Water Cost-of-Service City of Las Cruces Water Cost-of-Service January 10, 2018

Agenda The water rate setting process What is cost-of-service? Water revenue requirement Cost-of-service findings

Rate Setting Process Cost-of-Service Allocation Revenue Requirements Rate Design Cost-of-Service Allocation Revenue Requirements How much do the rates need to collect? Which portions should each customer pay, and why? How customers are billed for their costs of service?

What is Cost-of-Service? Cost-of-service analysis divides the total revenue requirement into smaller cost categories that match the way the system works. Smaller costs are then matched to customers’ usage to determine each customer class’ share of the total revenue requirement. Total Revenue Required Water System Functions Customer Demands Divided into Matched to Results in Avg. Cost per Unit of Demand

Summary Revenue Requirement Adjusted Cost Element $ Million Operating & Maint. Expense1 $13.4 Principal & Interest on Debt 4.9 Cash for Capital Projects & Other 2.8 Total Revenue Requirement $21.1 1 includes allowance for uncollectable accounts Revenues at current rates - $17.4 Additional Funds Needed = $3.8 The water utility needs to add $3.8 million to its revenues as soon as possible in order meet its expected obligations – a 24% increase to user rates.

Customer Demands

Phase-in Options Year 1 Year 2 Year 3 Full Cost 24% 0% Option 1 15% 4% 7% 8% These options each would allow revenues to be increased to the appropriate level within 3-years.

Full Costs of Service

Full Cost of Service The rates in this option would be based on the entire cost of service from our findings without a phase-in

User-Charge Revenue Requirement at Full Cost User-charge requirement is the total revenue requirement less misc. fees Water rights acquisition fees Service charges Line extensions Misc.

Functional Cost Allocation – Full Costs We match all costs to each part of the water system (called “functions”) The total cost of each function is then allocated to customer classes based their demand for each function. Only the Residential class is shown here, but we allocate costs for all customer classes….the table is too big for this screen!

Average Costs per Unit – Full Cost Dividing the total costs by the units of demand, we can find the average cost per unit of volume, and per customer.

Compare Costs to Revenues – Full Cost We then compare the revenue recovered under existing rates with each class’ cost of service. Some recover enough already, and some don’t.

Adjust Revenues – Full Cost Proposed adjustments increase total revenue to meet the costs of service – some classes need greater increases than others.

Residential Rate – Full COS Current Proposed Access Charge Per month $6.82 $13.58 Volume Charge Summer Period First 3,000 gal $.70 +$.41 $.98 Over 3,000 gal $2.08 $2.92 Non-Summer Period $1.89 $2.65 Base Rate Revenue $2,624,793 $5,226,488 Usage Rate Revenue $7,440,902 $8,147,159 Total Rate Revenue $10,065,695 $13,373,647

Phase-in Option 1

Option 1 Phase-in Plan The rates are based on reduced revenue requirements resulting in fewer dollars to support the capital requirements.

User-Charge Revenue Requirement for Option 1 (Year 1) User-charge requirement is the total revenue requirement less misc. fees Water rights acquisition fees Service charges Line extensions Misc.

Functional Cost Allocation – Option 1 We match all costs to each part of the water system (called “functions”) The total cost of each function is then allocated to customer classes based their demand for each function. Only the Residential class is shown here, but we allocate costs for all customer classes….the table is too big for this screen!

Average Costs per Unit – Option 1 Dividing the total costs by the units of demand, we can find the average cost per unit of volume, and per customer.

Compare Costs to Revenues – Option 1 While Option 1 results in a 14.2% revenue increase overall, the increase is not the same for each class; some are higher than others.

Full Costs vs. Phase-In FULL COST OPTION 1 Remember that the phase-in options only get you part of the way to full-cost recovery. Rate adjustments should be mindful of both targets.

