HomeMy WebLinkAboutWater & Wastewater Utility Cost of Service Rate Study - March 2008
City of
Port Townsend, WA
Final Report for
WATER AND
WASTEWATER
UTILITY COST
OF SERVICE
RATE STUDY
March 2008
CONSULTING SERVICES PROVIDED BY:
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7525 166th Avenue NE., Suite D-215
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made from post-consumer recycled plastic bottles. www.fcsgroup.com
REPORT CONTENTS
Section 1. Study Framework..........................................................................................................................1
A. Study Introduction..............................................................................................................................1
B. Utility Rate Setting Principles and Methodology.................................................................................1
B.1 Revenue Requirements Analysis....................................................................................................2
B.2 Cost of Service Analysis and Rate Design......................................................................................3
Section 2. Water Utility.................................................................................................................................5
A. Revenue Requirements........................................................................................................................5
A.1 Revenue Requirements Analysis....................................................................................................5
A.2 Capital Funding Plan....................................................................................................................6
A.3 Summary of Revenue Requirement...............................................................................................7
B. Cost of Service Analysis.......................................................................................................................8
B.1 Functional Allocation....................................................................................................................9
B.2 Customer Class Allocations.........................................................................................................11
B.3 Cost of Service Phase-In..............................................................................................................13
C. Rate Design......................................................................................................................................14
C.1 Existing Water Rates..................................................................................................................14
C.2 Proposed Water Rates.................................................................................................................15
D. Summary..........................................................................................................................................17
Section 3. Wastewater Utility.......................................................................................................................18
A. Revenue Requirements......................................................................................................................18
A.1 Operating Forecast......................................................................................................................18
A.2 Capital Funding Plan..................................................................................................................19
A.3 Summary of Revenue Requirement.............................................................................................20
B. Cost of Service Analysis.....................................................................................................................21
B.1 Functional Allocation..................................................................................................................22
B.2 Customer Class Allocations.........................................................................................................23
C. Rate Design......................................................................................................................................25
C.1 Existing Wastewater Rates..........................................................................................................25
C.2 Proposed Wastewater Rates........................................................................................................26
D. Summary..........................................................................................................................................27
(Continued on next page)
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Section 4. System Development Charges......................................................................................................28
A. Introduction......................................................................................................................................28
B. Methodology.....................................................................................................................................28
B.1 Existing Cost Basis......................................................................................................................29
B.2 Future Cost Basis........................................................................................................................29
C. Determination of the Water Connection Fee....................................................................................29
C.1 Existing Cost Basis.....................................................................................................................29
C.2 Future Cost Basis........................................................................................................................30
C.3 Calculation of the Water System Development Charge..............................................................30
D. Determination of the Wastewater Connection Fee...........................................................................30
D.1 Existing Cost Basis.....................................................................................................................30
D.2 Future Cost Basis.......................................................................................................................31
D.3 Calculation of the Wastewater System Development Charge......................................................31
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Water & Wastewater Utility Cost of Service Rate Study
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SECTION 1
STUDY FRAMEWORK
A. STUDY INTRODUCTION
In 2006, the City of Port Townsend authorized FCS GROUP to complete a Water & Wastewater
Utility Cost of Service Rate Study. The scope of the project included the following elements:
Assess revenue needs for a multi-year period that include adequate funding for operations and
maintenance, capital projects, debt service, and other program activities.
Project long-term capital needs and incorporate these needs into a long-term funding forecast
that may include rates, debt, and existing reserves.
Conduct a cost-of-service rate analysis with a focus on an equitable allocation of functional costs
to the different customer classes served by the City.
Development and recommendation of rate structures which:
o Allocate costs to each customer class based on proportional use of the system
o Promote water conservation
o Incorporate changes or improvements to the customer classification structure
Review and update the water and wastewater system development charges.
These scope elements are addressed throughout each phase of the work described in this report.
Where possible, specific responses to individual questions raised in this list have been provided in the
narrative.
B. UTILITY RATE SETTING PRINCIPLES AND METHODOLOGY
The methods used to establish utility rates are based on principles that are generally accepted and
widely followed throughout the industry. These principles are designed to produce rates that
equitably recover costs from each class of customer by setting the appropriate level of revenue to be
collected from ratepayers, and establishing a rate structure to equitably collect those revenues.
The primary tasks of the rate study are listed below:
Rate Revenue Requirements Analysis. This analysis identified the total revenue requirement to
be recovered from utility rates, considering operating and maintenance expenditure forecasts,
capital funding goals, debt requirements, and policy objectives.
CITY OF PORT TOWNSEND
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Cost-of-Service Analysis and Rate Design. The cost of service analysis developed an allocation
of the rate revenue requirement that identifies the functional elements of water and wastewater
service and distributes those calculated costs to customers based on their demand and use of the
system. Rate Design evaluated alternative rate structures that recover the revenue requirement
while achieving equity amongst customer classes.
B.1 REVENUE REQUIREMENTS ANALYSIS
A revenue requirement analysis forms the basis for a long-range financial plan and multi-year rate
management strategy for each utility. It also enables the City to set utility rate structures that are
rooted in the “costs-of-service” and which fully recover the total costs of operating each utility:
capital improvement and replacement, operations, maintenance, general administration, fiscal policy
attainment, cash reserve management, and debt repayment. Linking utility rate levels to a financial
plan such as this helps to enable not only sound financial performance for the City’s utility
enterprises, but also a clear and reasonable relationship between the costs imposed on utility
customers and the costs incurred to provide them the service.
When FCS GROUP conducts a revenue requirements analysis – the financial plan for each utility –
it includes the following core elements to form a complete portrayal of the utility’s financial
obligations:
Fiscal Policy Analysis – Identifies formal and informal fiscal policies of the City to ensure that
current policies are maintained, including: reserve levels, capital/system replacement funding and
debt service coverage targets.
Capital Funding Plan – Defines a strategy for funding the City’s capital improvement program,
including an analysis of available resources from rate revenues, system development charges, debt
financing, and any special resources that may be readily available (e.g., grants, developer
participation, etc.). Includes any planned or recommended accumulation and use of dedicated
reserves for asset renewal and replacement projects.
Operating Forecast – Identifies future annual non-capital costs associated with the operation,
maintenance, and administration of the utility systems.
Reserve Analysis – Forecasts cash flow and fund balance activity in the City’s utility reserves.
Tests for satisfaction of actual or recommended minimum fund balance policies, including
working capital/operating, capital contingency/emergency and system reinvestment.
Sufficiency Testing – Evaluates the sufficiency of utility revenues in meeting all obligations,
including cash uses such as operating expenses, debt service, capital outlays, and reserve
contributions, as well as any coverage requirements associated with long-term debt.
Strategy Development – Designs a forward-looking strategy for adjusting utility resources to
fully fund all utility obligations on a periodic or annual basis over the projection period.
From this foundation, utility rate structures can be adjusted to meet the defined annual and long-
CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
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CITY OF PORT TOWNSEND
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DEBT PROCEEDS
PLANNED CASH
CONTRIBUTION
DEBT SERVICE RATE
FUNDING
DEFINE POLICY DRIVERS & PARAMETERS
OPERATING
BUDGETS
FINANACIAL MANAGEMENT
PRACTICES & GOALSPRICING OBJECTIVES
EVOLVING
PLANNING NEEDS
CAPITAL
IMPROVEMENT
PLAN
ECOONOMIC`
ASSUMPTIONS
CUSTOMER
STATISTICS`
NON-RATE
REVENUES
DEVELOP RATE
REVENUE
REQUIREMENTS
DEVELOP
CAPITAL
FUNDING PLAN
RESERVE
TARGETS
UTILITY RATE STRUCTURES
6 YEAR RATE
STRATEGY
6 YEAR FINANCIAL
PLANANNUAL NEED
DEBT PROCEEDS
PLANNED CASH
CONTRIBUTION
DEBT SERVICE RATE
FUNDING
DEFINE POLICY DRIVERS & PARAMETERS
OPERATING
BUDGETS
FINANACIAL MANAGEMENT
PRACTICES & GOALSPRICING OBJECTIVES
EVOLVING
PLANNING NEEDS
CAPITAL
IMPROVEMENT
PLAN
ECOONOMIC`
ASSUMPTIONS
CUSTOMER
STATISTICS`
NON-RATE
REVENUES
DEVELOP RATE
REVENUE
REQUIREMENTS
DEVELOP
CAPITAL
FUNDING PLAN
RESERVE
TARGETS
UTILITY RATE STRUCTURES
6 YEAR RATE
STRATEGY
6 YEAR FINANCIAL
PLANANNUAL NEED
term funding target as well the City’s pricing objectives. Exhibit 1.1 illustrates these components.
