Utility Rates 201 Raleigh, NC - University of North ... Rates 201 Raleigh, NC ... As A Surrogate for...
Transcript of Utility Rates 201 Raleigh, NC - University of North ... Rates 201 Raleigh, NC ... As A Surrogate for...
Rate DesignOk, we know what we need, how do
we get it?
What approaches are fair, safe, logical?
How can we change from where we are?
And how do we get our Council to make a change?
And how do we keep our jobs?
RecapBase Max Day Max Hour Meters Bills Fire Protection Total
O&M $ 4,761,540 $ 1,909,462 $ 1,932,287 $ 826,585 $ 468,777 $ 413,292 $ 10,311,943
Capital 5,348,846 1,919,589 1,199,993 95,869 39,945 39,945 $ 8,644,188
$ 10,110,386 $ 3,829,051 $ 3,132,280 $ 922,454 $ 508,722 $ 453,238 $ 18,956,131
Allocated Costs Billable Units Unit Costs
Residential $ 11,397,943 6,430,654 $ 1.77
Commercial $ 3,184,163 2,229,274 $ 1.43
Industrial $ 1,936,424 1,541,405 $ 1.26
Irrigation $ 553,188 236,109 $ 2.34
Base Charge $ 1,884,413 47,515 $ 3.30
Common Issues Will our rates generate enough revenue?
Are these rates fair?
How different are these rates from what we have now?
Can we implement these rates?
What will the Mayor say?
How will this impact Anytown?
So What's the Problem?
Existing Percent
Model Change Change Change
Residential 1.77$ 1.45$ 0.32$ 22%
Commercial 1.43$ 1.45$ (0.02)$ -1%
Industrial 1.26$ 1.45$ (0.19)$ -13%
Irrigation 2.34$ 1.45$ 0.89$ 61%
Base Charge 3.31$ 2.00$ 1.31$ 66%
Review of the Global Rate Setting Principles Rates should be cost based and equitable and set at
such a level that they meet the full revenue requirements of the utility.
Rates should be easy to understand and administer
The process of allocating costs should conform to generally accepted rate setting techniques.
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Financial Planning Assure Financial Viability
Utilize as a Capital Planning Tool
Use as a Strategic Planning Tool
Use as a Basis to Develop and Minimize Rates
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Capital Budgeting - Key Issues Financial Planning Process – Balancing the Equation
Revenue = O&M + Debt + Rate Funded Capital
Capital and Debt Often Drive Rates
Need for Strategic Capital Planning
Typical Result is a Capital Improvement Plan
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Why are Rate Studies Important? Avoids Interclass and Intraclass Rate Subsidies -
Fairness
Avoids “Rate Shock”
Tracks Costs and Provides Accurate Price Signal (Price = Costs)
Helps Manage Revenue Stability
Legal Considerations
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Objectives When Setting Rates Revenue Stability and Sufficiency Continuity in Rate Philosophy Cost-Based Equitable Ability to Pay Simplicity (Administrative and Customer
Understanding) Defendable Legal and Regulatory Constraints
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Review of the Global Rate Setting Principles Rates should be cost based and equitable and set at
such a level that they meet the full revenue requirements of the utility.
Rates should be easy to understand and administer
The process of allocating costs should conform to generally accepted rate setting techniques.
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Utility Basis vs. Cash Basis
Cash Basis
Utility
Basis
+ O&M Expenses + O&M Expenses
+ Tax/Transfer Payments + Tax/Transfer Payments
+ Debt Service + Depreciation Expense
+ Capital Projects Funded from Rates + Return on Rate Base
= Total Revenue Requirements = Total Revenue Requirements
Where Rate Base =
+ Original Cost of Plant
- Accumulated Depreciation
= Net Plant in Service
+ Working Capital
- Contributions in Aid
= Rate Base
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Utility Basis vs. Cash Basis Pros and ConsUtility Basis
Stable over time.
Common for Investor Owned Utilities
Requires return calculation
Return can look like a profit from customers perspective
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Utility Basis vs. Cash Basis (cont.)Cash Basis
Simple
Conforms with budget process
Problem of “lumpy” funding of capital improvements
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Depreciation Definition: A decrease or loss in value, because of age,
wear, or market conditions.
Funding of depreciation would provide a reserve to proactively replace depleting assets.
Implementation Gyrations Costs don’t match up with rates
Historic protection of customer classes
Setting rates by voter profile
Residential vs. all others
Inside vs. outside
Funding Options Revenue Bonds – must have the ability to repay.
