1. Water & Sewer Rate Study Presented by: Chris Gonzalez, Project Manager
July 11, 2018

2. Agenda Overview of Key Questions Overview of Project Scope
Review of Preliminary Revenue Requirement Analysis
Overview of Other Study Elements
Cost-of-Service
Rate Design
System Participation Fees (SPFs)
Questions/Discussion

3. Key Questions
What rate adjustments are needed to cover each utility’s costs?
Do the City’s rates recover costs equitably from the City’s customers?
Among customer classes (e.g. single-family, multi-family, commercial)?
Among service areas (Winslow, Rockaway Beach/South Island)
Are the City’s rate structures a good fit, given current priorities?
What is development’s fair share of costs?

4. Overview of Project Scope
Financial Policies
O&M
Capital
Debt
Rate Revenue
Other Revenue
Flow
Strength (BOD/SS)
Customer Service
Cost-of-Service Analysis
Rate Design
Base Capacity
Peak Capacity
Fire Protection
Total Revenue Required
Revenue Requirement 4 6 5
Fixed Charges
Variable Charges
Wastewater
Water
Commercial
Single-Family
Functional Allocation
Customer Class Allocation
Initial Project Meeting 1
Data Collection 2
START
SPF Analysis 3
Existing Asset Costs
Future Project Costs
Customer Base (Equivalent Units)
SPF per Equivalent Unit
Multi-Family
Documentation 7
Workshops, Meetings, & Public Hearings 8
FINISH
Kickoff Meeting
Data Request
Follow-Up
Data Review
Utility Advisory Committee
Public Hearing
Council Study Session
Draft Report
Final Report  
Preliminary
Draft

5. Revenue Requirement Analysis How much revenue should rates generate?

6. Revenue Requirement Analysis
Defines “cost-based rates” as rates based on aggregate obligations
Operating costs
Capital project expenditures
Debt service payments
Other financial needs
Establishes a multi-year financial plan beyond the current budget cycle
Key Elements of Revenue Requirement Analysis:
Defining revenues and expenses
Developing capital funding strategy
Establishing fiscal policy “framework”

7. Defining Revenues & Expenses
Operating revenues/expenses are generally based on the City’s Budget
Often adjusted for inflation for future-year projections
Issues to consider in developing revenue/expense projections:
Revenue planning based on “normal-year” sales
Prior-year actuals + growth vs. budgeted amounts?
Accounting for abnormally high/low sales years
Accounting for trends in water usage
Accounting for recurring vs. one-time expenses
Changes in contract/commodity costs (e.g. Kitsap County Sewer District #7)
Anticipated operational changes (e.g. staff additions)

8. Utility Fiscal Policies
Fiscal Policy
Purpose
Target
Policy
Water (2018)
Sewer (2018)
Operating Reserve
Liquidity cushion to accommodate fluctuations in cash flow
60 Days of Operating Expenses
$225,000
$454,000
Capital Reserve
To address emergency repairs and unanticipated capital repairs
1% of the cost of system assets
$132,000
$363,000
System Reinvestment
Promote ongoing system integrity through investment in the system
Annual depreciation expense
$275,000
$924,000
Debt Service Coverage
Compliance with debt covenants, preserving credit rating for future debt issuance
(N/A – City utilities do not have any debt requiring coverage)

9. Key Assumptions Annual Cost Inflation Operating Forecast
Salaries: 2.0%
Benefits: 4.0%
Other Operating Costs: 2.0%
Construction Costs: 3.0%
Operating Forecast
Generally based on 2018 Budget
Adjusted for inflation in future years
Adjusted to account for one-time expenses
Annual Growth Rates
Based on experience since 2013
Winslow Residential: 1.7 – 1.8% per year
Winslow Commercial: 0.4% per year
Winslow Irrigation: 4.6% per year
Rockaway Beach: 0.3% per year
Aggregate Growth Assumptions
Winslow: 45 accounts per year
Rockaway Beach: <1 account per year

10. Capital Needs Forecast – Water
$7,204,000 in capital projects from 2018 – 2024
Cash resources are expected to cover projected capital costs
Storage Tank: $3,562,000
Mains: $2,413,000
Supply/Treatment: $489,000
Meters: $309,000
Other: $431,000

11. Water Revenue Requirement Forecast
Existing
Proposed
Projected
2018
2019
2020
2021
2022
2023
2024
Annual Rate Adjustment
3.00%
Single-Family 7 ccf/Month
$19.74
$20.33
$20.94
$21.57
$22.22
$22.88
$23.57
Change From Prior Year
+$0.59
+$0.61
+$0.63
+$0.65
+$0.67
+$0.69
Rate increases are needed to phase in proposed system reinvestment policy
Fund 30% of depreciation in 2019; increases to 55% by 2024

12. Capital Needs Forecast – Sewer
$10,875,000 in capital projects from 2018 – 2024
Cash resources are expected to cover projected capital costs
Pump Stations: $7,974,000
WWTP Outfall: $1,306,000
Gravity Mains: $747,000
Fleet: $848,000