What may be different from this study’s approach to developing the financial foundation for rates
and the City’s annual, internal process is that FCS GROUP considers the utilities’ revenue
requirements from a “needs-driven” perspective. We have compiled financial data for the utilities,
forecasted near- and long-term needs, incorporated financial policies, and established the full annual
cost of service for each utility, which must be recovered primarily from user rates.
Exhibit 1.1 - Revenue Requirements Analytical Components
B.2 COST OF SERVICE ANALYSIS & RATE DESIGN
asis for distributing the full costs of
ng
e analysis includes the following components, described on the next page and
– Apportions the annual revenue requirement for a selected test
d
The purpose of a cost of service analysis is to provide a rational b
utility service – direct and indirect, fixed and variable – to each class of customers in proportion to
the distinct demands they place on the systems. Detailed cost allocations, along with appropriate
customer class designations, help to sharpen the degree of equity that can be achieved in the resulti
rate structure design. This analysis yields an appropriate method for allocating water and wastewater
costs which could be sustained until substantial changes in cost drivers or customer patterns change
in either utility.
The cost of servic
illustrated in Exhibit 1.2:.
Functional Cost Allocation
year by major function of utility service. For water, functional cost pools include those incurre
CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
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DEFINE POLICY
DRIVERS &
PARAMETERS
CUSTOMER CLASSIFICATION AND
COST ALLOCATION
CUSTOMER
BASE
PEAK
FIRE
MULTI-FAMILYRESIDENTIAL
IRRIGATION
FIXEDVARIABLE
RATE STRUCTURE DESIGN
ANNUAL REVENUE
NEED FROM RATE
STRATEGY
FUNCTIONAL COST ALLOCATION
CUSTOMER
DEMAND
STATISTICS
CUSTOMER
FLOW
STRENGTH
COMMERCIAL A
COMMERCIAL BGOVERNMENT
DEFINE POLICY
DRIVERS &
PARAMETERS
CUSTOMER CLASSIFICATION AND
COST ALLOCATION
CUSTOMER
BASE
PEAK
FIRE
MULTI-FAMILYRESIDENTIAL
IRRIGATION
FIXEDVARIABLE
RATE STRUCTURE DESIGN
ANNUAL REVENUE
NEED FROM RATE
STRATEGY
FUNCTIONAL COST ALLOCATION
CUSTOMER
DEMAND
STATISTICS
CUSTOMER
FLOW
STRENGTH
COMMERCIAL A
COMMERCIAL BGOVERNMENT
f
by
g on
sts of service by customer class, laying the
Exhibit 1.2 - Cost of Service Analysis and Rate Design Analytical Components
to meet the base (or average) demands of users, to meet the peak demands of users, to provide
required fire protection (flow and duration), and to provide customer service. For wastewater,
functional cost pools include those incurred to handle user flows, to treat the volume of user
flows, to treat the strength (expressed as biochemical oxygen demand and suspended solids) o
user flows, and to provide customer service.
Customer Classification & Cost Allocation – Allocates functional cost pools to classes of
water and wastewater customers, based on their unique demands for each service, as defined
system planning documents, industry standards, and recorded user history (from billing data).
Identifies shifts in cost recovery by customer class from that experienced under the existing rate
structures. Determines the amount of revenue to be recovered from each class of customer,
linked to a proportionate share of costs required to serve their demand (i.e., an equitable
distribution of costs). Determines whether new or revised classes are warranted, dependin
characteristics culled from detailed customer data.
Unit Cost Determination – Calculates the unit co
groundwork for how costs will be applied in the rate structures: in either fixed or volume-based
rates.
SECTION 2
WATER UTILITY
A. REVENUE REQUIREMENTS
A revenue requirement analysis forms the basis for a long-range financial plan and multi-year rate
management strategy. The analysis is developed by completion of an operating forecast that
identifies future annual non-operating costs and a capital funding plan that defines a strategy for
funding capital improvement needs of the City.
A.1 REVENUE REQUIREMENTS ANALYSIS
The purpose of the operating forecast is to determine whether the currently adopted rates and
charges are sufficient to recover the costs the City incurs to operate and maintain the water system.
The 2006 budget revenues and expenses form the baseline for this forecast. The operating income
forecast was developed for the six-year projected period of 2007 through 2012.
Key Assumptions
Operating Reserves: 45 days of O&M expenses (per discussion with City staff and industry
standard)
Capital Contingency Reserves: 2% of total Plant-in-Service
Operating Revenue
Customer Growth Rate Revenue: 1.97% per year (per Water Plan)
Interest Earnings Rate: 3.50% per year (per discussion with City staff)
Operating & Maintenance (O&M) Expenses
General Cost Inflation: 3.0% per year (based on analysis of historical Consumer Price Index data
and discussion with City staff)
Construction Cost Inflation: 3.0% per year (based on Engineering News Record Seattle
Construction Cost Index)
Labor & Benefits: 3.0% per year (per discussion with City staff)
Local/State Excise Taxes: Public utility excise tax rate is 5.029% on all water rate revenues
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Water & Wastewater Utility Cost of Service Rate Study
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State B&O Tax: 1.50% on all non-rate revenues
Local City Utility Tax: The 20% tax is not included in the analysis as an embedded cost.
Instead, the utility tax is added on to the total bill once the utility bill has been calculated.
Debt Service
Existing Debt Service: The four (4) outstanding debt issues in the water utility consist of a 1978
revenue bond, a 1998 revenue bond (the water utility pays 7% of the total annual payments for
this bond), and two public works trust fund loans (1998 and 2002).
New Debt Service: There are no new debt issues forecasted for the water utility; our analysis
indicates that projected revenues and fund balances will provide sufficient funding for operations
and capital projects.
System Reinvestment
System reinvestment funding is to ensure system integrity through reinvestment in the system.
Ideally, the minimum funding would be an amount equal to or greater than depreciation
expense. Historically, this rate funded component has had minimal funding. In the near-term,
2007 – 2010 this component will not be funded due to other rate pressures. However, future
analysis should consider the funding of this component for prudent financial management of
system assets.
A.2 CAPITAL FUNDING PLAN
A summary of the capital-funding plan is provided in Exhibit 2.1. The water utility is anticipating
$2.6 million in capital costs in 2007 through 2012. The annual average capital funding need is
approximately $437,000 with 2010 being the highest capital outlay year at $726,000.
Exhibit 2.1 - Water Utility Capital Funding Summary
Summary of Expenditures200720082009201020112012TOTAL
CAPITAL PROJECTS
Improvement Upgrades & Expansions144,200$ 180,353$ 177,568$ 391,114$ 347,782$ 213,914$ 1,454,932$
Repairs and Replacements144,200 148,526 155,714 334,839 173,891 213,914 1,171,084
TOTAL CAPITAL EXPENDITURES288,400$ 328,879$ 333,282$ 725,953$ 521,673$ 427,829$ 2,626,016$
FUNDING SOURCES
Capital Fund Balance- - - 320,588 260,913 254,144 835,644
System Development Charges144,200 180,353 177,568 391,114 260,761 173,685 1,327,681
Revenue Bond Proceeds- - - - - - -
Funded Depreciation144,200 148,526 155,714 14,251 - - 462,690
-
TOTAL CAPITAL RESOURCES288,400$ 328,879$ 333,282$ 725,953$ 521,673$ 427,829$ 2,626,016$
The majority of capital projects (55%) relate to improvement upgrades and expansion projects, the
remainder are repair and replacement projects. Due to the nature of the capital projects as
identified, the majority of funding for future capital needs is expected to come from system
development charges (50%) and the remainder from existing fund balance.
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A.3 SUMMARY OF REVENUE REQUIREMENT
The operating forecast components of O&M expenses and debt service come together to form the
multi-year revenue requirement. The revenue requirement compares the overall revenue available to
the water utility to the expenses to evaluate the sufficiency of rates. Exhibit 2.2 provides a summary
of the water utility revenue requirement findings.
