Copyright Rehmann Robson Pennfield Charter Township Water and Sewer Utilities Rate Study

Pennfield Charter Township Copyright Rehmann Robson Pennfield Township Water Utilities Water supplied by Township wells & City of Battle Creek Water supplied by Township wells & City of Battle Creek Township owns all utility infrastructure Township owns all utility infrastructure All sewer treated by City of Battle Creek All sewer treated by City of Battle Creek Utility expansion/upgrades in 1990’s anticipated greater growth in Township Utility expansion/upgrades in 1990’s anticipated greater growth in Township Debt from expansion being paid by existing customers Debt from expansion being paid by existing customers Battle Creek instituting new rates-particularly significant in Sewer Fund Battle Creek instituting new rates-particularly significant in Sewer Fund

Pennfield Charter Township Copyright Rehmann Robson Purpose of Rate Study Project the revenue requirements of the Water and Sewer Funds Project the revenue requirements of the Water and Sewer Funds –How much money is needed? Cost of service allocations Cost of service allocations –Who should pay? Develop framework for new rates Develop framework for new rates –How should utility services/commodity be priced? Develop rates sufficient to meet revenue requirements Develop rates sufficient to meet revenue requirements

Pennfield Charter Township Copyright Rehmann Robson Rate-Setting Objectives Understandable Understandable Reasonable Reasonable Acceptable Acceptable Manageable Manageable Affordable Affordable Equitable Equitable Influence consumption behavior Influence consumption behavior

Pennfield Charter Township Copyright Rehmann Robson Utilities are Enterprise Funds Operated as separate businesses Operated as separate businesses Costs must be covered by rates, not through taxation Costs must be covered by rates, not through taxation No subsidies from General Fund or other funds No subsidies from General Fund or other funds Revenues need to cover expenses and build cash reserves Revenues need to cover expenses and build cash reserves Revues come from rates, fees, interest Revues come from rates, fees, interest

Pennfield Charter Township Copyright Rehmann Robson Revenue Requirements What are we paying for?? Operations & maintenance expense Operations & maintenance expense Capital replacements Capital replacements System expansion System expansion Regulatory compliance Regulatory compliance Debt payments Debt payments Administration, billing, customer service Administration, billing, customer service Reserves Reserves Clean water Clean water

Pennfield Charter Township Copyright Rehmann Robson Fixed vs. Variable Costs Certain costs are required, even if no water is used (fixed costs) Certain costs are required, even if no water is used (fixed costs) As consumption increases, so too do some expenses (utilities, maintenance, etc.) As consumption increases, so too do some expenses (utilities, maintenance, etc.) Pennfield’s systems have a lot of variable costs Pennfield’s systems have a lot of variable costs Assigning fixed costs to variable rates can result in insufficient revenues Assigning fixed costs to variable rates can result in insufficient revenues

Pennfield Charter Township Copyright Rehmann Robson Fixed Costs In Sewer Fund, fixed costs are expected to increase as Battle Creek RTS charges increase In Sewer Fund, fixed costs are expected to increase as Battle Creek RTS charges increase –37% of costs in –47% of costs in In Water Fund, fixed costs are expected to be more steady In Water Fund, fixed costs are expected to be more steady –26% - 29% over next five years

Pennfield Charter Township Copyright Rehmann Robson Who Pays? All customers share fixed costs, pay for usage All customers share fixed costs, pay for usage Large users often pay a greater share of fixed costs, based on potential system demand requirements Large users often pay a greater share of fixed costs, based on potential system demand requirements Equity considerations Equity considerations

Pennfield Charter Township Copyright Rehmann Robson Utility Rate Components Readiness to Serve (RTS) charge Readiness to Serve (RTS) charge –Recovers fixed costs of system –Charges vary based on meter size (relative demand on system capacity) –Fixed rate per billing period Current RTS charges in Sewer Fund do not conform to EPA grant requirements Current RTS charges in Sewer Fund do not conform to EPA grant requirements –Rates must be equitable among all users –No differential between residential and commercial customers allowed

Pennfield Charter Township Copyright Rehmann Robson Utility Rate Components Commodity charge Commodity charge –Set to recover variable costs of utility systems –Uniform rate for every unit of water –Revenue based on metered consumption –Commodity rates in Sewer Fund meet equitability requirements of EPA

Pennfield Charter Township Copyright Rehmann Robson Current Pennfield Rates

Pennfield Charter Township Copyright Rehmann Robson Adequacy of Rates Sewer rates currently sufficient to meet revenue requirements Sewer rates currently sufficient to meet revenue requirements –Excess cash has accumulated in Fund –Significant increases expected from City of Battle Creek in Sewer RTS charges in future years Water rates insufficient to meet revenue requirements Water rates insufficient to meet revenue requirements –Cash reserves are designated –Borrowing from Sewer Fund –Rates must be adjusted to keep Fund healthy

Pennfield Charter Township Copyright Rehmann Robson Revenue Requirements Water & Sewer budgets projected through 2013 Water & Sewer budgets projected through 2013 –Primary assumptions: 3% annual inflation 3% annual inflation 3% wage increase/year 3% wage increase/year Employee insurance costs increase 7.5% annually Employee insurance costs increase 7.5% annually Admin charges increase 5% annually Admin charges increase 5% annually Gas utilities 5% annual increase Gas utilities 5% annual increase Battle Creek water & sewer rates based on recent study recommendations Battle Creek water & sewer rates based on recent study recommendations No increase in customer base or consumption No increase in customer base or consumption Capital outlays reflect anticipated needs Capital outlays reflect anticipated needs