13. Sewer Revenue Requirement Forecast
Existing
Proposed
Projected
2018
2019
2020
2021
2022
2023
2024
Annual Rate Adjustment
3.00%
Single-Family 7 ccf/Month
$93.65
$96.46
$99.35
$102.33
$105.40
$108.57
$111.00
Change From Prior Year
+$2.81
+$2.89
+$2.98
+$3.07
+$3.17
+$2.43
Rate increases are needed to generate funding for capital and phase in system reinvestment
Fund 35% of depreciation in 2019; increases to 95% by 2024

14. Sample Monthly Bill – 3/4” Single-Family @ 7 ccf

15. Key Policy Questions: Revenue Requirements
What level of rate-funded system reinvestment is appropriate?
Closely related to cash vs. debt funding policy/preferences
Need to consider generational equity and near-term impacts
How should the City adjust its utility rates?
Moderate annual increases
Larger, more periodic adjustments

16. Cost-of-Service Analysis How much should each customer class pay?

17. What is a “Cost-of-Service” Analysis?
An equitable distribution of costs that considers:
Measures of usage and demand
Planning, engineering, and design criteria
Facility requirements
A cost-of-service analysis determines:
Cost of providing service by function
Equitable share of costs for each customer class

18. Cost-of-Service Analysis Methodology
Revenue Requirement
Step #1: Allocate Costs to Functions of Service
Customer
Meters & Services
Base Capacity
Peak Capacity
Fire Protection
Step #2: Allocate Costs Among Customer Classes
Residential
Multi-Family
Commercial
Irrigation

19. Key Policy Questions: Cost-of-Service Analysis
How should costs be allocated to fire protection?
Which customer classes should be used for rates?
Should be based on distinctions in demand / service needs
Goal is equity, within the capabilities of the billing system
Should cost shifts be phased in over time?
Mitigate impacts to individual customer classes
Facilitate logical progression of rates over time
Allows monitoring of demand trends to inform ratemaking
Water service needs incremental to
fire flow needs
Fire flow needs incremental to water service needs
Proportionate allocation of needs

20. Rate Structure Analysis How should rates be set to meet the utility’s objectives?

21. Rate Structure Analysis
Goal: Set rates for each class to recover assigned share of costs
Base charges
May increase with meter size and/or dwelling units
Independent of water use
Consumption charges
Dependent on water use
Generally requires customer data
Customer counts by meter size
Billable water usage by account, by billing period

22. Current Water Rate Structure
Monthly Water Rates
Winslow
Rockaway Beach
Residential
Commercial
Other
Irrigation
Base Rate
Per Multi-Family Dwelling Unit
$5.37
Up to 3/4”
$10.77
$16.45
$24.04
$4.73
$11.64 1”
$21.24
$36.40
$55.37
$6.22
$22.94
1-1/2”
$38.72
$69.78
$107.58
$8.70
$41.85 2”
$59.71
$109.52
$170.23
$11.70
$64.53 3”
$115.70
$215.89
$337.28
$19.64 4”
$178.65
$335.55
$525.22
$28.59 6”
$353.94
$667.94
$1,047.31
$53.47
Consumption Charge per ccf
$3.89
First 5 ccf (0 – 5 ccf)
$1.09
$1.18
Next 7 ccf (6 – 12 ccf)
$1.76
$1.90
Next 18 ccf (13 – 30 ccf)
$2.49
$2.69
Over 30 ccf
$3.39
$3.66
Water Billed from Nov – Apr
$1.43
Water Billed from May – Oct
$1.65

23. Current Sewer Rate Structure
Monthly Sewer Rates
Single-Family
Multi-Family
Commercial/
Mixed Use
Senior/
Low-Income
Users of Both Water and Sewer
Base Rate per Unit
$42.69
$37.39
$123.69
$21.35
Consumption Charge per ccf of Water Use1
$7.28
$3.65
Sewer-Only Customers Served by Winslow WWTP
Base Rate per Equivalent Residential Unit
$119.80
$129.43
$59.90
Customers Served by Kitsap County SD #72
Properties with Grinder Pumps
$23.59
Properties without Grinder Pumps
$19.42
1From mid-June through mid-September, single-family and multi-family users are billed for their average water usage from mid-December through mid-May.
2South Island sewer customers are also subject to a monthly rate assessed by KCSD #7, currently $56.65 per equivalent residential unit.