Exhibit 2.2 - Water Utility Revenue Requirement Summary
Revenue Requirements200720082009201020112012
Revenues
Rate Revenues Under Existing Rates1,706,377$ 1,739,992$ 1,774,270$ 1,809,223$ 1,844,865$ 1,881,209$
Non-Rate Revenues188,391 183,812 178,208 173,456 163,827 156,850
Total Revenues1,894,767$ 1,923,804$ 1,952,478$ 1,982,679$ 2,008,692$ 2,038,059$
Expenses
Cash O&M Expenses1,726,093$ 1,780,549$ 1,836,973$ 1,895,478$ 1,956,066$ 2,018,945$
Existing Debt Service187,432 186,199 184,539 183,482 171,734 137,978
Total Expenses1,913,525$ 1,966,747$ 2,021,513$ 2,078,960$ 2,127,801$ 2,156,923$
Net Surplus (Deficiency)(18,758)$ (42,943)$ (69,035)$ (96,281)$ (119,109)$ (118,864)$
% of Rate Revenue1.10%2.47%3.89%5.32%6.46%6.32%
Use of Reserves18,758$ 42,943$ 69,035$ 38,632$ -$ -$
Net Surplus (Deficiency) after Reserves0$ (0)$ 0$ (57,649)$ (119,109)$ (118,864)$
Req. Increase after Use of Funds0.00%0.00%0.00%3.75%3.71%0.00%
Annual Rate Adjustment 0.00%0.00%0.00%3.75%3.75%0.00%y
Net Cash Flow After Rate Increase0$ (0)$ 0$ 0$ 666$ 3,270$
The 2007 revenue requirement from rates is $1.7 million (total expenses minus non-rate revenues).
The revenue requirement analysis indicates a rate deficiency in each year of the study ranging from
1.1% in 2007 increasing to 6.3% by 2012. Although the results indicate small rate adjustments may
be warranted, the increase to the local utility tax from 10% to 20% puts added pressure on the
utility. Therefore, no rate adjustments were planned; instead it was recommended that $169,000 in
existing reserves be used to cover cash deficiencies until 2010. If all study assumptions remained the
same, a 3.75% rate adjustment for 2010 and 2011 would provide sufficient revenue to meet utility
financial obligations through 2012.
The recommendation to cover the rate deficiencies with existing reserves from 2007 to 2009 was
based on two factors: the strength of the City’s fund balances and the goal to minimize unnecessary
rate impacts on customers. Exhibit 2.3 on the following page contains an analysis of the City’s fund
balances through the length of the study:
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Exhibit 2.3 - Water Utility Fund Activity
Fund Balances200720082009201020112012
Operating:
Beginning Balance2,079,216$ 2,060,458$ 2,017,515$ 1,948,481$ 1,589,261$ 1,329,014$
Less: Use of Reserves for Rate Stabilization(18,758)(42,943)(69,035)(38,632)00
Plus: Net Cash Flow after Rate Increase0 (0) 0 0 666 3,270
Ending Balance2,060,458$ 2,017,515$ 1,948,481$ 1,909,849$ 1,589,927$ 1,332,284$
Less: Min.Operating 45 Day Target212,806$ 219,520$ 226,476$ 233,689$ 241,159$ 248,911$
Balance Available for Capital1,847,652$ 1,797,995$ 1,722,004$ 1,676,160$ 1,348,768$ 1,083,373$
Plus: Capital Funding Sources
System Development Charges (SDCs)144,200 180,353 177,568 391,114 260,761 173,685
Funded Depreciation144,200 148,526 155,714 14,251 - -
Total Capital Resources2,136,052$ 2,126,874$ 2,055,286$ 2,081,525$ 1,609,528$ 1,257,058$
Less:
Total Capital Projects(288,400)$ (328,879)$ (333,282)$ (725,953)$ (521,673)$ (427,829)$
Ending Balance1,847,652$ 1,797,995$ 1,722,004$ 1,355,572$ 1,087,855$ 829,229$
Less: Min. Cap. Cont. Target 2% of Plant360,923$ 367,501$ 374,166$ 388,685$ 399,119$ 407,675$
Ending Balance after policies funded1,486,729$ 1,430,495$ 1,347,838$ 966,886$ 688,736$ 421,554$
As discussed in the “Key Assumptions” section above, two fiscal policy targets have been
incorporated into the analysis:
Operating Reserve: 45 days of O&M expenses ($212,000 to $248,000 each year)
Capital Contingency: 2% of total Plant-in-Service ($360,000 to $407,000 each year)
Although $169,000 of existing reserves are required to meet short term cash flow needs, the healthy
fund balance in the water utility enables the City to reach its fiscal policy targets in each year of the
study. Even after meeting the fiscal policy targets and funding all planned capital projects, the City
has available funds at the end of the year ranging from $420,000 to $1.4 million.
We recommend that the City revisit rates for 2010 and beyond. At that time, the City can address
the need to begin funding annual system reinvestment. In addition, future water filtration costs may
be more firm and can be incorporated into the analysis to evaluate rate impacts and the continued
health of the fund balance.
B. COST-OF-SERVICE ANALYSIS
A cost-of-service analysis determines the equitable recovery of required revenues from customers
according to unique demands each class places on the system. There are three fundamental steps to
allocating the calculated annual revenue requirement to customer classes and developing the final
rates.
Functional Allocation. Plant in service and annual rate revenue requirements (costs) were first
allocated to functional categories of water service (base demand, peak demand, customer and
fire protection) based on system requirements and characteristics.
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Customer Class Identification and Allocation of Functional Costs to Customer Classes.
Functional costs are distributed to customer classes based on customer specific usage
characteristics and facility requirements.
Unit Cost Development. The functional costs allocated to each customer class are broken into
unit costs and then used as building blocks for the design of a new water rate structure.
B.1 FUNCTIONAL ALLOCATION
The primary analytical objective of the cost-of-service task was the functional allocation of plant-in-
service and revenue requirement. This allocation assigned value and costs to functional categories
based on documented system requirements, including engineering criteria (e.g., average demand,
peak demand, storage requirements, fire protection) and other general allocation criteria (e.g.,
industry standards).
First, we allocated plant-in service to service functions based on the relationship of each class of
assets and their use in the system. Assets are allocated to the functions of service according to known
or assumed cost “causation.” The following data sources and key assumptions were applied in the
allocation process:
2005 fixed asset data formed the basis for the allocation of plant-in-service and expenses to
functional components.
Water system peak day to average day demand ratio was assumed to be 1.94 (per the
Comprehensive Water System Plan). This ratio is commonly used to allocate costs between the
base and peak demand functional components.
Supply, treatment, and pumping related expenses are allocated to base (34.1%) and peak
(65.9%) demand using the ratio of peak day to average day demand.
Transmission and distribution related costs were allocated 4.0% to fire protection, based on the
proportion of the cost of the system’s mains designed for fire protection to the total cost of the
system’s mains. The remaining costs were allocated to base (32.7%) and peak (63.3%) using
the ratio of peak day to average day demand.
Storage related costs were allocated to base (24.9%) peak (38.6%) and fire protection (36.5%)
based on a weighted average analysis of storage capacity needs for operational storage,
equalizing storage, emergency storage, and fire suppression storage as identified in the
Comprehensive Water System Plan.
Meters and services costs were directly assigned to the meters and services functional
component.
Hydrant costs were directly assigned to fire protection
General plant was allocated in proportion to all other infrastructure costs.
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A summary of the allocation of plant-in-service to the service functions is provided in Exhibit
2.4:
Exhibit 2.4 - Water Functional Allocation Table
FUNCTIONS OF WATER SERVICE
CUSTOMER METERS &
SERVICES BASEPEAK FIRE
PROTECTION
Supply/Treatment0.00%0.00%34.06%65.94%0.00%0.00%
Pumping0.00%0.00%34.06%65.94%0.00%0.00%
Storage0.00%0.00%24.87%38.64%36.50%0.00%
Transmission & Distribution0.00%0.00%32.72%63.34%3.94%0.00%
Meters & Services0.00%100.00%0.00%0.00%0.00%0.00%
Hydrants0.00%0.00%0.00%0.00%100.00%0.00%
General Plant0.00%0.00%0.00%0.00%0.00%100.00%
AS ALL
OTHERSPLANT-IN-SERVICE
The operating portion of the rate revenue requirements (O&M expenses net of non-rate revenues)
was allocated to functions based on a detailed review of line item categories, following the cost
causation process used in the allocation of plant and/or identifying a relationship between each type
of expense and the assumed reason the cost was incurred. For example, the expenses for maintaining
distribution plant were allocated in the same manner as distribution plant assets, while water supply
costs were allocated in the same manner as water supply plant.
Once the allocations of plant-in-service and expenses were performed, associated allocation
percentages were applied to the capital and debt components of the revenue requirement. Capital
revenue requirements were allocated by the plant-in-service allocation percentages.
