Wilderness Rim Association Water Rate and Reserve Study Board Meeting April 23, 2014 Presented By:...

Wilderness Rim Association

Water Rate and Reserve Study

Board MeetingApril 23, 2014

Presented By: Chris Gonzalez, Project Manager

Agenda

Overview of Utility Rate Making

Discussion of Utility Financial Policies

Sources & Uses of Funds

Utility Reserve Structure

System Reinvestment (Funded by Surcharge)

Financial Performance Standards

Summary of Financial Forecast & Rate Strategy

Questions/Discussion

Introduction to Utility Rate Making

Utility rates are set to recover the cost of providing service Utilities incur two primary types of costs:

Operating costs (regular/ongoing) • Employee salaries and benefits• Power and chemicals• Asset repair and maintenance

Capital costs (inconsistent/limited)• Infrastructure replacement• Facility expansions and upgrades Year 1 Year 2 Year 3 Year 4 Year 5

Operating Capital

General Methodology

3. Define

Rate Revenue

Requirement

2. Forecast Revenues

2. Forecast Expenses

1. Establish Policy Framework

Policy Framework

Fiscal policies provide a sound basis for financial management of a utility, addressing various topics including (but not limited to):


Utility Reserves (Structure & Levels)

Rate-Funded Capital Reinvestment



The water utility is an “enterprise” Water rates are set based on the cost of providing service Water utility costs are funded by water utility revenues, without

support from the General Fund or assessment revenues

The utility maintains a separation of capital and operating resources/expenditures Current budget reflects an allocation of surcharge revenue to the Water

Reserve (for capital) Revenue from water sales and other operating revenues must fund the

cost of system operation and maintenance

Utility Reserve StructureThe Association maintains a separate ‘Water Reserve’ for capital expenditures. Potential purposes for this reserve include:

Potential Purpose Sample Balance Target

Segregating funds designated for capital purposes • (No explicit minimum balance)

Protecting against capital cost overruns • 10% of rolling six-year capital improvement program

Providing funding for emergency infrastructure replacement

• 2% of fixed asset cost (≈ $8,500)or

•Cost of most expensive asset (could be ≈ $250,000 for original water system)

Providing funding for a long-term asset management program

•Linked to water system replacement cost (could be ≈ $1 million based on current system valuation)

Considerations for Sizing Water Reserve

Potential exposure to financial liability Regulatory changes (e.g. water quality or fire flow standards) Other capital investment needs identified in Water System

Management Plan Accumulating infrastructure replacement liability

Availability of other funding sources Limited access to external funding can justify a larger fund balance

Potential impacts to ratepayers Reserve funding comes from monthly surcharges imposed on

customers (currently $8.00 per bimonthly billing period per customer)

Other Utility ReservesOther common reserves not currently in place for the Water Utility:

Operating Reserve Intent: Manage short-term

fluctuations in revenue andexpense cycles

Benchmark: 30 – 45 days (8 – 12%) of budgeted operating expenses• 2013-14 Budget Target balance of $19,500 – $29,250

Rate Stabilization Reserve (Not Funded In This Study) Intent: Protect against revenue loss during low-sales years Benchmark: 20 – 25% of annual rate revenue

• Goal: Cover a 10% revenue shortfall for up to 2.5 years• 2013-14 Budget Target balance of $42,300 – $52,900

Jul-Aug Sep-Oct Nov-Dec Jan-Feb Mar-Apr May-Jun

Water Sales Revenue Expenses

System Reinvestment

The Association’s water rates are set to cover the cost of system operation and maintenance

Funding for asset replacement is an important part of a long-term rate-management strategy Infrastructure replacement can be costly Deferred maintenance also has costs

Potential benchmarks for annual system reinvestment funding Depreciation expense (based on original cost) Depreciation expense (based on replacement cost) Sinking fund (based on anticipated needs)

System Reinvestment: WRA Example Assumptions:

Cost of original water system (1986): $247,061

• 50-year useful life replace original water system in 2036

• 3% annual cost inflation estimated 2036 replacement cost = $1.3 million 1% investment interest rate 2013 Reserve Balance: $502,937 Projected 2014 – 2019 capital expenditures: $75,510

Potential benchmarks for annual system reinvestment funding: Original-Cost Depreciation: $247,061 50 years = $4,941 Replacement-Cost Depreciation: $4,941 × (1.03)Asset Age

Sinking Fund: $27,382

Annual transfer needed to fully cover projected replacement cost in projected year of replacement, given other projected expenses

Annual transfers escalate with inflation, ranging from $10,983 – $21,677 per year

System Reinvestment: WRA Example

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

Asset Replacement Cost Original-Cost DepreciationReplacement-Cost Depreciation Sinking Fund

Cash Accumulated for Replacement of Original Water System

Replacement-cost basis funds ≈ 81% of replacement liability

Original-cost basis funds ≈ 52% of replacement liability

Replacement Cost in 2036: $1.3 Million

System reinvestment policies intend to generate a reasonable level of cash funding, considering near-term financial impacts.

