Cost of Service Based Water and Wastewater Rates City of Lawrence, Kansas February 11, 2004 J. Rowe McKinley Keith D. Barber

02/11/04 Page - 2 Current Utility Rate Status l Prior Rate Report Completed in August 1999 l Water & Wastewater Rates Designed for Calendar Years 2000 through 2004 n No Water Rate Increases n Annual Wastewater Rate Increases of 6% l System Development Charges n First Imposed January 1, 2001 at Reduced Levels n Four-Year Gradual Phase-In Period n Current Charges Probably Less than Equity Value

02/11/04 Page - 3 Introduction l Key Issues l Project Approach n General n Water Rates n Wastewater Rates l Rate Design Methodology l System Development Charges l Policy Issues

02/11/04 Page - 4 Key Issues l Revenue Adequacy l Optimal Multi-Year Financial Plan l Fair and Equitable Cost Allocations l Practical Rate and Billing Formats n Water & Wastewater Service Charges n System Development Charges n Septage Charges l Customer Understanding and Acceptance

02/11/04 Page - 5 Project Approach - General l Water Rates – AWWA Principles of Water Rates, Fees, and Charges (M1, 5 th Edition ) l Wastewater Rates – Water Environment Federation (WEF) Financing and Charges for Wastewater Systems l Guidelines presented in both manuals have been accepted by courts and public utility and other rate commissions

02/11/04 Page - 6 Project Approach - Water l Utility Basis of Rate Design – Permits Recognition of Proprietary Responsibilities and Risks of Serving Outside City Customers. l Base – Extra Capacity Cost Allocation Methodology l Special Considerations n Wholesale Customers n University of Kansas

02/11/04 Page - 7 Water Utility Cost Causative Components l Base – Average Water Use l Maximum Day – Peak maximum day demand exerted on the system l Maximum Hour – Peak maximum hour demand exerted on the system l Customer Requirements n Meter Reading & Billing n Meters and Services l Public Fire Protection

02/11/04 Page - 8 Water Cost of Service Concepts Maximum Day Extra Capacity Treatment Plant Annual Average Day Base Maximum Hour Extra Capacity Maximum Day Extra Capacity Water Mains

02/11/04 Page - 9 Project Approach - Wastewater l Utility Basis of Rate Design l Cost Allocations – Cost Causative l Excess Strength Surcharges l Septage Charges – Based on Same Volume and Excess Strength Charges Applied to Other Customers

02/11/04 Page - 10 Wastewater Utility Cost Causative Components l Volume – Average wastewater discharge n Contributed wastewater n Infiltration / Inflow (Volume Portion) l Capacity – Maximum wastewater discharge n Contributed wastewater n Infiltration / Inflow l Wastewater Strength (Contributed & I/I) n Biochemical Oxygen Demand (BOD) n Suspended Solids l Customer n Billing n Infiltration / Inflow (Customer Portion) s Policy Issue

02/11/04 Page - 11 Project Approach - Methodology l Step 1 – Revenues and Revenue Requirements l Step 2 – Cost of Service Allocations l Step 3 – Rate Design l User-Friendly Rate Model Cost of Service Allocations Rate Design Revenue and Revenue Requirements

02/11/04 Page - 12 Step 1 l Step 1 – Revenues and Revenue Requirements l Step 2 – Cost of Service Allocations l Step 3 – Rate Design Provide adequate funding of future utility operating and capital program needs with minimum adverse impact on overall level of customer charges

02/11/04 Page - 13 Step 2 l Step 1 – Revenues and Revenue Requirements l Step 2 – Cost of Service Allocations l Step 3 – Rate Design To Provide an Equitable Measure of Costs By Class for the Subsequent Design of Cost Based Rates of Charge

02/11/04 Page - 14 Step 3 l Step 1 – Revenues and Revenue Requirements l Step 2 – Cost of Service Allocations l Step 3 – Rate Design Establish Practical Rates That Recognize Allocated Costs of Service by Class, and are Also Understandable and Fair

02/11/04 Page - 15 System Development Fees l Purpose – Growth Pays For Growth l Basic Methodologies n System Buy-In n Incremental Cost-Pricing n Value of Service l Asset Valuation Methods n Original Cost (OC) n Reproduction Cost (RC) n Depreciation (OCLD & RCLD)

02/11/04 Page - 16 System Buy-in Methodology l Determine Total Equity Value l Determine Available System Capacity l Divide Total Equity Value by Available System Capacity to Determine Unit Equity Value l Apply Unit Equity Value to Customer Usage to Determine System Development Charge

02/11/04 Page - 17 Policy Issues 1.Capital Financing 2.Debt Service Coverage 3.Fire Protection 4.Water Rate Structure 5.System Development Charges 6.I/I Cost Recovery

02/11/04 Page - 18 Issue 1 Capital Financing l Capital Financing Mix? n Cash – Pay-As-You-Go n Debt s Traditional s SRF Loan Program n System Development Charges

02/11/04 Page - 19 Issue 2 Debt Service Coverage l Based on Combined Utility Approach l Large Coverage Ratio – 140% l Lower Debt Service Coverage Requirement? n Refinance Existing Debt n Reduce Required Coverage to 125%? l Rate Design Target Level – 130%?