The functions of service to which water service costs were allocated are listed below:
Customer. These are the costs associated with establishing, maintaining, and serving water
customers and tend to include administrative and billing costs, customer service, and
sometimes meter reading. These costs are generally uniform by customer regardless of their
meter size and demand placed on the water system.
Meters & Services Costs. These costs are associated with installation, maintenance, and
repairs of meters and services. These costs are typically associated with the number of
connections and meter sizes.
Base Costs. These costs relate to average service provided on demand and are essentially
correlated with year-round water consumption.
Peak Costs. These costs relate to peak demand service typically associated with the ability of
the system to provide capacity to customers with higher than average volume, which usually
occurs during the summer months.
Fire Protection. These are the costs associated with the ability of the system to provide
adequate capacity and water flow corresponding to minimum fire safety standards required to
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Water & Wastewater Utility Cost of Service Rate Study
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serve its customer demographic. These are mostly incremental costs related to providing
storage, transmission capacity, and hydrants for fire protection.
Exhibit 2.5 provides a summary of the functional cost allocation results.
Exhibit 2.5 - Water Utility Functional Cost Allocation Summary – FY 2007
PEAK
56.05%
BASE
29.05%
FIRE
PROTECTION
3.47%
METER/
SERVICES
1.41%
CUSTOMER
10.03%
The water utility cost allocation indicates that the majority of costs 56% relate to meeting peak day
demands.
B.2 CUSTOMER CLASS ALLOCATIONS
The City’s current customer classes consist of residential and commercial customers. All of the City’s
customers are currently on the same rate schedule, regardless of class. One of the issues to be resolved
by the water utility rate study was an evaluation of the commercial class, which in the current class
system includes all commercial and government customers. During the cost allocation process, the
commercial class was split into 3 classes – Government, Commercial A and Commercial B.
Commercial A includes all customers with a 2” meter or less, while Commercial B includes all
customers with a 3” or greater meter.
The cost of service was calculated for the following classes:
Single Family Residential
Multi-Family Residential
Commercial A: <= 2” meter
Commercial B: >= 3” meter
Government
Irrigation
Once the customer classes were defined, functional cost pools (shown in Exhibit 2.5) were then
allocated to these customer classes based on the demand each class places on the system. In order to
do this, we first identified customer characteristics including number of accounts, consumption
levels, peak demand patterns, and fire flow requirements. From this detailed customer information
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Water & Wastewater Utility Cost of Service Rate Study
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Existing Revenue Distribution
Single
Family
Residential
69.5%
Multi
Family
Residential
6.6%
Comm B
4.7%
Other
2.3%
Govt
2.5%Comm A
14.4%
Cost of Service Revenue Distribution
Govt
3.2%
Other
3.4%
Comm B
7.3%
Single
Family
Residential
65.9%
Multi Family
Residential
5.5%
Comm A
14.8%
supplied by the City, unit costs were developed for each functional cost category using the most
applicable basis. The cost-per-function relationship provided the basis for allocating specific costs to
customer classes as follows:
Customer-related costs were allocated based on the number of customers (meters) within
each class.
Meters and services costs were allocated based on proportional shares of meter service
equivalents. The American Water Works Association (AWWA) has developed a meter
service equivalency factor that reflects relative costs for different size meters.
Year-round indoor usage costs (base demand costs) were allocated to customer classes based
on their relative share of total system annual water usage.
Summer peak usage costs (peak demand costs) were allocated based on the ratio of peak
month usage to average winter monthly water usage. Winter months were defined as
January-April and November-December.
Fire protection costs were allocated based on the amount of water flow required per minute
for a two-hour duration. The gallon per minute (gpm) demand ranged from 1,500 gpm for
single family to a high of 3,000 gpm for the commercial B class. A class with a high fire flow
requirement is allocated more fire related costs than a class with a lower fire flow
requirement.
To illustrate the cost allocation concept, the single family residential class represents 82% of the total
number of customer accounts, 62% of meter capacity equivalents, 60% of annual water
consumption, 63% of incremental peak period usage, and 65% of meter capacity equivalents
adjusted by fire flow requirements. The respective percentages were applied to the total costs
allocated to each functional component to determine the share of total costs assigned to the single
family residential class. The same process was used for each functional component and customer
class. The resulting allocation of costs establishes the costs to serve each class.
Exhibit 2.6 provides a comparison between current rate revenue distribution between customer
classes and the results of the cost-of-service analysis.
Exhibit 2.6 - Comparison of Current Revenue Distribution to Cost-of-Service Distribution
As Exhibit 2.6 illustrates, the cost-of-service analysis shifted costs from the single family and multi-
family customer classes to the commercial B, government, and “other” (fire and irrigation customer)
classes. This suggests that the single family and multi-family customers might have been paying more
than the cost to serve them under the City’s current rate structure.
B.3 COST OF SERVICE PHASE-IN
The results of the cost of service indicate a need for a shift of costs between customer classes. When
analyzing the results of the cost of service, it is important to remember a few key factors:
Cost of service is a snap-shot of one point in time. In this case, the usage characteristics and
facility requirements indicated by the year 2006 were used.
It has been some time (over 10 years) that a cost of service has been completed.
Any cost of service adjustments may have added impacts to customers beyond overall rate
adjustments.
The key factors outlined above indicate that a prudent approach to incorporating cost of service
results would be to phase the results in over time. A three-year implementation period has been
selected to minimize any undue burden on a single customer class. A summary of the three-year
cost-of-service phase-in by customer class is provided in Exhibit 2.7.
Exhibit 2.7 - Three Year Cost of Service Phase-in
200720082009
System Wide Increase - Annual Average0.00%0.00%0.00%
Single Family -1.75%-1.75%-1.75%
Multi-Family -5.50%-5.50%-5.50%
Commercial Group A2.00%1.00%0.00%
Commercial Group B15.50%15.50%15.50%
Government 8.00%8.00%8.00%
Irrigation20.00%17.00%17.00%
Fire0.00%0.00%0.00%
The annual adjustments indicate that the Commercial Group B and Irrigation classes require the
largest cost of service adjustments. These customers contribute significantly to the peak day
requirements of the system and are allocated more of the peak cost burden. During the next rate
update, cost of service will be revisited to ensure the results of this update are maintained. If any
customer class changes their usage characteristics (e.g. reduction of peak day demands), cost
allocations will change accordingly.
CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
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C. RATE DESIGN
The principal objective of the rate design stage of this rate study was to implement water rate
structures that collect the appropriate level of revenue, have been established on an equitable basis
(according to cost-of-service results), and might simplify the current rate structures. The City’s
customer information database provided detailed information about each customer, their water
meter size, current customer class, and water consumption. From this information detailed statistics
were compiled, such as the number of water meters, the number of water meter service equivalents,
and the billed consumption by month and year.
A well-designed rate structure can provide improved equity between customers within a class by
better ensuring that large customers do not materially subsidize small customers or visa versa. In
addition, fixed and variable components were balanced so that they reflect the City’s desired level of
revenue stability with the customer’s ability to affect their bill with changes in usage patterns. A
well-designed rate structure can also reflect policy level decisions related to affordability, stability,
and simplicity.
Establishing rates is a blend of “Art” and “Science” and especially so when it comes to the rate levels
and structures. Several variables must be balanced to arrive at the optimal rates. The results of the
cost-of-service analysis were used to develop new water rate structures designed to equitably recover
the projected revenue requirements from customers. Rate structures reflect policy objectives
expressed by the City such as simplified rate structures or rates that promote efficient water use.
C.1 EXISTING WATER RATES
The existing water rates are composed of a fixed monthly charge by meter size for all customers. A
flat volume charge is applied to all customers per 1,000 gallons of usage. Low Income Discount
customers pay the same volume charge as the City’s other customers, but receive a discount on their
fixed monthly charge (approx. 45% of the 3/4–inch fixed charge). Customers residing outside of the
City limits pay a 10% higher fixed charge and an 8% higher volume charge. As the rate design
analysis did not include an evaluation of the inside/outside city rate differential, the proposed rate
structure maintains the current differential.
