1. 1 Redmond Town Center, 7525 166 th Avenue NE, Suite D-215, Redmond, WA 98052; T: (425) 867-1802 F: (425) 867-1937 www.fcsgroup.com 2008 BCWWA Annual Conference Whistler, British Columbia Presented by: Karyn Johnson, Principal – FCS GROUP April 29, 2008 Designing Water Rates to Reflect Cost of Service and Support Water Sustainability

2. 2 What is a Cost of Service Rate Analysis? Revenue Requirement “Defining Overall Needs” Cost of Service “Equity Evaluation” Rate Design “Collecting the Target Revenues”

3. Revenue Requirement “Defining Overall Needs”

4. 4 Multi-year financial plan that determines the amount of revenue necessary to recover the total costs incurred to provide service Cash reserves System reinvestment funding Operating & maintenance costs Capital related costs Used to allocate costs to users of the system Forms the basis for rate design …With revenue needs defined… What’s Next? Summary of Revenue Requirement

5. Cost of Service “Equity Evaluation”

6. 6 Why is Cost of Service Important? Pressure to ensure that customers are paying their fair share of system costs Regulatory requirements (Interior Health’s mandate for safe and clean drinking water) Sustaining adequate water supply System replacement needs Inflationary pressures Provides a rational basis for distributing the full costs of utility service to each class of customer An equitable distribution of cost shares that considers utility-specific data leads to defensible rate structures

7. 7 Cost of Service Elements Classify Plant and Expenses / Allocate to Function System Design Criteria / Industry Standards Define Customer Classes Distinctions in Demand and Service Levels Define Utility Functions Service Components Allocate Costs to Customers “Cost Shares” Develop Unit Costs Per Function Fixed / Variable Charges What Level of COSA is Right for You?

8. 8 Analytical Steps of a COSA Step 1: Functionalize Define Functions of Service Sewer System Functions Customer Contributed Flow Inflow & Infiltration Strength (BOD, SS, etc.) Water System Functions Customer Meters & Services Base Demand Peak Demand Fire Protection

9. 9 Analytical Steps of a COSA Step 2: Classify Categorize assets / expenses by major cost components Assign cost components to functions based on cost causation Why is the infrastructure needed? Why did you incur the expense? How did you determine the size? How is asset used/operated? Water Supply/Treatment Transmission/Distribution Storage Hydrants General Sewer Collection Conveyance Pumping Treatment General

10. 10 Allocation of Water System Components How is infrastructure assigned to functions? Source of Supply/TreatmentRatio of peak day to average day demand Transmission/DistributionPortion to fire protection; remainder to peak/average day StorageBased on storage requirements (operational, equalizing, emergency, fire suppression) from system plan documents HydrantsDirectly assigned to fire protection Other categories based on the unique design of each system Costs can be directly assigned if benefit only one customer or a group of customers

11. 11 Example Classification of Plant in Service Operating expenses are generally allocated based on a detailed review of individual line items Proportional to individual plant components Proportional to total plant Directly assigned to one or more functional components

12. 12 Example: Summary of System Cost Allocation Peak Demand 39.7% Average Demand 40.4% Customer 13.1% Fire Protection 6.8%

13. 13 How is this System Allocation Used? Not all customers use the system in the same manner - system costs should not be recovered uniformly from all customers Provides a basis for differentiating customer classes Represents a “snapshot” of cost breakdowns and cost relationships Used for allocation of costs to groups of customers having similar usage characteristics or facility requirements

14. 14 What Makes a Customer Class Distinct? Distinct service requirements Usage levels Usage patterns Seasonality of use Strength of wastewater Location Type of user

15. 15 What are Common Customer Classes? Single Family Multi-Family Residential Commercial IrrigationIndustrial Government Wholesale

16. 16 Typical Customer Class Distinctions Relatively low usage per dwelling unit High peaking (summer outdoor usage) Lowest fire flow requirement Lower usage per unit than SFR Relatively constant year- around use Fire flow requirement falls between SFR & commercial Can exhibit high usage per account Relatively constant year- around use Highest fire flow requirement Single family residential Multi-family residential Commercial/Industrial Parks & Irrigation Majority of, if not all, usage in peak period No fire flow requirement

