What’s New in Water Rates - pnws-awwa.org PM Utility 0… · What’s New in Water Rates? • New...
Transcript of What’s New in Water Rates - pnws-awwa.org PM Utility 0… · What’s New in Water Rates? • New...
2013 Pacific Northwest Section AWWA—Spokane, WA
Principles of Water Rates, Fees, and Charges
What’s New in Water Rates:
Insight into AWWA’s Newly
Published M1 Manual
Presented by:
Paul Matthews, Tualatin Valley Water District
Tom Gould, HDR Engineering
2
M1 – A Foundation to Build On
• M1 Manual provides the theory and methodologies
of establishing cost-based water rates and fees
• Sound cost-of-service process
• Functionalize-Allocate-Distribute (FAD)
• Provides a basis for rate design
• Support for staff and public officials
Starting Point for Developing a Sustainable
Long-Range Financial and Rate Plan
. .
. .
.
3
What’s New in Water Rates?
• New M-1 Manual is an update to the 5th Edition
published in 2000
• A number of sections had major updates to
reflect changing and current industry thinking
Affordability
Water-Budget Rate Designs
System Development Charges
Outside-City and Wholesale Rates
4
How Can M1 Manual Help?
• Long-range revenue requirement forecasting
• Customer consumption analysis
• Cost-of-service methodologies
• Conservation rate designs
• Price elasticity in water demand forecasting
• Fixed charges for revenue requirement recovery – revenue stability
The M1 Manual is a powerful reference and resource that addresses:
2013 Pacific Northwest Section AWWA—Spokane, WA
Principles of Water Rates, Fees, and Charges
Affordability:
Challenges & Opportunities
6
Affordability – Current Issues
• Utilities design rates to be cost-based
• Affordability and low-income issues are now impacting both customers and the utility • Can be addressed through non-rate and rate
programs
• Specific circumstances may require special rates
How should a utility systematically best address this policy and technical issue?
.
7
Different and Varying
Definitions of Affordability
• The ability of the poorest households to afford their water and wastewater bills
• The ability of the average household to afford their water and wastewater bills
• The ability of the community to bear the total costs of providing water and wastewater infrastructure and services
• The ability of the community to afford these costs as measured by the USEPA or other relevant regulatory agency
. .
. .
8
It’s an Important Policy Decision
• Affordability is likely to become more relevant
and important
• Affordability and low-income programs are a
policy decision of the governing body
• Differing viewpoints
• Water is an “essential need” and should be
addressed via an affordability/low-income program
• Not the role of a water utility to address society’s low-
income or affordability issues
9
General Considerations
• Rates/bills are typically increasing at a level
which exceed general inflation
• Appropriately designed programs can benefit
both the customer and the utility
• Late payments, shut-off notices, service terminations,
bad debt write-offs
• As bad debt increases, the cost to other ratepayers
rises
10
Common Affordability Programs
• Programs to working with the customers:
• Arrearage forgiveness
• Leak detection assistance
• Fixture repairs
• Crisis vouchers
• Safety net concepts
• Budget billing (average monthly bills)
• Alliances with community service organizations
• Targeting conservation outreach and education
11
Water Rate Affordability Programs
• Different approaches or options
• Discount on the full bill
• Discount on the variable (consumption) portion
• Discount on the fixed (minimum) portion
• Percentage of income (sliding scale)
• Fixed credits
This chapter of the M1 manual discusses in detail the advantages and disadvantages of each approach:
.
12
Other Key Chapter Items
• Historical perspectives
• Income verification
• Administrative considerations
• References to other leading research and
discussion on the topic
• Case example calculations
• Securing support for the program from utility
leadership and stakeholders
2013 Pacific Northwest Section AWWA—Spokane, WA
Principles of Water Rates, Fees, and Charges
Water Budget
Rate Structures
Water Rate Structures
14
FLAT RATE: $xx / month regardless of usage
Pros: Revenue stability, easy to understand
Cons: Inequitable, no conservation signal, not affordable for essential use
Revenue Mechanism
. .
. .
UNIFORM RATE: $xx / ccf
Pros: Revenue stability, administrative ease, easy to understand
Cons: Weak conservation, not affordable for essential use
Revenue Mechanism
Price Information
Water Rate Structures
15
. .
. .
SEASONAL RATE: $ xxx / ccf in Summer, $ x/ccf in Winter
Pros: Promote water conservation in the summer, easy to administer
Cons: Revenue instability, not affordable for essential use
Revenue Mechanism
Price Information
Behavior Change
Water Rate Structures
16
. .