Grants – subject to availability and qualifications.
Rate Increase.
Combination of all of the above.
Old Fashioned WisdomDeclining Block
As A Surrogate for Customer Class Rates
Existing Percent
Recomm. Rates Change Change
First Black 0 - 10k $ 1.74 $ 1.45 $ 0.29 20%
Second Block 10k - 50k $ 1.66 $ 1.45 $ 0.21 14%
Third Block 50k + $ 1.40 $ 1.45 $ (0.05) -3%
Irrigation $ 2.40 $ 1.45 $ 0.95 66%
Base Charge $ 3.31 $ 2.00 $ 1.31 66%
Common Objectives Revenue sufficient
Implementable
Equitable
Not burdensome
Forward looking
Increasing fund balances
Competitive
Objectives In Conflict Revenue sufficient vs. affordability
Implementable vs. revenue adequacy
Equitable vs. consistent with existing rates
Not burdensome vs. revenue sufficiency
Forward looking vs. implementability
Increasing fund balances vs. affordability
Competitive vs. revenue sufficiency
Prioritization Revenue sufficiency
Bond covenants
Long term needs
Implementable
Relative to existing rates
Relative to political realities
Equity, affordability, conservation
Start with what you have Get a sense of the percentage increase needed
Is an across-the-board increase appropriate?
Confidence in your existing rates?
Known issues?
Compounding can cause distortions
Project Your Cost
Projection of Costs
Anytown Water System
Test Year -
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014Projection
Basis
Labor:
Salaries and Wages 9,680,000$ 10,164,000$ 10,672,200$ 11,205,810$ 11,766,101$ 2
Overtime 370,000 388,500 407,925 428,321 449,737 2
Retirement 690,000 724,500 760,725 798,761 838,699 2
FICA 770,000 808,500 848,925 891,371 935,940 2
Group Insurance 1,960,000 2,058,000 2,160,900 2,268,945 2,382,392 2
Worker's Compensation 140,000 147,000 154,350 162,068 170,171 2
Employment Security Commission 10,000 10,500 11,025 11,576 12,155 2
Other Benefits-Disability Insurance 140,000 147,000 154,350 162,068 170,171 2
Subtotal: Labor 13,760,000$ 14,448,000$ 15,170,400$ 15,928,920$ 16,725,366$
Supplies & Maintenance:
Printing and Office Supplies 150,000$ 154,500$ 159,135$ 163,909$ 168,826$ 3
Safety Equipment and Supplies 100,000 103,000 106,090 109,273 112,551 2
Equipment Maintenance 60,000 61,800 63,654 65,564 67,531 5
Vehicle Operations & Maintenance 340,000 350,200 360,706 371,527 382,673 2
Const. Equipment Ops & Maintenance 100,000 103,000 106,090 109,273 112,551 1
System Operations & Maintenance 2,100,000 2,163,000 2,227,890 2,294,727 2,363,569 1
Building & Grounds Maintenance 550,000 566,500 583,495 601,000 619,030 1
Treatment & Filter Supplies 1,130,000 1,163,900 1,198,817 1,234,782 1,271,825 1
Lab Supplies 210,000 216,300 222,789 229,473 236,357 1
Subtotal: Supplies & Maintenance 4,740,000$ 4,882,200$ 5,028,666$ 5,179,526$ 5,334,912$
Outside Services:
Utilities 2,320,000$ 2,412,800$ 2,509,312$ 2,609,684$ 2,714,072$ 1
Telephone 290,000 301,600 313,664 326,211 339,259 2
Uniforms 60,000 62,400 64,896 67,492 70,192 2
Legal 100,000 104,000 108,160 112,486 116,986 3
Consulting Services 350,000 364,000 378,560 393,702 409,450 3
Audit 20,000 20,800 21,632 22,497 23,397 3
Fees and Support Services 200,000 208,000 216,320 224,973 233,972 3
Postage and Delivery 160,000 166,400 173,056 179,978 187,177 3
Advertising 2,000 2,080 2,163 2,250 2,340 3
Other Outside Services 610,000 634,400 659,776 686,167 713,614 1
Subtotal: Outside Services 4,112,000$ 4,276,480$ 4,447,539$ 4,625,441$ 4,810,458$
Education & Training Expenses:
Education & Training 150,000$ 151,500$ 153,015$ 154,545$ 156,091$ 2
Meals & Lodging 20,000 20,200 20,402 20,606 20,812 2
Transportation 10,000 10,100 10,201 10,303 10,406 2
Membership & Dues 60,000 60,600 61,206 61,818 62,436 2
Employment Expenses 50,000 50,500 51,005 51,515 52,030 2
Employee Programs 60,000 60,600 61,206 61,818 62,436 2
Company Training Programs 70,000 70,700 71,407 72,121 72,842 2
Safety Training & Programs 60,000 60,600 61,206 61,818 62,436 2
Subtotal: Education & Training 480,000$ 484,800$ 489,648$ 494,544$ 499,490$