02/11/04 Page - 20 Issue 3 Private Fire Protection Charges l It is common utility practice to charge commercial customers a private fire protection charge for private fire connections serving their properties l Should a private fire protection charge be imposed by the City of Lawrence?

02/11/04 Page - 21 Issue 4 Water Rate Structure l General l Customer Charges l Volume Charges n Uniform n Declining Block n Inverted Block n Seasonal (Conservation) l Alternative Pricing Options

02/11/04 Page - 22 Rate Structure - General A rate structure normally consists of various elements: l A fixed or minimum rate for the lowest consumption levels and to recover fixed, customer related costs. l A charge that generally varies with the volume consumed.

02/11/04 Page - 23 Rate Structure - General A properly structured rate should recognize the following rules: l Yield total required revenue in a stable and predictable manner. l Minimize unexpected changes to customer’s bills. l Discourage wasteful use.

02/11/04 Page - 24 Rate Structure - General l Promote fairness and equity among classes of customers. l Avoid discrimination. l Maintain simplicity, certainty, convenience, and feasibility. l Comply with all applicable laws.

02/11/04 Page - 25 Customer Charges 1.Service Charge: s Recovers customer related costs: s Meter costs l Meter reading l Billing and collecting l Customer service l Varies by size of meter s No volume allowance or costs included

02/11/04 Page - 26 Customer Charges 2.Minimum Bill Charge: s Recovers same costs as in Service Charge s Varies by meter size s Includes small volume allowance and associated cost

02/11/04 Page - 27 Monthly Service Charge The monthly service charge should be determined based on the cost to read the meter, prepare the bill, and provide other customer related services. Monthly rate = Total customer service costs Total number of bills

02/11/04 Page - 28 Monthly Service Charge Check to ensure that this minimum or fixed monthly rate is affordable for your community.

02/11/04 Page - 29 Volume Charges 1.Uniform Volume Rate 2.Declining Block Rates (Lawrence) 3.Inverted Block Rates 4.Seasonal (Conservation) Rates

02/11/04 Page - 30 Volume Charges - Uniform 1.Uniform Volume Rate l All consumption billed at same unit rate: n All customers n Separate rate by class l Simplicity/customer understanding are highly valued l Customer classes have similar usage characteristics/demand

02/11/04 Page - 31 Volume Charges - Uniform l Customer consumption data is limited l Easy to implement l Provides revenue stability l Sends conservation signal relative to Flat Rates or Declining Block Rates

02/11/04 Page - 32 Volume Charges – Declining Block 2.Declining Block Rates l Varied demands by customer class l A single rate schedule applicable to all classes l System costs decline with increasing usage (economies of scale)

02/11/04 Page - 33 Volume Charges – Declining Block l Requires adequate customer class consumption records. l Provides equitable class cost recovery. l Appears to conflict with conservation goals. l Provides revenue stability. l Can be difficult to implement.

02/11/04 Page - 34 Volume Charges – Inverted Block 3.Inverted Block Rates l Requires adequate customer class consumption records. l Conservation-oriented/sends strong price signal. l Not generally applicable to large commercial customers. l Can result in revenue instability (requires Rate Stabilization Reserve Fund). l Can be difficult to implement.

02/11/04 Page - 35 Volume Charges - Seasonal 4.Seasonal Rates l Applicable where there are large seasonal demands and associated costs. l Conservation-oriented. l Can result in revenue instability. l Can be difficult to implement.

02/11/04 Page - 36 Volume Charges - Seasonal l Two alternatives: n On-Peak (Higher Unit Rate)/Off-Peak (Lower Unit Rate). n Excess Use (Usage > 1.25 x Winter Higher Unit Rate).

02/11/04 Page - 37 Issue 5 System Development Charges l Growth Pays for Growth n System Buy-In Methodology s Current Charges Have Not Been Updated Since They Were Enacted In 1999 s Large Increases May Be Required n Incremental Cost Pricing l Dedicated Capacity Charges?

02/11/04 Page - 38 Issue 6 - Infiltration / Inflow (I/I) Cost Recovery l I/I Costs Must Be Recovered from Customers l Currently Recovered: n 2/3 on Customer Basis n 1/3 on Volume Basis l Should this allocation basis be changed to lower minimum charges?

02/11/04 Page - 39 Questions / Answers