. .
INCLINING TIERED RATE:
Pros: Promote conservation, affordable for essential use, easy to administer, easy to understand
Cons: Penalize large users
Revenue Mechanism
Price Information
Behavior Change
Water Rate Structures
17
. .
. .
Water Budget Tiered Rate:
Pros: Promote water efficiency, equitable, affordable for essential use, drought allocation tool, revenue stability
Cons: High administrative cost, harder to understand
Revenue Mechanism
Price Information
Behavior Change
Water Resource Management
Water Rate Structures
18
. .
. .
What Is a Water Budget?
19
A water budget rate is a form of an increasing block rate
structure where the amount of water within each block is
individually tailored for each customer
to reflect their efficient water use.
Conservation & Efficiency
20
Water Efficiency
• Reducing water waste
• Target driven
• Appropriate water use
Water Conservation
• Reducing water usage
• Rules and regulations
• Restricting water use
. .
.
21
Conservation Rate Structures
Inclining Block Pros
+ Easy to administer
+ Sends clear conservation signal
+ Addresses affordability for basic needs
Cons
- Targets larger water users
High use = wasteful use
- Equity concerns
Penalizes large families / lots
Exacerbated during drought pricing
Water Budget Pros
+ Provides water efficiency targets
Can address equity concerns for large families / lots
+ Allocates drought penalty rates
+ Addresses affordability for basic needs
Cons
- Higher administrative costs
How is efficiency defined?
Billing system requirement
Proactive public outreach
Increases staff for customer service
Complicated—customer understanding
. .
. .
22
Water Resource Management:
Defining Efficiency
• Water budget rate structures are typically
applied first to:
Irrigation accounts
Residential accounts
Water budgets are more challenging for
commercial customers
• Objective method in determining efficient water
use for irrigation and residential accounts
Water Budget Tiered Rate
23
Outdoor Water
Budget
Tier 2 Tier 3
P1
P2
P3
Quantity Tier 1
Indoor Water
Budget
Excessive Use
(Percentage of total water
budget)
Rates
. .
.
How Do We Define Equity?
25
• Why should a larger property receive a larger water budget when others have the same meter size and paid the same SDC?
• Why should two customers with the same water usage have different bills?
• A utilities costs are largely based on the capacity required to serve customers. shouldn’t capacity requirements impact rates?
Arguments Against Water Budgets:
26
How Do We Define Equity?
• We should first focus on achieving efficiency, regardless of family size and landscape area
• Focus on allocating least expensive water to efficient customers
Arguments for Water Budgets:
2013 Pacific Northwest Section AWWA—Spokane, WA
Principles of Water Rates, Fees, and Charges
System Development
Charges
28
What is a System Development
Charge (SDC)?
• One-time charge paid by new connections to
finance capital facilities benefitting such
development
• Variety of names: development impact fee,
capacity fee, connection fee, capital facility fee,
buy-in fee, mitigation fee
• Certain legal requirements for establishing
SDCs (vary by state and locale)
29
SDC Financial Goals and Objectives
• Maintain existing levels of utility service or possibly increase level of service (LOS)
• Ensure new growth pays its fair share for new or expanded facility capacity
• Potential to minimize future debt
• Potential to minimize rates and taxes
• Encourage disciplined capital improvement planning
• Promote inter-generational equity for system capacity – Equitably reimburse existing customers
30
Limitations on the Use of SDC Revenues
• Use of SDC proceeds are generally limited by
law
• Used to pay directly for a growth-related capital
improvement project
• Pay for long-term debt directly related to a growth-
related capital project
• SDC proceeds should not be used for O&M
• Utilities should not be overly-reliant on SDC
receipts (see housing crash of 2008)
31
Legal Background
• Rational Nexus Test:
1. A connection established between new development and
the new or expanded facilities needed. This establishes
the rational basis of public policy
2. Identification of the cost of the new or expanded facilities.
This established the burden to the public of providing the
facilities.
3. Appropriate apportionment of that cost to new
development in relation to the benefits it reasonably
receives – establishes the “nexus” between the fees being
paid and the benefit that new development receives
. .
.
32
Various Fee Methodologies
• Buy-In Method
Based on the value of existing facilities and capacity
Four different valuation methodologies for existing facilities
• Incremental Cost Method
Based on the value of to expand the existing system capacity
• Combined Approach
Blend of the buy-in and incremental cost methods
This chapter of the M1 manual discusses each methodology in detail and provides
a case example calculation
.