Other Company Expenses:
Property and Liability Insurance 160,000$ 164,800$ 169,744$ 174,836$ 180,081$ 5
Public Relations & Information 100,000 103,000 106,090 109,273 112,551 2
Contingency 40,000 41,200 42,436 43,709 45,020 2
Bad Debt Expense 140,000 144,200 148,526 152,982 157,571 4
Government Transfers (b) 850,000 875,500 901,765 928,818 956,682 4
Subtotal: Other Company Expenses 1,290,000$ 1,328,700$ 1,368,561$ 1,409,618$ 1,451,906$
Sales Projections
Projection of Sales
Anytown Water System
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Unit Sales
Residential 6,430,654 6,880,800 7,018,416 7,158,784 7,301,960
Commercial 2,229,274 2,385,323 2,433,030 2,481,690 2,531,324
Industrial 1,541,405 1,649,303 1,682,289 1,715,935 1,750,254
Irrigation 236,109 252,637 257,689 262,843 268,100
Base Charge 47,515 50,841 51,858 52,895 53,953
Rate Projections
Projection of Rates
Anytown Water System
Current FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Residential $ 1.45 $ 1.70 $ 1.82 $ 1.85 $ 1.89 $ 1.93
Commercial 1.45 1.70 1.82 1.85 1.89 1.93
Industrial 1.45 1.70 1.82 1.85 1.89 1.93
Irrigation 1.45 1.70 1.82 1.85 1.89 1.93
Base Charge 2.00 3.31 3.54 3.61 3.68 3.76
Percentage Adjustment 17% 7% 2% 2% 2%
Selling is part of doing Achieve Customer Understanding, Trust
and Approval Reach out to the kids
Reach out to the elected officials
Public workshops
Partnering Process Seek Input
Incorporate stakeholder feedback
Ensure communication - web page, bill stuffers
Consumption by Monthly Amount
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100,000
200,000
300,000
400,000
500,000
600,000
700,0000 4 8
12
16
20
24
28
32
36
40
44
48
CCF / mo.
To
tal Resid
Comm
Industrial
Cumulative Consumption By Monthly Amount
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1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
0 3 6 9
12
15
18
21
24
27
30
33
36
39
42
45
48
51 +
Monthly
Cum
ula
tive
Resid
Comm
Industrial
Fixed and Variable Charges Everything is fixed.
Everything is variable.
High fixed charge promotes revenue stability
High variable charges promote water conservation
Minimum Fixed – meter reading, postage, administrative costs, etc.
Declining Block Rates Charge less for usage in higher blocks.
Was very popular several years ago.
For example:
Consumption between 0 and 10,000 gallons in a month is billed at $2.50 per thousand gallons
Consumption between 10,000 and 20,000 gallons is billed at $2.25 per thousand gallons
Consumption over 20,000 gallons is billed at $1.75 per thousand gallons
Inclining Block Rates Charge more for usage in higher blocks
For example:
Consumption between 0 and 10,000 gallons in a month is billed at $2.50 per thousand gallons
Consumption between 10,000 and 20,000 gallons is billed at $3.00 per thousand gallons
Consumption over 20,000 gallons is billed at $4.00 per thousand gallons
Use care with increasing blocks Crude increasing blocks, (some as low as 8,000
gallons per month), can penalize large families.
Increasing blocks for commercial can penalize large businesses. If a large business is not more demanding on a water system than a group of smaller customers, such blocks can work against basic equity.
Uniform Unit Charges Major Advantages
Generally easy to implement, administer, and update
Are understandable and accepted by most customers
Major Disadvantages
Does not fully allocate system costs associated with peak/seasonal demand to usage which creates the peaks
May only marginally achieve conservation objectives
Excess (Individualized) Rates Rates that increase when usage goes above an
established “allotment”
Reflect individualized allotments for each customer
Often using 3 winter months to capture indoor usage
Effective, requires good billing data.
Water Conservation Mandated conservation efforts becoming more
common
Good practice in water-short regions
Good practice in terms of public relations