24. Rate Policy Objectives
A sound water rate structure balances a variety of objectives1:
It is prudent to review rate-setting goals and objectives periodically
The revenue requirement and COS analyses help ensure that rates:
Are cost-based and legally defensible
Generate sufficient revenue
Equitably recover costs from customer classes
The rate structure analysis focuses on the other objectives
Revenue/Rate-Related
Cost-Related
Practical-Related
Revenue Sufficiency
Consistency with Costs
Legal Defensibility
Revenue Stability
Conservation & Efficiency
Simplicity
Philosophical Continuity
Fairness & Equity
Feasibility
Affordability
1Per Bonbright, Danielsen, and Kamerschen in Principles of Public Utility Rates

25. Key Rate Structure Policy Objectives
Definition
Revenue Stability
Control and predict revenue, regardless of external factors
Conservation & Efficiency
Encourage efficient water use
Affordability
Provide affordable water to “lifeline” users
Understandability
Keep structure simple to administer and explain to customers
It is important to have a clear / consistent understanding of:
The definition of each objective
How the various objectives differ from each other
Most rate structures reflect a balancing of these objectives, some of which conflict with each other

26. Weighing These Objectives
Pair-wise Comparison:
Compare two objectives at a time
Assign subjective weighting “points” to each objective
Evaluate relative priority of objectives
Our Version:
For each comparison, assign 1 – 5 points to each objective
The number of points assigned to both objectives should add up to 6
Relative ranking of alternatives is determined by adding up all points 1 2 3 4 5
Much Less
Less
Equally
More
Much More
Important

27. Sample Pairwise Comparison5
Revenue Stability
vs.
Conservation & Efficiency 1 4
Affordability 2
Understandability 3
Objective
Total Score
Ranking
Revenue Stability
= 11 2
Conservation & Efficiency
= 3 4
Affordability
= 10 3
Understandability
= 12 1
Various factors may impact the results, including:
Participant role / objectives
Participant personality traits (e.g. risk aversion)
When the comparison is performed

28. Impacting Achievement of Objectives
Revenue Stability
Conservation & Efficiency
Affordability
Understandability
Increasing Base Rates /
Decreasing Volume Rates
  –
Decreasing Base Rates /
Increasing Volume Rates
– – 
Adding Usage Blocks / Tiers
Increasing Higher-Block Volume Rates
Adding Seasonal Volume Rate Differential
Adding / Increasing Volume Allowance In Base Rate 
: Improves achievement of objective –
: Hinders achievement of objective

29. System Participation Fees What is growth’s equitable contribution to system costs?

30. SPF Overview
The SPF is a connection charge authorized under RCW that:
Recovers an equitable share of system costs from development
Is based on the cost of existing assets and future capital projects
Provides a source of funding for capital projects and/or debt service
What Can It Include?
What Should It Exclude?
Original cost of existing assets
Interest accrued on assets (up to 10 years)
Capital improvement program (uninflated)
Assets funded by external sources
Facilities paid for through other charges

31. Current System Participation Fees
Single-Family
Multi-Family
Commercial
Irrigation
Water SPFs
Up to 3/4” Meter
$2,754
$4,515
$5,692
$4,498
1” Meter
$6,885
$11,287
$14,231
$11,245
1-1/2” Meter
$13,770
$22,575
$28,462
$22,490
2” Meter
$22,033
$36,120
$45,539
$35,984
3” Meter
$44,066
$72,241
$91,079
$71,968
4” Meter
$68,854
$112,876
$142,311
$112,450
6” Meter
$137,708
$225,753
$284,623
$224,901
Sewer SPFs
$5,123
$3,178 per Unit
$5,123 per ERU1
1Defined by the City as 20 fixture units.

32. Conceptual Methodologies
System Buy-In Approach
Based on existing system cost
Up to ten years of accrued interest can be added
Applied over existing customer base (or capacity)
System Expansion Approach
Focuses on future costs associated with expanding capacity
Applied over incremental growth / capacity added
Similar to an impact fee
CFC =
Existing System Cost
Existing Customers
CFC =
Future Expansion Cost
Future Growth

33. Conceptual Methodologies (Continued)
CFC =
Existing & Future Asset Cost
Existing Customers & Growth
Total Integrated System
Integrated / Hybrid Approaches
Blend of historical / future costs
Applied over existing customer base (or capacity)
Various allocation rules can apply
CFC =
Existing System Cost
Existing Customers & Growth
Future Expansion Cost
Future Growth
Modified Existing + Future Capacity
CFC =
Cost of Remaining Capacity
Future Expansion Cost
Future Growth
Growth Allocation of Capacity

34. Choosing a Methodology
System Buy-In Approach
System Expansion Approach
Integrated / Hybrid Approach
Well Suited For…
Mature systems with relatively little growth
Newer systems expecting substantial growth
Any system
Pros
Based exclusively on known information
Relatively stable charges over time
Recovers equitable share of growth-related costs from growth
Generally results in more equitable charges
Cons
Does not recognize cost of oversizing existing system to serve growth
Does not recover costs of oversizing existing facilities for growth
Relatively volatile charges over time
Potentially most complex calculation

35. Key Policy Questions: SPFs
Which methodology should be used?
System buy-in method?
System expansion method?
Variation of the hybrid method?
How should recommended charges be implemented?
Full calculated charges
Phasing to full calculated charges
Some level below full calculated charges
Dependent on calculation results

36. Questions / Discussion

37. Chris Gonzalez (425) 867-1802 www.fcsgroup.com Project Manager
(425)
Contact FCS GROUP:
(425)