34
Mechanism for Applying SDCs
• Different methods of applying SDCs
• Meter size and meter equivalencies (Table VI.2.-5)
• Equivalent residential units (ERU)
• Dwelling (plumbing) fixture units
• Estimated usage
• Timing of SDC assessment and collection
35
Other SDC Technical
and Administrative Issues
• SDC Revenue (Debt) Credits
• Use of SDC Receipts
• Reimbursement policies
• Economic development issues
• Administrative issues
• Refunds, Redevelopment
• Accounting issues
• Restricted fund, receipts, expenditures, etc.
• When to update SDCs
2013 Pacific Northwest Section AWWA—Spokane, WA
Principles of Water Rates, Fees, and Charges
Outside-City and
Wholesale Rates
37
Overview of Outside-City Services
• Why included now?
• Increasingly common questions
• Legal disputes
• Limited guidance in prior editions
• Outside-city service benefits
• Shared costs
• Economies of scale
• What is cost-basis for outside-city differential
38
Revenue Requirement Methodologies
• Cash
• Utility Basis
• Utility Basis with Cash Residual
• Rate Differential (Multiplier)
Advantages Disadvantages
40
Comparison of Outside-City Approaches
Cash Basis
• Conforms to municipal budgeting
• Transparency
• Simplicity
• Limited data requirements
• Matching of revenue and cash requirements
Utility Basis
• Explicit recognition of business and other risks
• Technical justification of inside vs. outside City rate differentials
• Consistent with typical Public Utility Commission (PUC) requirements
Utility Basis with Cash Residual
• Matching of revenue recovery and cash requirements
• Explicit recognition of business and other risks
• Justification of inside vs. outside City rate differentials
Rate Differentials
• Historical precedence
• Support municipal policy objectives
• Transparency
• Simplicity
• Limited data requirements
• Lower costs
• Matching of revenue recovery and cash requirements
41
Risk Factors
• Business Risk • Unforeseen events
• Tort / civil liabilities
• Customer withdrawal
• Interest Rate Risk • Long-term investments
• Financial Risk • Commitment of debt capacity
• Liquidity Risk • Commitments to fixed assets
42
Outside-City Retail and Wholesale
Customer Classifications
• Necessary or desirable to separate inside- and
outside-city users?
• Differing levels of service?
• Transmission vs. distribution
• Fire protection
• Differing service characteristics?
• Essentially same considerations as for inside-
city services
Rate Equity Public Policies
Administrative Customer Service
Stakeholder Engagement
43
Summary and Conclusions
• Outside-City service can convey significant benefits to all parties • Economies of scale
• Municipal returns
• Unique circumstances of individual utilities determine relative advantages of: • Alternative methods to determine revenue requirements
• Assessment of risks and return determination
• Customer classification
• Implementation requires care and attention to legal and stakeholder issues
2013 Pacific Northwest Section AWWA—Spokane, WA
Principles of Water Rates, Fees, and Charges
Closing Thoughts
45
Outline of Topics in the M-1
• Overview of Cost-Based Rate Making
• General Concepts for Establishing Revenue Requirements
• Revenues
• Operation and Maintenance Expenses
• Taxes
• Capital-Related Costs
• Examples of Revenue Requirements
• Cost Allocations • Allocating Revenue Requirements to Cost
Components
• Distributing Costs to Customer Classes
• Rate Design • Selecting Rate Structures
• Uniform Rates
• Decreasing Block Rates
• Increasing Block Rates
• Seasonal Rates
• Water-Budget Rates
• Fixed Charges
• Rates for Fire Protection Service
• Other Rate Issues • Outside-City and Wholesale Rates
• Standby Rates
• Drought and Surcharge Rates
• Low-Income Affordability Rates
• Negotiated Contract and Economic Development Rates
• Indexed Rates
• Price Elasticity
• Marginal Cost Pricing
• Miscellaneous and Special Charges
• Capacity and Development Charges • Connection and Customer Facility Charges
• System Development Charges
• Availability Charges
• Implementation Issues • Public Involvement in Rate Making
• Legal Considerations
• Data Requirements
• Appendices, Glossary, Other Useful Manuals
46
Why You Need A Copy of the M-1
• The 6th Edition is the most comprehensive
manual on water rate setting that is available
• Discusses and addresses many of the
contemporary issues that you may currently be
working on (or struggling with)
• Culmination of the voluntary efforts of the
AWWA Rates and Charges Committee