Adjust Revenues – Option 1 Proposed adjustments increase total revenue up to the phase-in target by applying a uniform increase to classes whose rates are currently too low

Residential – Option 1 Current Proposed Access Charge Per month $6.82 $13.17 Volume Charge Summer Period First 3,000 gal $.70 +$.41 $.82 Over 3,000 gal $2.08 $2.43 Non-Summer Period $1.89 $2.20 Base Rate Revenue $2,624,793 $5,068,475 Usage Rate Revenue $7,440,902 $6,852,091 Total Rate Revenue $10,065,695 $11,920,566

Phase-in Option 2

Option 2 Phase-in Plan The rates are based on reduced revenue requirements resulting in fewer dollars to support the capital requirements.

User-Charge Revenue Requirement for Option 2 (Year 1) User-charge requirement is the total revenue requirement less misc. fees Water rights acquisition fees Service charges Line extensions Misc.

Functional Cost Allocation – Option 2 We match all costs to each part of the water system (called “functions”) The total cost of each function is then allocated to customer classes based their demand for each function. Only the Residential class is shown here, but we allocate costs for all customer classes….the table is too big for this screen!

Average Costs per Unit – Option 2 Dividing the total costs by the units of demand, we can find the average cost per unit of volume, and per customer.

Compare Costs to Revenues – Option 2 While Option 2 results in a 6.2% revenue increase overall, the increase is not the same for each class; some are higher than others.

Full Costs vs. Phase-In FULL COST OPTION 2 Remember that the phase-in options only get you part of the way to full-cost recovery. Rate adjustments should be mindful of both targets.

Adjust Revenues – Option 2 Proposed adjustments increase total revenue up to the phase-in target by applying a uniform increase to classes whose rates are currently too low

Residential – Option 2 Current Proposed Access Charge Per month $6.82 $12.82 Volume Charge Summer Period First 3,000 gal $.70 +$.41 Over 3,000 gal $2.08 Non-Summer Period $1.89 Base Rate Revenue $2,624,793 $4,932,380 Usage Rate Revenue $7,440,902 $5,952,966 Total Rate Revenue $10,065,695 $10,885,345

Water Rate Foundation The rates are based on the total rate revenues required to pay for the operating and capital needs of the water utility. This represents a phase-in plan to get the Water Utility revenues up to its full cost of service in the next three years. All rates shown reflect only the FIRST year of the plan.

Cost-of-Service A second analysis divides the total revenue requirement into smaller cost categories that match the functioning of the system. Smaller costs are then matched to customers’ usage to determine each customer class’ share of the total revenue requirement. Total Revenue Required Water System Functions Customer Demands Divided into Matched to Results in Avg. Cost per Unit of Demand

Rate Adjustments are Cost Based Adjustments to rates, if any, are determined from the cost-of-service by class compared to the revenue each class recovers from existing rates.

Cost-of-Service as a Guide Cost-of-service is a guide for adjusting rates. Some rates need to be increased, while others do not. 80% of the revenue increase needed next year is due to a need for increased Residential revenue to match the costs of serving that class

Residential Current rates are under-recovering revenue from the class; Proposed Access Charge Per month $6.82 $12.82 Volume Charge Summer Period First 3,000 gal $.70 +$.41 Over 3,000 gal $2.08 Non-Summer Period $1.89 Base Rate Revenue $2,624,793 $4,932,380 Usage Rate Revenue $7,440,902 $5,952,966 Total Rate Revenue $10,065,695 $10,885,345 Current rates are under-recovering revenue from the class; Proposed access charges increase to recover customer-related costs; Any remaining costs recovered from volume charges. Class Cost of Service = $10.88M

Residential – Bill Comparison The proposed rate recovers more revenue from the access charge and less from volume charges resulting in higher bills in non-summer months.

Small Commercial Current Proposed Access Charge Per month $15.75 Volume Charge Summer Period Per 1,000 gal $1.26 +$.41 $1.93 Non-Summer Period $1.05 $1.61 Base Rate Revenue $687,094 Usage Rate Revenue $1,222,276 $1,377,786 Total Rate Revenue $1,909,370 $2,064,880 Current rates are under-recovering revenue in the class; Access charges are sufficient compared to cost-of-service; Volume rates increased to meet remaining costs. Class Cost of Service = $2.06M

Small Commercial – Bill Comparison The proposed rate recovers the same revenue from the access charge and more from volume charges resulting in higher bills on average.

Large Commercial/Multi-Unit Current Proposed Access Charge Per month $37.00 Volume Charge Summer Period Per 1,000 gal $2.05 +$.41 $2.46 Non-Summer Period $1.71 $2.12 Base Rate Revenue $191,882 Usage Rate Revenue $2,111,886 Total Rate Revenue $2,303,768 Current rate recovers sufficient revenue for the class No increase required

Large Commercial – Bill Comparison There are no changes proposed for the Large Commercial class at this time.

Industrial Current rate recovers sufficient revenue for the class Proposed Access Charge Per month $1,000 Volume Charge Summer Period Per 1,000 gal $1.54 +$.41 $1.95 Non-Summer Period $1.28 $1.69 Base Rate Revenue $216,000 Usage Rate Revenue $645,190 Total Rate Revenue $861,190 Current rate recovers sufficient revenue for the class No increase required

Non-Potable Parks Current Proposed Access Charge Per month $0.00 $38.35 Volume Charge Summer Period Per 1,000 gal $1.32 +$.41 $1.75 Non-Summer Period Base Rate Revenue $0 $920 Usage Rate Revenue $23,206 $24,175 Total Rate Revenue $25,095 Current rates are under-recovering revenue in the class; Access charges are not sufficient compared to cost-of-service; Volume rates do not need to be adjusted. Class Cost of Service = $25,100

Bulk Water Current rate recovers sufficient revenue for the class Proposed Access Charge Per month $23.50 Volume Charge Summer Period Per 1,000 gal $3.74 Non-Summer Period $3.12 Base Rate Revenue $24,957 Usage Rate Revenue $222,825 Total Rate Revenue $247,782 Current rate recovers sufficient revenue for the class No increase required

Parks Current rates are under-recovering revenue in the class; Proposed Access Charge Per month $82.00 Volume Charge Summer Period Per 1,000 gal $1.93 +$.41 $2.60 Non-Summer Period $1.61 $2.17 Base Rate Revenue $34,440 Usage Rate Revenue $162,136 $178,186 Total Rate Revenue $196,576 $212,626 Current rates are under-recovering revenue in the class; Access charges are sufficient compared to cost-of-service; Volume rates are adjusted to meet remaining costs for class. Class Cost of Service = $212,500

Parks Off-Peak Current rates are under-recovering revenue in the class; Access charges are not sufficient compared to cost-of-service; Volume rates do not need to be adjusted. Current Proposed Access Charge Per month $82.00 Volume Charge Per 1,000 gal $1.03 +$.41 $1.44 Base Rate Revenue $57,072 Usage Rate Revenue $181,553 Total Rate Revenue $238,625

Reclaimed Current rates are under-recovering revenue in the class; Access charges are sufficient compared to cost-of-service; Volume rates are adjusted to meet remaining costs for class. Current Proposed Access Charge Per month $20.00 Volume Charge Per 1,000 gal 50% of class rate $.67 Base Rate Revenue $1,920 Usage Rate Revenue $81,357 $88,139 Total Rate Revenue $83,277 $90,059 Class Cost of Service = $90,025

San Pablo Current rates are under-recovering revenue in the class; Due to contract provisions, these rates cannot be adjusted until 2023 Current Proposed Access Charge Per month $8.96 Volume Charge Per 1,000 gal $.86 Base Rate Revenue $72 $108 Usage Rate Revenue $12,940 Total Rate Revenue $13,012 Class Cost of Service = $14,060

Las Cruces Rate Survey

% Revenue from Access Charges Base rates make a utility more resilient against revenue instability from changing water usage Utility % Revenue from Access Charges Las Cruces 29% Albuquerque 49% Rio Rancho 23% Santa Fe 30%

