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Redmond Town Center, 7525 166th Avenue NE, Suite D-215, Redmond, WA 98052; T: (425) 867-1802 F: (425) 867-1937 www.fcsgroup.com

2008 BCWWA Annual Conference Whistler, British Columbia

Presented by:

Karyn Johnson, Principal – FCS GROUP

April 29, 2008

Designing Water Rates to Reflect Cost of Service and Support Water Sustainability

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What is a Cost of Service Rate Analysis?

Revenue Requirement“Defining Overall Needs”

Cost of Service“Equity Evaluation”

Rate Design“Collecting the Target Revenues”

Revenue Requirement“Defining Overall Needs”

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Multi-year financial plan that determines the amount of revenue necessary to recover the total costs incurred to provide service Cash reserves System reinvestment funding Operating & maintenance costs Capital related costs

Used to allocate costs to users of the system

Forms the basis for rate design

…With revenue needs defined… What’s Next?

Summary of Revenue Requirement

Long-Range Financial

Forecasting Components Revenue Surplus or

Shortfall Calculation

Rate Forecast and Impact

Capital Financing Plan

Capital Improvement Program (CIP)

Operating Financial Plan

O&M CostsImpact of CIP

Financing

Fiscal Policies Financial Standards

Cost of Service“Equity Evaluation”

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Why is Cost of Service Important?

Pressure to ensure that customers are paying their fair share of system costs Regulatory requirements (Interior Health’s mandate for

safe and clean drinking water) Sustaining adequate water supply System replacement needs Inflationary pressures

Provides a rational basis for distributing the full costs of utility service to each class of customer

An equitable distribution of cost shares that considers utility-specific data leads to defensible rate structures

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Cost of Service

Elements

Classify Plant and Expenses /

Allocate to Function

System Design Criteria / Industry

StandardsDefine Customer

Classes Distinctions in

Demand and Service Levels

Define Utility Functions

Service Components

Allocate Costs to Customers

“Cost Shares”

Develop Unit Costs Per Function

Fixed / Variable Charges

What Level of COSA is Right for You?

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Analytical Steps of a COSAStep 1: Functionalize

Define Functions of Service

Sewer System Functions

Customer

Contributed Flow

Inflow & Infiltration

Strength (BOD, SS, etc.)

Water System Functions

Customer

Meters & Services

Base Demand

Peak Demand

Fire Protection

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Analytical Steps of a COSAStep 2: Classify

Categorize assets / expenses by major cost components

Assign cost components to functions based on cost causation Why is the infrastructure needed? Why did you incur the expense? How did you determine the size? How is asset used/operated?

Water Supply/Treatment Transmission/

Distribution Storage Hydrants General

Sewer Collection Conveyance Pumping Treatment General

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Allocation of Water System Components

How is infrastructure assigned to functions?

Source of Supply/Treatment

Ratio of peak day to average day demand

Transmission/Distribution Portion to fire protection; remainder to peak/average day

Storage Based on storage requirements (operational, equalizing, emergency, fire suppression) from system plan documents

Hydrants Directly assigned to fire protection

Other categories based on the unique design of each system

Costs can be directly assigned if benefit only one customer or a group of customers

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Example Classification of Plant in Service

Asset CategoryOriginal

CostAverage Demand

Peaking Demand

Fire Protection Customer

Source of Supply $1,500,000 50% 50%Storage $1,000,000 25% 50% 25%Transmission & Distribution $4,000,000 30% 60% 10%Meters & Services $500,000 100%Hydrants $300,000 100%General $100,000

$7,400,000 30.0% 50.0% 13.3% 6.7%

Operating expenses are generally allocated based on a detailed review of individual line items Proportional to individual plant components Proportional to total plant Directly assigned to one or more functional components

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Example: Summary of System Cost Allocation

Peak Demand

39.7%

AverageDemand

40.4%

Customer

13.1%

Fire Protection

6.8%

Water Revenue RequirementAVERAGE DEMAND

PEAK DEMAND

FIRE PROTECTION CUSTOMER

Operating Expense $840,000 47.9% 32.4% 2.1% 17.6%Capital & Debt Service $600,000 30.0% 50.0% 13.3% 6.7%

$1,440,000 $582,360 $572,160 $97,440 $188,04040.4% 39.7% 6.8% 13.1%

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How is this System Allocation Used?

Not all customers use the system in the same manner - system costs should not be recovered uniformly from all customers

Provides a basis for differentiating customer classes

Represents a “snapshot” of cost breakdowns and cost relationships Used for allocation of costs to groups of customers

having similar usage characteristics or facility requirements

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What Makes a Customer Class Distinct?

Distinct service requirements

Usage levels

Usage patterns

Seasonality of use

Strength of wastewater

Location

Type of user

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What are Common Customer Classes?