Exhibit 2.8 on the following page provides a summary of the current water utility rate structure:
CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
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Exhibit 2.8 - Current Water Rates
Mo. Base Charge -
All Classes
Inside
CityOutside City
3/4"$16.84$18.50
1"38.9742.83
1-1/4"58.4764.29
1-1/2"77.9585.73
1-3/4"101.30111.42
2"124.71137.15
3"235.15258.69
4"391.06430.17
6"783.41861.74
8"1,252.451,377.72
Low Income - 3/4"$7.55$9.21
Volume Charges
All Classes$2.26$2.44
Irrigation$2.89$3.18
Low Income $2.26$2.44
C.2 PROPOSED WATER RATES
The proposed water rate schedule contains several key changes from the current rates:
During the cost allocation process, the commercial class was split into 3 classes – Government,
Commercial A and Commercial B
o Commercial A includes all customers with a 2” meter or less
o Commercial B includes all customers with a 3” or greater meter
The revised rate design requires that commercial customers be regrouped into the new class
definitions based on meter size
o Under the revised classes, only 6 customers fall within the Commercial B definition
Meter charges remain the same for all classes.
Meter capacity weightings by size have been adjusted to American Water Works Association
standards beginning in 2007.
Fort Worden is not currently charged a meter rate and is instead charged $100.00 per month
under a special contract rate
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Water & Wastewater Utility Cost of Service Rate Study
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o The transition of Fort Worden to a monthly base charge based on meter size (in the
Commercial B customer class) will be phased in over three years to minimize the rate
impact on this customer [2007 = $300.00, 2008 = $550.00 and 2009 = $707.50]
Irrigation volume charge changed to a seasonal winter/summer rate per volume of usage.
Exhibit 2.9 provides a summary of the proposed rate structure for the three-year phase-in period:
Exhibit 2.9 - Proposed Water Rates
Inside CityOutside City
Mo. Base Charge - All
Classes 200720082009200720082009
3/4"$14.80$14.35$14.15$16.30$15.80$15.60
1"37.0035.8835.3840.7539.5039.00
1-1/4"49.2847.7947.1254.2852.6151.95
1-1/2"74.0071.7570.7581.5079.0078.00
1-3/4"96.2093.2891.98105.95102.70101.40
2"118.40114.80113.20130.40126.40124.80
3"222.00215.25212.25244.50237.00234.00
4"370.00358.75353.75407.50395.00390.00
6"740.00717.50707.50815.00790.00780.00
8"1,184.001,148.001,132.001,304.001,264.001,248.00
Inside CityOutside City
Volume Charges200720082009200720082009
Single Family$2.05$2.05$2.00$2.21$2.21$2.16
Multi-Family$1.85$1.70$1.55$2.00$1.84$1.67
Commercial A$2.26$2.26$2.30$2.44$2.44$2.48
Commercial B$2.50$2.92$3.47
Government$2.26$2.65$3.00
Irrigation - Winter**$1.65$2.00$2.40$1.82$2.20$2.64
Irrigation - Summer**$2.89$3.50$4.20$3.18$3.85$4.62
Low Income$2.05$2.05$2.00$2.21$2.21$2.16
**Summer months defined as May - Oct
CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
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D. SUMMARY
The analysis described above concludes the utility rate study for the water utility. The cost-of-service
analysis indicates the need for equity adjustments between classes that are recommended to be
phased-in over three years to minimize undue burden on any single customer class. Part of the study
included a review of the existing rate structures and recommendations to better align existing rates
with the demands customers place on the system and meeting the City’s pricing goals and objectives.
The detailed technical exhibits developed as part of the water rate study can be found at the end of
this report in the Technical Appendix.
CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
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SECTION 3
WASTEWATER UTILITY
A. REVENUE REQUIREMENTS
A revenue requirement analysis forms the basis for a long-range financial plan and multi-year rate
management strategy. The analysis is developed by completion of an operating forecast that
identifies future annual non-operating costs and a capital funding plan that defines a strategy for
funding capital improvement needs of the City.
A.1 OPERATING FORECAST
The purpose of the operating forecast is to determine whether the currently adopted rates and
charges are sufficient to recover the costs the City incurs to operate and maintain the wastewater
system. The 2006 budget revenues and expenses form the baseline for this forecast. The operating
income forecast was developed for the six-year projected period of 2007 through 2012.
Key Assumptions
Operating Reserves: 30 days of O&M expenses (based on industry standard and discussion
with City staff)
Capital Contingency Reserves: 2% of total Plant-in-Service
Operating Revenue
Customer Growth Rate Revenue: 1.90% per year (per Wastewater Comprehensive Plan,
assumed annual growth rate used for projections from 2003-2023)
Interest Earnings Rate: 3.50% per year (per discussion with City staff)
Operating & Maintenance (O&M) Expenses
General Cost Inflation: 3.0% per year (based on analysis of historical Consumer Price Index
data and discussion with City staff)
Construction Cost Inflation: 3.0% per year (based on Engineering News Record Seattle
Construction Cost Index)
Labor & Benefits: 7.0% per year (per discussion with City staff)
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Local City Utility Tax: The 20% tax is not included in the analysis as an embedded cost.
Instead, the utility tax is added on to the total bill once the utility bill has been calculated.
Debt Service
Existing Debt Service: The four (4) outstanding debt issues in the wastewater utility consist of a
1998 revenue bond (the wastewater utility pays 93% of the total annual payments for this
bond), two public works trust fund loans (1999 and 2001), and a 2002 state revolving fund
(SRF) loan.
New Debt Service: The analysis assumes a revenue bond issuance of $200,000 in 2011 to assist
with the funding of capital projects. The revenue bond is assumed to be repaid over a 20-year
period at 4% annual interest (terms determined per discussion with City staff).
System Reinvestment
The purpose of system reinvestment funding is to ensure system integrity through reinvestment
in the system. Ideally, the minimum funding would be an amount equal to or greater than
depreciation expense. Historically, this rate funded component has had minimal funding. In
the near-term, 2007 – 2011 this component will not be funded due to other rate pressures.
However, as a result of the elimination of a large debt expense in 2012, we recommend that the
City begin to implement a rate-funded system reinvestment strategy at that time. Future
analysis should consider the funding of this component for prudent financial management of
system assets.
A.2 CAPITAL FUNDING PLAN
A summary of the capital funding plan is provided in Exhibit 3.1. The wastewater utility is
anticipating $3.2 million in capital costs in 2007 through 2012. Due to the nature of the capital
projects as identified, the majority of funding for future capital needs is expected to come from
system development charges, existing fund balance, revenue bond proceeds, and rate-funded system
reinvestment. In addition, per discussion with City staff, we have assumed a developer contribution
of approximately $1.2 million to fund a capital project (Upper Sims Way Pump Station) in 2008.
Exhibit 3.1 - Wastewater Utility Capital Funding Summary
Summary of Expenditures200720082009201020112012TOTAL
CAPITAL PROJECTS
Improvement Upgrades & Expansions164,800$ 1,320,821$ 95,614$ 140,689$ 86,946$ 179,108$ 1,987,976$
Repairs and Replacements252,350 376,620 95,614 140,689 86,946 179,108 1,131,325
TOTAL CAPITAL EXPENDITURES417,150$ 1,697,440$ 191,227$ 281,377$ 173,891$ 358,216$ 3,169,301$
FUNDING SOURCES
Capital Fund Balance- 81,990 95,614 140,689 - 3,306 321,598
System Development Charges164,800 47,741 95,614 140,689 86,946 179,108 714,896
Revenue Bond Proceeds- - - - 200,000 - 200,000
Funded Depreciation252,350 294,630 - - - 175,802 722,782
-
TOTAL CAPITAL RESOURCES417,150$ 1,697,440$ 191,227$ 281,377$ 286,946$ 358,216$ 3,232,356$
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Water & Wastewater Utility Cost of Service Rate Study
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The majority of capital projects (61%) relate to improvement upgrades and expansion projects, the
remainder are repair and replacement projects. Due to the nature of the capital projects as
identified, the majority of funding for future capital needs is expected to come from system
development charges (23%), existing fund balance, and a debt issue of $200,000 in 2011.
A.3 SUMMARY OF REVENUE REQUIREMENT
The operating forecast components of O&M expenses and debt service come together to form the
multi-year revenue requirement. The revenue requirement compares the overall revenue available to
the utility to the expenses to evaluate the sufficiency of rates. Exhibit 3.2 provides a summary of the
wastewater utility revenue requirement findings.