Residential access charges Utility Residential access charges Las Cruces-Current $ 6.82 Las Cruces-Proposed 12.82 Albuquerque* 15.91 Rio Rancho* 11.53 Santa Fe* 18.42 El Paso* 6.63 Deming 3.00 Alamogordo* 13.60 Mesa* 27.55 Seattle* 15.15 Lubbock* 16.00 Tucson* 13.53 Access Charges Comparison of Access Charges * * * * * * * * * *Base rates vary by meter size

Tiered Pricing Objectives of tiered pricing: Encourage conservation generally Promote efficient use while reflecting differences in household size or reasonable outdoor use 2 tiers 3+ tiers Utilities with 2 tiers Las Cruces Santa Fe Utilities with 3 tiers Rio Rancho El Paso Seattle Lubbock Utilities with 4 tiers Mesa Tucson Albuquerque Utilities with 5 tiers Alamogordo

Tier Sizes Utility Tier 1 Volume Tier 1 Rate Tier 2 Volume Tier 2 Rate Uniform Rate Structure Deming Uniform $1.64 (w) $1.98 (s) - 2 Tier Rate Structure Las Cruces-Current 3 kgal $.70 - $1.89 (w) $2.08 (s) Las Cruces-Proposed $.78 $2.09 (w) $2.30 (s) Santa Fe 7 kgal (w) 10 kgal (s) $6.06 $21.72

Tier Sizes Utility Tier 1 Volume Tier 1 Rate Tier 2 Volume Tier 2 Rate 3 Tier Rate Structure Rio Rancho 6 kgal $5.32 10 kgal $5.76 - $6.21 El Paso 150% AWC* $2.66 250% AWC $6.32 $9.04 Seattle 7 kgal $6.89 17 kgal $7.07 $8.74 Lubbock 5 kgal $4.76 45 kgal $6.50 $7.79 *AWC (Average Winter Consumption)

Tier Sizes 4 Tier Rate Structure 5 Tier Rate Structure Utility Tier 1 Volume Tier 1 Rate Tier 2 Volume Tier 2 Rate Tier 3 Volume Tier 3 Rate Tier 4 Volume Tier 4 Rate Tier 5 Rate 4 Tier Rate Structure Albuqu-erque 200% AWC* $2.54 300% AWC* $3.81 400% AWC* $5.09 - $6.36 Mesa 10 kgal $3.13 20 kgal $4.70 24 kgal $5.57 $6.07 Tucson 5 kgal $2.31 11 kgal $4.44 22 kgal $10.33 $16.04 5 Tier Rate Structure Alamo-gordo 20 kgal $1.94 40 kgal $3.14 53 kgal $4.88 67 $7.09 $10.63 *AWC (Average Winter Consumption)

Seasonal Rates Objectives of seasonal rates: Recover additional operating expenses in summer: Purchased water costs Power costs Encourage conservation in summer months… If source of supply is constrained in summer months If customers tend to be more wasteful in summer months

Seasonal Rate Structure Utility Seasonal Rate Structure Las Cruces Tier 2 rates increase in summer Albuquerque Tiers 2, 3, and 4 in summer only Santa Fe Tier 1 width increases in summer Deming Uniform rates increase in summer Seattle Tier 2 and Tier 3 in summer only

Rate Riders Las Cruces and Albuquerque are the only utilities with ‘Rate Riders’, however other utilities recover specific costs in various ways. Utility Water Rights DIF/Capital Charge Litigation Power Las Cruces $.11/kgal $.41/kgal $.02/kgal Albuquerque $.16/kgal $.07/kgal Rio Rancho Greater of $6 or $.50/kgal El Paso $9.83* Alamogordo $1.00/customer Tucson $.92/kgal *Water rights charge varies by meter size