Single Family Multi-Family

Residential Commercial

IrrigationIndustrial

Government

Wholesale

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Typical Customer Class Distinctions

Relatively low usage per dwelling unit

High peaking (summer outdoor usage)

Lowest fire flow requirement

Lower usage per unit than SFR

Relatively constant year-around use

Fire flow requirement falls between SFR & commercial

Can exhibit high usage per account

Relatively constant year-around use

Highest fire flow requirement

Single family residential

Multi-family residential

Commercial/Industrial

Parks & IrrigationMajority of, if not all,

usage in peak periodNo fire flow

requirement

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Analytical Steps of a COSAStep 3: Allocate to Customers

Costs are distributed based on relative demands (water):

Base Costs Average annual water usage

Peak Costs Peak period (season, month, etc.) usage

Customer Costs Accounts

Meters & Services Costs Equivalent Residential Units (adjusted for meter size)

Fire Protection Costs Liters per second/minute requirement

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Defining Customer Usage Characteristics

Types of customers

Distinguishing characteristics

Levels of demand for each service component

# of AccountsMeter

EquivalentsAnnual Volume

(m3)Peak Month Usage (m3)

Peak Day Demand (mgd)

Fire Flow Reqrmnts

Single Family 3,700 4,000 500,000 80,000 2.6 60

Multi-Family 60 400 50,000 5,000 0.2 90

Commercial 218 1,000 200,000 20,000 0.5 150

Industrial 2 100 100,000 10,000 0.2 200Irrigation 2 100 100,000 10,000 0.2 na

4,000 6,000 1,000,000 150,000 4.5 200

SFR as % of Total 92.50% 66.70% 50.00% 53.30% 57.80% 23.10%

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Customer Class Allocation Example

Single family customer allocation example Pro rata share of costs in proportion to demand levels Unit costs for rate design

Functional Cost Total Cost Allocation BasisSFR as %

of Total SFR CostAverage Demand $582,360 annual volume 50.0% $291,180Peak Demand $572,160 peak day demand 57.8% $330,708Fire $97,440 fire factor 23.1% $22,509Customer $188,040 # of accounts 92.5% $173,937

$818,33456.8%

Total SFR Allocated CostsAs Percent of Total

Rate Design“Collecting the Target Revenue”

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Goals of Rate Design Target revenue levels

Cost-based

Policy objectivesConservation

Risks (revenue stability)

Customer impacts/affordability

Administrative practicality

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Basic Rate Features Flat charges

Fixed charge plus volume charges Uniform volume charges Class-specific volume charges Inverted (tiered) volume charges (single family residential)

Seasonal charges

Other rate design features Wholesale rates Large commercial/industrial rates Interruptible service rates Strength charges Outside city (district) rates

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Conservation Rate Structures

Seasonal Rate

$ per unit of water in winter, higher $ per unit of water in

summer

Uniform Single Block

$ per unit for all water use

Increasing Block Rate

$ per unit of water that increases above each threshold of usage (most commonly 3 blocks, can be any number of blocks)

Appropriate for classes exhibiting relatively constant usage, demand patterns (multi-family residential;

commercial/industrial)

Reflects peak capacity costs; encourages conservation; appropriate

for multi-family and commercial customers

Reflects peak capacity costs; encourages conservation; appropriate for single family

residences

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Other Rate Design Features Wholesale rates

Reflect limited service commitment– Some costs may not be applicable to wholesale service

Different, typically higher, cost of service basis

– Includes a return on utility investment

– May include “non-cash” costs of service

– May include charges for unique services, facilities Usually lower than retail rates!

Large/industrial customer rates Large customer with unique usage requirements Often “tailored” to directly reflect service costs May include capacity (take or pay) features Often based on “bulk” statistics (million gallons, pounds of

pollutants)

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Other Rate Design Features Interruptible service rates

Used as a peak shaving rate form Customer is requested to interrupt service Customer is provided lower overall rate as a “credit” for

willingness to interrupt

Strength charges (sewer)

Outside city (district) rates Commonly a rate multiplier ( 1.10-1.50) Premised on “renter” rather than “owner” Can be cost-based

– Higher costs due to location– Benefits of utility government w/o costs– Different usage patterns– Higher infrastructure needs (lower density)– Risk & return

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Summary of Rate Design Final adopted rate designs should:

Collect the desired level of revenues Reflect the way costs are incurred (fixed vs. variable) Reflect the balance of policy objectives against the desire for

cost based rates

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What’s Right for You? What do you wish to accomplish?

What information can you use?

What structures can your system handle?

Will the message be received?

Is it worth it?

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About the SpeakerKaryn Johnson is a Principal and Firm shareholder for FCS GROUP with over 22 years of professional experience, including 15 years as a municipal rate consultant. She specializes in performing a variety of financial studies including fiscal policy development, capital financial plans, capital connection charges, revenue requirements, cost of service/rate design, and wholesale/regional water supply issues. Her consulting engagements number in excess of 200 and encompass water, wastewater, and stormwater programs.

Karyn is known for her effective style of communicating technical information in public process, stakeholder participation, staff review, and industry training forums. She is a member of BCWWA and presented at the 2006 annual conference on “Transitioning to Universal Metering & Water Conservation Rates.”

Karyn Johnson

FCS GROUP

7525 166th Ave NE

Suite D-215

Redmond, WA 98052

425-867-1802 x241

Email:

karynj@fcsgroup.com