Exhibit 3.2 - Wastewater Utility Revenue Requirement Summary
Revenue Requirements200720082009201020112012
Revenues
Rate Revenues Under Existing Rates2,168,029$ 2,209,221$ 2,251,196$ 2,293,969$ 2,337,554$ 2,381,968$
Non-Rate Revenues179,023 163,364 142,056 129,252 117,942 123,782
Total Revenues2,347,052$ 2,372,585$ 2,393,252$ 2,423,221$ 2,455,497$ 2,505,750$
Expenses
Cash O&M Expenses1,815,968$ 1,875,296$ 1,936,744$ 2,000,398$ 2,066,351$ 2,134,698$
Existing Debt Service739,285 742,240 739,545 744,858 608,143 179,014
New Debt Service- - - - 16,236 16,236
Depreciation- - - - - 175,802
Total Expenses2,555,252$ 2,617,536$ 2,676,289$ 2,745,256$ 2,690,730$ 2,505,750$
Net Surplus (Deficiency)(208,200)$ (244,950)$ (283,036)$ (322,036)$ (235,233)$ 0$
% of Rate Revenue9.60%11.09%12.57%14.04%10.06%0.00%
Use of Reserves208,200$ 244,950$ 283,036$ 322,036$ 235,233$ -$
Net Surplus (Deficiency) after Reserves0 0 0 0 0 0
Req. Increase After Use of Funds0.00%0.00%0.00%0.00%0.00%0.00%
Annual Rate Adjustment 0.00%0.00%0.00%0.00%0.00%0.00%
The 2007 revenue requirement from rates is $2.3 million (total expenses minus non-rate revenues).
The revenue requirement analysis indicates a rate deficiency in the range of 9.6% tp 14.0% in each
of the first five years of the study. However, in the sixth year (2012), sufficient revenue is available to
meet cash flow needs due to a $600,000 - $700,000 annual debt obligation that will be fully paid
off.
Although the results indicate rate adjustments may be warranted, the increase to the local utility tax
from 10% to 20% puts added pressure on the utility. Therefore, as opposed to increasing rates in
2007-2011, we recommend that the City use existing reserves of $1.3 million to cover any cash flow
deficiencies. This would allow the City to avoid unnecessary rate increases which would result in a
significant cash surplus in 2012 and beyond. In addition, since the wastewater utility will have a cash
surplus in 2012 as a result of the drop-off in annual debt expense, we recommend that the City
begin funding system reinvestment from rates at that time and continue developing a strategy to
fund this component in the future.
CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
20
The recommendation to cover the rate deficiencies with existing reserves was based on two factors:
the strength of the City’s fund balances and the goal to minimize unnecessary rate impacts on
customers. The following exhibit contains an analysis of the wastewater utility’s fund balances
through the length of the study:
Exhibit 3.3 - Wastewater Utility Fund Activity
Fund Balances200720082009201020112012
Operating:
Beginning Balance2,149,992$ 1,941,792$ 1,614,852$ 1,236,202$ 773,478$ 651,299$
less: Use of Reserves for Rate Stabilization(208,200)(244,950)(283,036)(322,036)(235,233)0
Plus: Net Cash Flow after Rate Adjustment(0) (0) (0) 0 (0) 0
Ending Balance1,941,792$ 1,696,842$ 1,331,816$ 914,166$ 538,245$ 651,299$
Less: Min.Operating 30 Day Target149,258$ 154,134$ 159,184$ 164,416$ 169,837$ 175,455$
Balance Available for Capital1,792,534$ 1,542,708$ 1,172,631$ 749,750$ 368,407$ 475,844$
Plus:
Other Capital Funding Resources
Developer Contributions$0$1,273,080$0$0$0$0
System Development Charges (SDCs)164,800 47,741 95,614 140,689 86,946 179,108
Debt Proceeds- - - - 200,000 -
Renewal & Replacement Funding252,350 294,630 - - - 175,802
Total Capital Resources2,209,684$ 3,158,158$ 1,268,245$ 890,438$ 655,353$ 830,754$
Less:
Growth Related Improvements/Expansions(164,800)$ (1,320,821)$ (95,614)$ (140,689)$ (86,946)$ (179,108)$
Renewal and Replacements(252,350) (376,620) (95,614) (140,689) (86,946) (179,108)
Total Capital Projects(417,150)$ (1,697,440)$ (191,227)$ (281,377)$ (173,891)$ (358,216)$
Ending Balance1,792,534$ 1,460,718$ 1,077,018$ 609,061$ 481,462$ 472,539$
Less: Min. Cap. Cont. Target 2% of Plant406,835$ 440,784$ 444,608$ 450,236$ 453,714$ 460,878$
Balance After Policies Funded1,385,699$ 1,019,934$ 632,409$ 158,825$ 27,748$ 11,660$
As discussed in the “Key Assumptions” section above, two fiscal policy targets have been
incorporated into the analysis:
Operating Reserve: 30 days of O&M expenses ($149,000 to $175,000 each year)
Capital Contingency: 2% of total Plant-in-Service ($406,000 to $460,000 each year)
Although approximately $1.3 million of existing reserves are required to meet short term cash flow
needs, the healthy fund balance in the wastewater utility enables the City to reach its fiscal policy
targets in each year of the study. Even after meeting the fiscal policy targets and funding all planned
capital projects, the City has available funds at the end of each year. Similar to the recommended
approach for the water utility, the City should revisit wastewater rates for 2010 and beyond to ensure
rates remain sufficient and the fund level is adequate to meet cash flow needs and target fund
balances.
B. COST-OF-SERVICE ANALYSIS
Similar to the water utility, the cost-of-service allocation process for the wastewater utility involves
three steps:
Functional Allocation. Annual rate revenue requirements (costs) were first allocated to
functional categories of wastewater service based on system requirements and characteristics.
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Water & Wastewater Utility Cost of Service Rate Study
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CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
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Customer Class Identification and Allocation of Functional Costs to Customer Classes.
Functional costs are distributed to customer classes based on factors that describe the average
demand of each class for that particular service.
Unit Cost Development and Rate Structure Design. The functional costs allocated to each
customer class are broken into unit costs and then used as building blocks for a new rate
structure design.
B.1 FUNCTIONAL ALLOCATION
The allocation of plant-in-service to wastewater service functions relies on engineering, operational,
and customer usage information. The following assumptions were applied in the wastewater plant-
in-service allocation process:
The system peak flow ratio calculates the proportion of costs related to conveying and treating
wastewater volume. The system peak flow ratio of 2.48 was derived from the Wastewater
Comprehensive Plan.
Treatment related costs were split between flow and strength assuming a 50/50 hydraulic organic
split. Flow costs are further allocated between contributed flow and Inflow & Infiltration (I&I)
based on the peak to average day ratio, while strength costs are allocated 50/50 to biochemical
oxygen demand (BOD) and suspended solids (SS). The resulting split was 50% hydraulic/I&I,
25% BOD and 25% SS for the total functional cost.
Collection costs were allocated 10% to customer with the remaining 90% allocated to
contributed flow based on the ratio of peak to average flow.
A summary of the allocation of plant-in-service to the service functions is provided in Exhibit 3.4
Exhibit 3.4 - Allocation of Wastewater Plant-in-Service
he operating portion of the rate revenue requirements (O&M expenses net of non-rate revenues)
e to customers regardless of
and treating wastewater flow
(volume) both in direct customer contribution and from groundwater and storm water runoff
into the sewers (inflow and infiltration, or I&I).
T
was allocated to functions based on a detailed review of line item categories, following the cost
causation process used in the allocation of plant and/or identifying a relationship between each type
of expense and the assumed reason the cost was incurred. The functions of service to which
Wastewater service costs have been allocated are listed below:
Customer. These costs are associated with providing servic
wastewater contribution, such as billing and office support.
Wastewater Flow. These costs are associated with conveying
FUNCTIONS OF SEWER SERVICE
CUSTOMERFLOWI&IBODSS
Treatment 0.00%20.16%29.84%25.00%25.00%0.00%100.00%
Collection10.00%40.32%49.68%0.00%0.00%0.00%100.00%
General Plant0.00%0.00%0.00%0.00%0.00%100.00%100.00%
PLANT-IN-SERVICE TOTALAS ALL OTHERS
CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
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Strength. These costs are associated with treating effluent loading of Biochemical Oxygen
Demand (BOD) and Suspended Solids (SS).
Exhibit 3.5 provides a summary of the functional cost allocation results.
Exhibit 3.5 - Wastewater Utility Functional Cost Allocation Summary – FY 2007
Customer
12%
Flow
56%
BOD
16%
SS
16%
B.2 CUSTOMER CLASS ALLOCATIONS
he next step in the cost-of-service analysis involved distribution of the functionally allocated system
costs to the customer classes. Based on discussion with City staff, we split the commercial customer
commercial classes based on meter size. The cost of
-wide costs are allocated to these customer classes as follows:
the customer classes based on their proportional share of total
r of accounts.
