Redmond Town Center, 7525 166 th Avenue NE, Suite D-215,
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Transcript of Redmond Town Center, 7525 166 th Avenue NE, Suite D-215,
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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”
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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
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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
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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: