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

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

3. 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?

4. 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

5. 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.

6. Customer Demands

7. 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.

8. Full Costs of Service

9. 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

10. 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.

11. 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!

12. 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.

13. 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.

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

15. 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

16. Phase-in Option 1

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

18. 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.

19. 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!

20. 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.

21. 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.

22. 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.

23. 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

24. 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

25. Phase-in Option 2

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

27. 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.

28. 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!

29. 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.

30. 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.

31. 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.

32. 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

33. 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

34. 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.

35. 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

36. 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.

37. 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

38. 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

39. 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.

40. 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

41. 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.

42. 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

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

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

51. Las Cruces Rate Survey

52. % 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%

53. Residential access charges
Utility
Residential access charges
Las Cruces-Current $
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

54. 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

55. 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

56. 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)

57. 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)

58. 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

59. 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

60. 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

61. Total Bill Comparison
Low Residential User - Summer

62. Total Bill Comparison
High Residential User - Summer

63. Total Bill Comparison
Moderate Residential User - Winter

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

65. 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

66. 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

67. 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

68. 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

69. 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

70. 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

71. 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

72. 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

73. 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

74. 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