T
class into 3 classes: a Government class and 2
service was conducted for the following classes:
Single Family Residential
Multi-Family Residential
Commercial A: <= 2” meter
Commercial B: >= 3” meter
Government
The functionally allocated system
Customer costs are allocated to
system numbe
Wastewater flow and I&I related costs are allocated to the customer classes based on their
proportional share of total winter average flow (winter months are January – April and
November – December).
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Water & Wastewater Utility Cost of Service Rate Study
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Strength related costs were allocated based on the winter average flow adjusted for the diffe
strength factors associated with each customer class. For example, single family resident
domestic strength is equiva
rent
ial
lent to 1.0, while the multi family residential and government
st-of-Service Distribution
customer classes were equivalent to 1.33. The strength factors came from discussion with City
staff and system data from the Wastewater Comprehensive Plan.
Exhibit 3.6 provides a comparison of the distribution of revenues under existing rates to the
distribution of revenues indicated from the cost-of-service analysis.
Exhibit 3.6 - Comparison of Current Revenue Distribution to Co
Existing Revenue Distribution
Govt
Comm A
11.17%
Comm B
5.00%
1.73%Multi-Family
Residential
4.40%
Single Family
Residential
77.70%
Cost of Service Revenue Distribution
15.49%
Multi-Family
Residential
5.60%
Single Family
Residential
71.03%
Comm B
5.51%Govt
2.37%
Comm A
The cost-of-service analysis results indicate that a shift or re-allocation of cost recovery among the
customer classes is necessary. The single family class appears to be paying more than their cost of
service. The commercial A and multi family residential customer classes appear to require the most
. In order to minimize undue immediate burden on any
significant shift of cost.
Since the cost of service analysis indicates a need for cost shifts, discretion is needed in terms of
timing of cost-of-service implementation. Improved equity is absolutely important; however
customer impact must also be weighed
single customer class, a three-year cost-of-service phase-in was also developed for this utility. A
summary of the three-year cost-of-service phase-in, by customer class is provided on the following
page in Exhibit 3.7.
Exhibit 3.7 - Wastewater Cost-of-Service Phase-In
200720082009
System-Wide Increase
Annual Average0.00%0.00%0.00%
Single Family -3.75%-3.00%-2.00%
Multi-Family 28.00%0.00%0.00%
Commercial Group A13.50%13.50%8.00%
Commercial Group B3.50%3.50%3.50%
Government11.50%11.00%11.00%
The annual adjustments indicate that the Multi Family, Commercial A and Government classes
require the largest cost of service adjustments. The multi family customer class is fully adjusted in the
first year because of a change in their rate structure; under the current rates, multi family customer
usage charges were capped at 4,000 gallons per unit, per month. This ceiling has been eliminated
and, as a result, the revenue collected from this customer class immediately increases. During the
next rate update, cost of service will be revisited to ensure the results of this update are accurate. If
any customer class changes their usage characteristics, cost allocations will change accordingly.
C. RATE DESIGN
As discussed in the water utility section, the principal objective of the rate design stage is to
implement wastewater rate structures that collect the appropriate level of revenue, are established on
an equitable basis (according to cost-of-service results), and simplify the current rate structures in
place. The City’s customer database provided detailed information about each customer, their meter
size and strength factor (when applicable), current customer class, and monthly consumption level.
C.1 EXISTING WASTEWATER RATES
The existing wastewater rates are composed of a fixed monthly fee based on water usage for
residential customers. Low income customers receive a discount of $19.45 (both inside and outside
City limits) from the residential the fixed monthly fee. Multi family and commercial customers pay a
fixed monthly fee based on their meter size and a volume charge based on water usage. Please note
that volume charges in a given month for multi family customers are capped at a 4,000 gallon per-
unit ceiling. Exhibit 3.8 on the following page provides a summary of the current wastewater rate
structure.
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Water & Wastewater Utility Cost of Service Rate Study
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Exhibit 3.8 - Existing Wastewater Rate Schedule
Residential
Under 3,000 gallons use per month43.17$
Over 3,000 gallons use per month48.19$
Low Income
Under 3,000 gallons use per month23.72$
Over 3,000 gallons use per month28.74$
MultiFamily/Commercial
3/4"32.53$
1"45.05
1-1/4"52.55
1-1/2"58.81
1-3/4"76.01
2"93.90
3"358.07
4"455.68
6"683.59
8"943.97
Volume Charge
Multifamily/1,000 gallons*3.36$
Commercial/1,000 gallons3.36$
C.2 PROPOSED WASTEWATER RATES
Most of the current rate structure was maintained in the rate design analysis, with single family
residential customers paying a monthly charge based on monthly water usage and commercial, multi
family, and government customers paying a fixed monthly charge and a volume charge based on
water use.
However, the proposed rate structure contains several key changes from existing rates:
During the cost allocation process, the commercial class was split into 3 classes – government,
commercial A and commercial B
o Commercial A includes all customers with a 2” meter or less
o Commercial B includes all customers with a 3” or greater meter
Based on a unit cost analysis completed during the cost of service portion of the rate study, the
differential for the single family residential rates (over and under 3,000 gallons per month) is
increased from $5.02 to $8.00
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CITY OF PORT TOWNSEND
Water & Wastewater Utility Cost of Service Rate Study
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200720082009
Residential
Under 3,000 gallons use per month35.95$ 34.70$ 33.85$
Over 3,000 gallons use per month43.95$ 42.70$ 41.85$
Low Income
Under 3,000 gallons use per month23.72$ 23.72$ 23.72$
Over 3,000 gallons use per month28.74$ 28.74$ 28.74$
MultiFamily/Commercial
3/4"30.00$ 30.00$ 30.00$
1"45.00 45.00 45.00
1-1/4"60.00 60.00 60.00
1-1/2"75.00 75.00 75.00
1-3/4"90.00 90.00 90.00
2"115.00 115.00 115.00
3"375.00 385.00 420.00
470.00 470.00 470.00
700.00 700.00 700.00
960.00 960.00 960.00
Volume Charge
Multifamily/1,000 gallons3.45$ 3.45$ 3.45$
Commercial A/1,000 gallons3.55$ 4.20$ 4.65$
4"
6"
8"
Commercial B/1,000 gallons3.00$ 3.05$ 3.05$
Government /1,000 gallons3.36$ 3.85$ 4.55$
The 4,000 gallon per unit ceiling in the multi family customer class is eliminated
The revised rate design requires that commercial customers be regrouped into the new class
definitions based on meter size
o Under the revised classes, only 6 customers fall within the commercial B definition
The multi family, commercial, and government customer classes all pay from the same monthly
fixed meter charge schedule
o Adjustments between these classes were made in the volume charges
Fort Worden is not currently charged a meter rate and is instead charged under a special contract
rate
o The transition of Fort Worden to a monthly base charge based on meter size (in the
Commercial B customer class) will be phased in over three years to minimize the rate impact
on this customer [2007 = $350.00, 2008 = $550.00 and 2009 = $700.00]
Exhibit 3.9 provides a summary of the proposed three-year wastewater rate schedule.
D. SUMMARY Exhibit 3.9 - Proposed Wastewater Rate Schedule (3 years)
The analysis described above concludes
the utility rate study for the wastewater
utility. To minimize undue burden on
any single customer class, cost-of-service
implementation will be phased-in over a
three-year period. Most rate structures
were maintained. As noted above, the
commercial class was split into 3 classes:
Government, and Commercial A and B
(based on meter size). In addition, the
differential for the two single family
residential rates was increased to $8.00
based on a unit cost analysis. Lastly, the
4,000 gallon per unit ceiling in the
multi family customer class was
eliminated. The detailed technical
exhibits developed as part of the
wastewater rate study are provided at
the end of this report in the Technical
Appendix.
SECTION 4
SYSTEM DEVELOPMENT CHARGES
A. INTRODUCTION
System Development Charges (SDCs) are sources of funding used by utilities to support capital needs. SDCs
are imposed on new customers connecting to the system as a condition of service. SDCs reflect capital
contribution to system capacity. The underlying premise of the SDC is that new customers should pay for a
pro rata share of the cost of providing system capacity, and through this mechanism offset growth-related
costs that would not have been necessary in absence of customer base growth.
The City of Port Townsend imposes connection charges on new development in order to recover an
equitable share of system costs from new customers connecting to the water and wastewater systems.