17. 17 Analytical Steps of a COSA Step 3: Allocate to Customers Costs are distributed based on relative demands (water): Base CostsAverage annual water usage Peak CostsPeak period (season, month, etc.) usage Customer CostsAccounts Meters & Services CostsEquivalent Residential Units (adjusted for meter size) Fire Protection CostsLiters per second/minute requirement

18. 18 Defining Customer Usage Characteristics Types of customers Distinguishing characteristics Levels of demand for each service component

19. 19 Customer Class Allocation Example Single family customer allocation example Pro rata share of costs in proportion to demand levels Unit costs for rate design

20. Rate Design “Collecting the Target Revenue”

21. 21 Goals of Rate Design Target revenue levels Cost-based Policy objectives Conservation Risks (revenue stability) Customer impacts/affordability Administrative practicality

22. 22 Basic Rate Features Flat charges Fixed charge plus volume charges Uniform volume charges Class-specific volume charges Inverted (tiered) volume charges (single family residential) Seasonal charges Other rate design features Wholesale rates Large commercial/industrial rates Interruptible service rates Strength charges Outside city (district) rates

23. 23 Conservation Rate Structures  Seasonal Rate $ per unit of water in winter, higher $ per unit of water in summer  Uniform Single Block $ per unit for all water use  Increasing Block Rate $ per unit of water that increases above each threshold of usage (most commonly 3 blocks, can be any number of blocks) Appropriate for classes exhibiting relatively constant usage, demand patterns (multi- family residential; commercial/industrial) Reflects peak capacity costs; encourages conservation; appropriate for multi-family and commercial customers Reflects peak capacity costs; encourages conservation; appropriate for single family residences

24. 24 Other Rate Design Features Wholesale rates Reflect limited service commitment –Some costs may not be applicable to wholesale service Different, typically higher, cost of service basis –Includes a return on utility investment –May include “non-cash” costs of service –May include charges for unique services, facilities Usually lower than retail rates! Large/industrial customer rates Large customer with unique usage requirements Often “ tailored ” to directly reflect service costs May include capacity (take or pay) features Often based on “ bulk ” statistics (million gallons, pounds of pollutants)

25. 25 Other Rate Design Features Interruptible service rates Used as a peak shaving rate form Customer is requested to interrupt service Customer is provided lower overall rate as a “credit” for willingness to interrupt Strength charges (sewer) Outside city (district) rates Commonly a rate multiplier ( 1.10-1.50) Premised on “renter” rather than “owner” Can be cost-based –Higher costs due to location –Benefits of utility government w/o costs –Different usage patterns –Higher infrastructure needs (lower density) –Risk & return

26. 26 Summary of Rate Design Final adopted rate designs should: Collect the desired level of revenues Reflect the way costs are incurred (fixed vs. variable) Reflect the balance of policy objectives against the desire for cost based rates

27. 27 What’s Right for You? What do you wish to accomplish? What information can you use? What structures can your system handle? Will the message be received? Is it worth it?

28. 28 About the Speaker Karyn Johnson is a Principal and Firm shareholder for FCS GROUP with over 22 years of professional experience, including 15 years as a municipal rate consultant. She specializes in performing a variety of financial studies including fiscal policy development, capital financial plans, capital connection charges, revenue requirements, cost of service/rate design, and wholesale/regional water supply issues. Her consulting engagements number in excess of 200 and encompass water, wastewater, and stormwater programs. Karyn is known for her effective style of communicating technical information in public process, stakeholder participation, staff review, and industry training forums. She is a member of BCWWA and presented at the 2006 annual conference on “Transitioning to Universal Metering & Water Conservation Rates.” Karyn Johnson FCS GROUP 7525 16 6th Ave NE Suite D-215 Redmond, WA 98052 425-867-1802 x241 Email: karynj@fcsgroup.com