WRA Surcharge for System Reinvestment

The Association currently charges its customers a bimonthly surcharge of $8.00 per account Projected to generate ≈ $31,000 per year 2013-2014 Budget: Revenue goes to reserve for capital

Annual transfer of ≈ $36,000 would be needed to cash-fund replacement of all current water system assets Based on projected infrastructure replacement needs, assuming that

assets need to be replaced 50 years from their acquisition date Relies on available water system asset records and assumptions (see

previous WRA system reinvestment example) Would equate to a bimonthly surcharge of ≈ $9.30 per account


Goal: Water utility generally maintains non-negative cash flow Water revenues are adequate to cover the water utility’s expenses Short-term deficits may be allowed as part of a multi-year rate strategy

Goal: Maintain reserves at or above targeted levels Rate studies should plan to meet reserve targets If a reserve’s balance falls below its target level, the Association should

plan to replenish it over several years

Goal: Comply with financial performance requirements established by debt agreements Not currently (or expected to be) an issue for the Association May become an issue if the Association needs to secure external

financing (e.g. bank loan) to fund capital projects

Revenue Forecasting

Water Sales222467

81%

Surcharges3706214%

Other13500

5%

2013-2014 Revenue

Water Sales:

• Based on estimated FY-2013-14 sales revenue and prevailing water rates

• Assumes no growth

Surcharges:

• Estimated based on customer statistics and prevailing surcharges

‒ Water surcharge ($8.00 per billing period) – ongoing

‒ Reserve study surcharge ($1.34 per billing period; expires in mid-2016)

Other Operating Revenues:

• Based on FY 2013-14 Budget (with no growth)

‒ Late Fees: $10,500

‒ Transfer Fees: $2,000

‒ Lock/Reconnect Fees: $1,000

Expense Forecasting

Sallal Water Pur-

chases119137.4

44%

Sallal O&M Contract42772.2

16%Other Water Operations

$5,200 2%

Water Reserve Transfers37062.1869333637

14%

Administrative Costs69296.4777377924

25%

2013-2014 Revenue

Sallal O&M Contract:

• Based FY-2013-14 Budget, reduced to reflect WRA’s assumption of billing responsibilities as of Jan 2014

• 4% increase for FY 2014-15 negotiated with Sallal

• Assumed to increase by 3% per year beyond FY 2014-15

Administrative Costs:

• Water utility’s allocation based on FY 2013-14 Budget

• Increased to reflect WRA’s assumption of billing responsibilities as of Jan 2014

• Labor costs increase by 2.5 – 4.0% per year; other costs increase with inflation (1.7 – 2.5% per year).

Sallal Water Purchases:

• Based on FY 2013-14 Budget

• 4% increase for FY 2014-15 negotiated with Sallal

• Assumed to increase by 3% per year beyond FY 2014-15

Water Reserve Transfers:

• Reflects transfer of surcharge revenues to reserve

Other Water Operations:

• Based on FY 2013-14 Budget

• Assumed to increase with inflation (1.7 – 2.5% per year)

Capital Needs Forecast

2014 2015 2016 2017 2018 20190

10000

20000

30000

40000

50000

Cash84913.3568473

257100%

Capital Costs Through 2019*: Sampling Stations: $37,250 Hydrant Modifications: $9,403 Meter Replacements: $5,321 Water System Plan Update: $32,939 Total: $84,913

Planned Funding Strategy: $84,913 in cash funding from

existing Water Reserve resources and surcharge revenue

*Reflects adjustments for future cost inflation at ≈ 3.2% per year

Water Revenue Requirement Analysis

Revenue at existing rates is insufficient to fully cover costs Partially due to increase in allocation of admin costs to water utility

• Driven by assumption of meter reading/billing duties by WRA

Operating deficit is expected to grow as costs increase over time

Recommended financial policies also have an impact… Water utility does not currently have an operating reserve

• General Fund operating reserve can be used in emergencies

• Goal is for the water utility to be self-sustaining

Assumed $71,000 interfund loan from the Water Reserve• Funds water utility operating reserve and enables the phasing of rate

increases over several years

• Balances recommended “sources and uses” and “financial performance” policies with near-term financial reality

Water Utility Financial Forecast

Forecast Summary Current FY 2015 FY 2016 FY 2017 FY 2018 FY 2019Annual Rate Increase 9.0% 9.0% 9.0% 8.0% 8.0%Bimonthly Bill @ 1,100 CF $54.12 $58.99 $64.30 $70.09 $75.70 $81.76Plus: Surcharges 9.34 9.34 9.34 8.00 8.00 8.00Total Bimonthly Bill $63.46 $68.33 $73.64 $78.09 $83.70 $89.76Change From Prior Year $4.87 $5.31 $4.45 $5.61 $6.06% Change From Prior Year +7.7% +7.8% +6.0% +7.2% +7.2%

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 $-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Cash Operating ExpensesInterfund Loan RepaymentRevenue @ Existing RatesRevenue @ Proposed/Projected Rates

Existing Op-erating Deficit

17%

Future Op-erating Cost

Increases40%

Funding Operating Reserve

12%

Phasing In Rate

In-creases31%

Breakdown of Cumulative IncreaseAlternative:

Upfront rate increase of ≈ 28%

Recommendations

Establish a separate operating reserve for the water utility

Consider establishing a rate stabilization reserve as resources allow Provides protection against revenue risk resulting from low-sales years

Maintain surcharge of $8.00 per month per account Continue to allocate surcharge revenue to the Water Reserve System reinvestment is an ongoing need consider integrating into the

“basic” water rate (rather than as a separate “surcharge”)

Increase water rates by 9% for FY 2015

Review utility rates annually

Wilderness Rim Association Water Rate and Reserve Study Board Meeting April 23, 2014 Presented By:...

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