As stated in Section 13.03.010 of the City’s municipal code, the fee is imposed:
“…for the purpose of recovering a proportionate share of the actual and projected capital costs of
water and sewer facilities from those properties within the utility service areas which, as a part of
their development and use, create the need for those facilities.”
B. METHODOLOGY
A “connection charge” (called a system development charge (SDC) by the City of Port Townsend)
as provided for by RCW 35.92.025, is a charge imposed on a new customer as a condition of
connection to the utility system(s) or when increasing the capacity of an existing connection.
Collection of SDCs promotes equity between new and existing customers while providing a source
of funding for capital projects.
Revenues generated from the SDC can be used to fund capital projects or to pay debt service
incurred to finance capital projects, but cannot be used to pay operating and maintenance costs.
There are several documented approaches used in the industry to establish a SDC that is legally
defensible if designed properly. Within the range of legally defensible approaches, the choice of the
costs the City targets is a matter of policy. It is important that the City follow a methodical and
rational approach to consistently determine and implement cost-based SDCs.
Since the calculated charges represent the maximum allowable charge, the City may choose to
implement a charge at any level up to the calculated charge. Revenues generated from the charge will
vary depending upon whether or not the full charge is implemented (e.g., phase-in strategies). The
lower the charge and longer the phase-in period, the less revenue will be collected and available to
help pay the cost of these facilities. This loss in revenue could result in delays in completing the
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capital improvement program and/or result in increased costs to the City’s existing ratepayers
through rates for service.
B.1 EXISTING COST BASIS
Legal interpretations of state statutes have provided guidelines for connection charges, which suggest
that such charges should reflect the actual original cost of the utility system and can include interest
on that cost at the rate of interest applicable at the time of construction (up to a 10-year period, not
to exceed 100 percent of the construction costs). This cost is net of donated facilities and non-utility
cash payments, whether from grants or developers. In addition, outstanding debt principal (less any
cash available to buy down debt) is deducted from plant-in-service because new customers will pay
their share of debt service through user rates. For this study, the existing cost basis for each utility is
based on the City’s record of system assets as of December 31, 2005, incorporating the adjustments
noted above.
B.2 FUTURE COST BASIS
Common practice and legal opinion suggest that future facilities needed to serve growth, as well as to
provide for regulatory system improvements, can be included in the connection charge. The future
cost basis can include utility capital projects planned for construction and identified in
comprehensive system planning documents. Projects directly funded by developers or special
property assessments are not included in the calculation. Major maintenance (repair and
replacement) projects are most often excluded from the calculation unless needed to increase the size
of the system. The original cost of replacement projects is already included in the existing cost basis.
Further, replacement costs are typically recovered through user rates.
In this study, the future cost basis has been broken into two categories. The first is the 6-year CIP,
which includes projects planned in each utility between 2006 and 2012. These projects are assumed
to serve the growth in customers from 2006-2012.
In addition, the City has developed a schedule of long-term planned projects: from 2013 to 2025 in
the water utility and from 2013 to 2020 in the wastewater utility. Taking a conservative approach,
we have assumed that these projects will serve each system’s projected population to build-out,
which is defined below for each utility.
C. DETERMINATION OF THE WATER CONNECTION FEE
C.1 EXISTING COST BASIS
As of 2005, water utility total fixed assets equal $16 million. Of this amount, about $3.9 million was
contributed and, therefore, excluded from the cost basis. Up to 10 years of interest is calculated on
non-contributed assets ($12.1 million). The water utility’s existing cash reserves were greater than
outstanding debt, and thus no adjustment was made to account for principal outstanding. After
adjusting the utility’s total assets for capital contributions and chargeable interest, the total existing
cost basis is about $19 million.
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Meter SizeExisting
SDC
Proposed
SDC
3/4" Meter2,522$ 5,402$
1" Meter4,212 9,021
1 1/2" Meter8,398 17,989
2" Meter13,442 28,793
3" Meter25,220 54,020
4" Meter42,042 90,051
6" Meter83,226 178,266
8" Meter134,498 288,089
10" Meter193,362 414,171
C.2 FUTURE COST BASIS
As mentioned above, we have separated the future cost basis into two components for this analysis.
The City has planned for about $2.5 million of capital projects in the water utility between 2006
and 2012. About $1.1 million of this total is for major maintenance (repair and replacement)
projects, which are excluded from the cost basis. The remaining $1.4 million in future
upgrade/expansion projects forms the 6-year CIP future cost basis.
In addition, the City has planned for approximately $20 million of capital projects between 2013
and 2025. We have assumed that these projects will serve the City’s projected population at build-
out of the water system, as defined in the Comprehensive Water Plan.
Based on utility billing system records, the water utility has 6,704 ERUs. Incorporating the growth
assumptions from the Comprehensive Water Plan (1.97% per year), the utility will add 832 ERUs
over the six year period – reaching a total customer base of 7,536 ERUs by 2012.
C.3 CALCULATION OF THE WATER SYSTEM DEVELOPMENT CHARGE
The existing cost basis was divided by the total customer base in 2012 (7,536 ERUs). The 6-year
CIP portion of the future cost basis was divided by the incremental growth in customer base from
2006-2012 (832 ERUs). Lastly, the 2013-2025 capital projects cost basis was divided by the number
of ERUs at system build-out (17,101 ERUs).
Exhibit 4.1 - Water Utility SDC by Meter Size
The table to the right summarizes the
proposed water utility SDC by meter size.
The proposed rate sets the cost base SDC for
a ¾” meter at $5,402. The proposed charge
is an increase of $2,880 when compared to
the City’s current charge of $2,522. It is
important to note that the proposed charge
represents the allowable ceiling. The City
may set by policy a rate that is something less,
if desired.
D. DETERMINATION OF THE WASTEWATER CONNECTION FEE
D.1 EXISTING COST BASIS
As of 2005, wastewater utility total fixed assets equal $19.8 million. Of this amount, about $12.5
million was contributed and, therefore, excluded from the cost basis. Up to 10 years of interest is
calculated on non-contributed assets ($3.3 million). The wastewater utility’s outstanding debt was
greater than existing cash reserves, and thus a $2.1 adjustment was made to account for principal
outstanding. After adjusting the utility’s total assets for capital contributions and chargeable interest,
the total existing cost basis is about $8.5 million.
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D.2 FUTURE COST BASIS
As mentioned above, we have separated the future cost basis into two components for this analysis.
The City has planned for about $2.4 million of capital projects in the wastewater utility between
2006 and 2012. About $1.1 million of this total is for major maintenance (repair and replacement)
projects. In addition, we have assumed a $1.2 million developer contribution for the Upper Sims
Way project in the CIP based on discussion with City staff. After adjusting for maintenance projects
and contributions, the remaining $667,500 in future upgrade/expansion projects forms the 6-year
CIP future cost basis.
In addition, the City has planned for approximately $12 million of capital projects in the wastewater
utility between 2013 and 2020. We have assumed that these projects will serve the City’s projected
population at build-out of the wastewater system, as defined in the Comprehensive Wastewater Plan.
Based on utility billing system records, the wastewater utility has 3,943 ERUs. Incorporating the
growth assumptions from the Comprehensive Wastewater Plan (1.90% per year), the utility will add
471 ERUs over the six year period – reaching a total customer base of 4,414 ERUs by 2012.
D.3 CALCULATION OF THE WASTEWATER SYSTEM DEVELOPMENT CHARGE
The existing cost basis was divided by the total customer base in 2012 (4,414 ERUs). The 6-year
CIP portion of the future cost basis was divided by the incremental growth in customer base from
2006-2012 (471 ERUs). Lastly, the 2013-2020 capital projects cost basis was divided by the number
of ERUs at system build-out (11,137 ERUs).
The following table summarizes the proposed wastewater system SDC by meter size.
Exhibit 4.2 - Wastewater System SDC by Meter Size
Meter SizeExisting
SDC
Proposed
SDC
3/4" Meter2,331 4,434
1" Meter3,893 7,405
1 1/2" Meter 7,762 14,765
2" Meter12,424 23,633
3" Meter23,310 44,340
4" Meter38,858 73,915
6" Meter76,923 146,322
8" Meter 124,312 236,465
10" Meter178,718 339,955
The proposed SDC for a 3/4” meter charge is $4,434. The proposed charge is an increase of $2,103
when compared to the City’s current charge of $2,331. As noted in the water SDC section, this
proposed rate is the allowable ceiling and the City may set a rate lower if desired.
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