the Utility’s success and focuses on adequately funding capital construction, properly funding operations and maintenance, maintaining sufficient reserves and debt coverage, and balancing these needs against the desire for smaller, more predictable annual rate increases rather than periodic rate spikes. The rate increases required to achieve these goals are as follows:
• Wastewater 2.5 percent in 2019 and 2020
• Water 3.0 percent in 2019 and 2020, and
• Stormwater 5.0 percent in 2019 and 2020.
Capital Investment
Based on the replacement cost of current assets, it is estimated that an annual investment of $40 million is needed to replace aging infrastructure. In the past two decades this investment effort has required a combination of cash-funded capital and utility revenue bonds. In previous rate proposals, increases in direct capital investment have been increased as debt service obligations have declined. In FY 2019, the City is investing nearly $37 million in capital projects ($17.7 in cash-funded capital and $18.9 million in debt service). In FY 2020, cash-funded capital will be reduced to maintain coverage ratios and allow for the issuance of an estimated $50 million in new utility revenue bonds. With the new debt service requirement, $4 million previously targeted for cash-funded capital investment will be redirected to debt service annually.
Operations and Maintenance
Public Works Department staff continue to identify operational efficiencies and savings in areas that are controllable; however, the majority of each system’s expenses are fixed, regardless of how much water is consumed, wastewater is treated, or stormwater is conveyed to the river. The Utility is tightly managed and cost saving opportunities are continually evaluated. FY 2017-18 operating expenditures were 6.6 percent greater than FY 2016-17, including extraordinary expenses related to the cyanotoxin event, the cost of six additional positions in FY 2018, and the expansion of programs such as those related to green infrastructure.
Reserves
Reserve levels are set based on debt requirements and best management practices. In FY 2018-19, the Utility Fund will maintain $11.7 million in debt reserves, equal to one-half of the maximum annual debt service requirements. Consistent with best management practices, a 120-day operating reserve of $23.2 million is also maintained. The operating reserve includes rate stabilization reserves that can be used in lieu of an urgent rate increase in years where net revenues are insufficient to meet coverage requirements.
Estimated Impacts on Customer Bills
Units of water and wastewater are measured in hundred cubic feet (ccf), and one ccf is equal to 748 gallons. Nearly 73 percent of Salem’s residential customers consume between 2 and 7 ccf per month as their average winter water usage, and 84 percent of Salem’s customers have 5/8-inch (the old standard) or 3/4-inch (the new standard) meters.
Average Single Family Residential Customer
A typical single family residential customer with a 5/8-inch or 3/4-inch meter using 8 ccf of water and 6 ccf of wastewater will see an increase of $2.13 and $2.77 per month in 2019 and 2020 respectively. Customers using more or less water will see similar dollar increases comparing year to year, while the percentage change will vary based on volume.
High Use Single Family Residential Customer
Residential customers with larger 1-inch meters may see a greater dollar increase. In this example, approximately $3.45 and $4.36 per month in 2019 and 2020 due to the increase in the base charge per meter. Actual bills will vary based on consumption and other customer characteristics.
Economic Impacts of the Utility Bill on Single Family Residential Customers
The total utility bill for a typical customer in Salem represents less than 2 percent of median household income, and Salem is anticipated to continue to remain in the middle of the standard comparator cities.
Multifamily Residential Customers
Multifamily customers will generally experience increases consistent with the planned revenue slope, with the exception of accounts having larger water meters and lower consumption. A four-plex with a 1-inch meter using 10 ccf of water and 7 ccf of wastewater will see a $5.19 or 5.5 percent increase the first year as a result of the increase in the base meter charge.
Non-Residential Customers
Commercial, public, and institutional bills will all vary based on customer characteristics and usage. Sample bills reflect changes of between 2.6 and 4.7 percent for inside-city customers. One of the most influential variables for commercial and public customers is the amount of impervious area used to calculate the stormwater fee. Those with large impervious areas will experience closer to 5 percent increases while those with smaller areas will experience closer to 3 percent increases. It is worth noting that customers with smaller volumes and larger meters may see greater than 3 percent increases due to the increase in the base charge per meter.
In contrast, irrigation accounts will see a 17 percent reduction in the volume rate as a result of the COSA update. Large volume industrial water users may also see reductions. Each customer is very unique and varies by usage, but one example selected shows a 1.0 percent decrease in 2019 before a 2.9 percent increase in 2020.
Wholesale Customers
Wholesale wastewater customers such as the Cities of Keizer and Turner will see small increases of between 2 and 4 percent. Wholesale water customers such as Orchard Heights Water Association, Turner, and Suburban East Salem Water District will see larger increases of 7 to 10 percent annually over the next four years (reflecting the COSA update and recommended rate smoothing). Orchard Heights Water Association (OHWA) provided a statement for consideration by the W/WWTF that is included as Attachment 4. One concern expressed by OHWA is that although the Council policy of applying an outside-city surcharge of 7.5 percent was removed by Council for incorporated cities such as Keizer and Turner, it remains in place for customers in unincorporated areas.
Sample bills for all customer classes and service areas are contained in Attachment 1 beginning on page ES-11 of the Executive Summary.
Alicia Blalock, Manager
Public Works Administration Division
Attachments:
1. 2018 Cost of Service Rate Study - Executive Summary (including sample bills)
2. Resolution 2018-79
3. Resolution 2018-79 Exhibit 1
4. Orchard Heights Water Association Statement
5. Written Testimony (1-10)