Pennfield Charter Township Copyright Rehmann Robson Additional Considerations Excess cash in Sewer Fund used to minimize rate increases over next five years Excess cash in Sewer Fund used to minimize rate increases over next five years Water Fund must increase cash reserves to stabilize fund Water Fund must increase cash reserves to stabilize fund Existing debt service payments will decrease slowly in future years Existing debt service payments will decrease slowly in future years

Pennfield Charter Township Copyright Rehmann Robson Cash Reserves Prepaid special assessments Prepaid special assessments Water tower maintenance-significant cost every years Water tower maintenance-significant cost every years O&M reserve-provides cash to cover expenses incurred before revenues are collected O&M reserve-provides cash to cover expenses incurred before revenues are collected Capital reserve-an amount set aside to cover unexpected capital replacements/repairs Capital reserve-an amount set aside to cover unexpected capital replacements/repairs

Pennfield Charter Township Copyright Rehmann Robson Estimated Rate Requirements RTS based on 5/8” meter equivalent RTS based on 5/8” meter equivalent Sewer RTS increases reflect anticipated BC rate adjustments Sewer RTS increases reflect anticipated BC rate adjustments Sewer commodity rate decrease reflects BC rates Sewer commodity rate decrease reflects BC rates

Pennfield Charter Township Copyright Rehmann Robson Equivalent Meters Explained The developed rates are based on “equivalent meter” ratios The developed rates are based on “equivalent meter” ratios –Reflects the maximum potential demand a given meter size places on the system, relative to the standard 5/8” residential meter –Based on American Waterworks Association standard capacity multiplier: –5/8” meter: 1 times-- 2” meter: 8 times –¾” meter: 1.5 times-- 3” meter: 15 times –1” meter: 2.5 times-- 4” meter: 25 times –1.5” meter: 5 times-- 6” meter: 50 times

Pennfield Charter Township Copyright Rehmann Robson Developed Sewer Rates

Pennfield Charter Township Copyright Rehmann Robson Developed Water Rates

Pennfield Charter Township Copyright Rehmann Robson

Pennfield Charter Township Copyright Rehmann Robson Why are our rates so “high?” Every system is unique Every system is unique Smaller systems with fewer users often result in higher per unit rates Smaller systems with fewer users often result in higher per unit rates Excess capacity results in higher costs per customer Excess capacity results in higher costs per customer Deferred maintenance is expensive Deferred maintenance is expensive Older/smaller systems are less efficient Older/smaller systems are less efficient New regulations/technologies may require higher costs and rates New regulations/technologies may require higher costs and rates

Pennfield Charter Township Copyright Rehmann Robson The Cost of Pennfield Water & Sewer Combined water & sewer less than 1 cent/gallon Combined water & sewer less than 1 cent/gallon –Bath (20 gallons) = 16 cents –Shower (3-6 gal/minute, 8 minutes) = 19 to 38 cents –Toilet (2-8 gallons/flush) = 2 to 6 cents –Dishwasher (9 gallons/load) = 7 cents –Washing machine (20-30 gallons) = 16 to 24 cents –Water bottle ( 20 ounces) = 1/8 of a cent

Pennfield Charter Township Copyright Rehmann Robson Tap Fees Current tap fees difficult to calculate Current tap fees difficult to calculate –Based on type of business, square footage, # of stools or bays, etc. Current tap fees include cost of making physical connection to the system Current tap fees include cost of making physical connection to the system –Varies significantly from customer to customer –May result in little or no additional net revenue to Funds –Basis of fee is unclear

Pennfield Charter Township Copyright Rehmann Robson Tap Fees: A New Approach System Development Charge (SDC) set to enable new customers to “buy in” to the existing system, at the rate of “equity ownership” of existing customers System Development Charge (SDC) set to enable new customers to “buy in” to the existing system, at the rate of “equity ownership” of existing customers –Calculate net value of each system –Divide by number of 5/8” equivalent meters Connection Charge paid directly by new customers Connection Charge paid directly by new customers –Varies based on location & size of main –Results in no additional costs to the Township –Ensures equitability in utility systems

Pennfield Charter Township Copyright Rehmann Robson What Could Change Rate Requirements? Additional customers = lower rates Additional customers = lower rates Infrastructure failures = higher rates Infrastructure failures = higher rates Battle Creek rate adjustments = higher rates? Battle Creek rate adjustments = higher rates? Additional capital expenditures = higher rates Additional capital expenditures = higher rates Regulatory requirements = higher rates (usually) Regulatory requirements = higher rates (usually)

Pennfield Charter Township Copyright Rehmann Robson Rate Controls Long-term financial and capital plans help stabilize rates Long-term financial and capital plans help stabilize rates Adding new customers without adding capacity reduces per-customer burden Adding new customers without adding capacity reduces per-customer burden Accurate meters ensure fair billing Accurate meters ensure fair billing Collecting on all accounts controls rates Collecting on all accounts controls rates Minimize leakage and regulatory violations Minimize leakage and regulatory violations Grants, low-interest loans Grants, low-interest loans

Pennfield Charter Township Copyright Rehmann Robson Moving Forward Educating customers is important Educating customers is important –How do we communicate with customers? –Make customers aware of issues –Comparing Pennfield to other systems doesn’t change unique needs/user base of Pennfield’s utilities

Pennfield Charter Township Copyright Rehmann Robson Pennfield Charter Township Questions?Discussion