Total Bill Comparison Low Residential User - Summer

Total Bill Comparison High Residential User - Summer

Total Bill Comparison Moderate Residential User - Winter

Proposed Rate Increases by Customer Class Las Cruces Utilities Proposed Rate Increases by Customer Class

Residential Current Option 1 Option 2 Full COS Access Charge Per month $6.82 $13.17 $12.82 $13.58 Volume Charge Summer Period First 3,000 gal $.70 +$.41 $.82 $.98 Over 3,000 gal $2.08 $2.43 $2.92 Non-Summer Period $1.89 $2.20 $2.65 Base Rate Revenue $2,624,793 $5,068,475 $4,932,380 $5,226,488 Usage Rate Revenue $7,440,902 $6,852,091 $5,952,966 $8,147,159 Total Rate Revenue $10,065,695 $11,920,566 $10,885,345 $13,373,647

Small Commercial Current Option 1 Option 2 Full COS Access Charge Per month $15.75 Volume Charge Summer Period Per 1,000 gal $1.26 +$.41 $2.20 $1.93 Non-Summer Period $1.05 $1.83 $1.61 Base Rate Revenue $687,094 Usage Rate Revenue $1,222,276 $1,573,535 $1,377,786 Total Rate Revenue $1,909,370 $2,260,629 $2,064,880

Large Commercial/Multi-Unit Current Option 1 Option 2 Full COS Access Charge Per month $37.00 Volume Charge Summer Period Per 1,000 gal $2.05 +$.41 $2.46 Non-Summer Period $1.71 $2.12 Base Rate Revenue $191,882 Usage Rate Revenue $2,111,886 Total Rate Revenue $2,303,768

Industrial Current Option 1 Option 2 Full COS Access Charge Per month $1,000 Volume Charge Summer Period Per 1,000 gal $1.54 +$.41 $1.95 Non-Summer Period $1.28 $1.69 Base Rate Revenue $216,000 Usage Rate Revenue $645,190 Total Rate Revenue $861,190

Reclaimed Current Option 1 Option 2 Full COS Access Charge Per month $20.00 Volume Charge Per 1,000 gal 50% of class rate $.74 $.67 $.83 Base Rate Revenue $1,920 Usage Rate Revenue $81,357 $96,706 $88,139 $108,724 Total Rate Revenue $83,277 $98,626 $90,059 $110,644

Bulk Water Current Option 1 Option 2 Full COS Access Charge Per month $23.50 Volume Charge Summer Period Per 1,000 gal $3.74 Non-Summer Period $3.12 Base Rate Revenue $24,957 Usage Rate Revenue $222,825 Total Rate Revenue $247,782

San Pablo Current Option 1 Option 2 Full COS Access Charge Per month $8.96 Volume Charge Per 1,000 gal $.86 Base Rate Revenue $72 $108 Usage Rate Revenue $12,940 Total Rate Revenue $13,012

Parks Current Option 1 Option 2 Full COS Access Charge Per month $82.00 Volume Charge Summer Period Per 1,000 gal $1.93 +$.41 $2.89 $2.60 $3.15 Non-Summer Period $1.61 $2.41 $2.17 $2.62 Base Rate Revenue $34,440 Usage Rate Revenue $162,136 $198,367 $178,186 $215,834 Total Rate Revenue $196,576 $232,807 $212,626 $250,274

Parks Off-Peak Current Option 1 Option 2 Full COS Access Charge Per month $82.00 Volume Charge Per 1,000 gal $1.03 +$.41 $1.44 Base Rate Revenue $57,072 Usage Rate Revenue $181,553 Total Rate Revenue $238,625

Non-Potable Parks Current Option 1 Option 2 Full COS Access Charge Per month $0.00 $41.54 $38.35 $45.25 Volume Charge Summer Period Per 1,000 gal $1.32 +$.41 $1.92 $1.75 $2.16 Non-Summer Period Base Rate Revenue $0 $997 $920 $1,086 Usage Rate Revenue $23,206 $26,485 $24,175 $29,746 Total Rate Revenue $27,482 $25,095 $30,832