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Utility Ratemaking & Management 2 Goal: Rates That Reflect - - PowerPoint PPT Presentation
Utility Ratemaking & Management 2 Goal: Rates That Reflect - - PowerPoint PPT Presentation
Utility Ratemaking & Management 2 Goal: Rates That Reflect Your Priorities Rates should reflect each communitys balance of sustainability Social Fair & equitable distribution of costs Promote public policy objectives
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Goal: Rates That Reflect Your Priorities
Rates should reflect each community’s balance of sustainability Social
Fair & equitable distribution of costs
Promote public policy objectives (affordability and economic development)
Environmental
Promote resource conservation
Fund cost of regulatory compliance
Economic
Satisfy operating costs
Fund asset management
Meet financial policies
Provide fiscal stability
Service existing & new debt
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Ratemaking Process Helps Overcome Challenges to Sustainability
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Actual Client’s Financial Plan
Before Hawksley engagement
Recent economic conditions set many communities back
Accelerated trends of declining water usage
Reduced revenues/lack of increases required deferral of maintenance/capital
Non-discretionary programs funded through reserves
Cost of operations and regulatory compliance continues to rise Recovery is very difficult given current environment
Political will and stakeholder resistance to increases in rates
Deferrals of key programs are/will have significant consequences in terms of level of service and quality of life Rate studies educate the public about the challenges facing utilities and the consequences of the status quo Studies are done with stakeholder involvement and usually result in sustainable solutions that are acceptable to the public
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Core Steps of Utility Ratemaking Process
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Fundamental Components 1. Revenue Requirement 2. Cost of Service 3. Rate Design 4. Stakeholder Education
Revenue Requirement Analysis: Compares revenues to
- perating & capital costs to determine adequacy of existing rates
Cost of Service Analysis: Allocates the revenue requirements of the system to customers in a fair and equitable manner Rate Design Analysis: Considers the level and structure of rates that will collect revenue requirements from each customer class Stakeholder Education: Explains the status quo, key issues/objectives, drivers of adjustments, and comparisons to local and national trends
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Consider Efficiency & Needs: May Not Need to Perform All Steps Each Year
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Analysis & Outreach Revenue Requirements
- Operating Costs
- Capital Costs
- Financial Policies
- Debt Coverage
- Reserves
Cost Allocation
- Define Classes of
Users
- Fair & Equitable
- Comparison to Current
Revenue Recovery
Rate Design
- Evaluate Objectives
- Conservation
- Identify Structures
- Customer Impacts
- Fee & Policy Review
- Adjustment Drivers
- National Trends
- Local Practices
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Selecting the Right Rate Structure For You
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Identify structure that meets your needs:
Conforms to industry practice
Meets all legal requirements
Easy to administer/understand
Elasticity of demand & weather
Conservation and affordability
Stakeholder input/concerns
Critical considerations:
Understanding the drivers and distribution of system costs
Integrating financial considerations
Reserve policies & revenue stability
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Most Common Rate Structures
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Uniform Rate Structure
Same rate regardless of usage
Most common rate structure
Declining Block
Rate decreases for higher levels of usage
Typically used to encourage economic development and minimize bills for large users
Was a very common and successful way of creating cost-based rates for customer classes within a single rate schedule
Usage Rate Usage Rate
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Most Common Rate Structures
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Inclining Block
Rate increases for higher levels of usage
Intended to encourage water conservation
Typically applied to single-family residential customers due to consistent usage within the class and to irrigation-only meters
Rarely appropriate to apply to non-residential customers
Pyramidal Block
Rate increases then decreases with higher usage
Intended to provide water conservation at lower usage levels and reduced impact on larger users
Allows for single structure that accommodates large users
Usage Rate Usage Rate
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Most Common Rate Structures
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Seasonal
Higher rates in peak times of year
May be appropriate for communities with customer classed that demonstrate seasonal usage patterns
Unique Tiers or Water Budgets
Forms of inclining block rates based on specific customer behavior or pre-determined efficient use allowances
Different blocks based on usage allowance per customer, class, lot size, or other factors
Structure used to focus higher rates on peak usage or to encourage wise use of water
Usage Rate Summer Winter Usage Rate
SLIDE 11
North Carolina Rate Structures
(Source: February 2015 UNC EFC Rate Survey)
11 Our Conclusions: 1. Many systems still have uniform rates 2. Large systems have inclining block rates 3. Non-residential structures are more varied 4. Not many seasonal rate structures (Other)
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Understanding Cost Allocation is Important in Selecting Rate Structures
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Analysis & Outreach Revenue Requirements
- Operating Costs
- Capital Costs
- Financial Policies
- Debt Coverage
- Reserves
Cost Allocation
- Define Classes of
Users
- Fair & Equitable
- Comparison to Current
Revenue Recovery
Rate Design
- Evaluate Objectives
- Conservation
- Identify Structures
- Customer Impacts
- Fee & Policy Review
- Adjustment Drivers
- National Trends
- Local Practices
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Cost of Service Allocation Process
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Review Historical Customer Data
- Examine customer
class usage
- Identify peak use
Evaluate Customer Classes
- Evaluate existing
customer classes
- Water: Peaking factors
and type of customer
- Sewer: Strength and
volume
- Consider industry
practices & local issues
Allocate Revenue Requirements
- Identify cost of
service & offsetting revenue (misc. fees)
- Allocate to systems
and then to functions
- Distribute costs to
users in proportion to contribution to each system function
Analysis/Use
- f Output
- Compare allocations to
current revenue
- Use as basis for
setting rates by class
- Rate structure and/or
level of rates unique to each class
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Utilize Available Industry Resources
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AWWA Manual M-1
Includes methods of detailed cost allocations to functions and ultimately to customers in proportion to their contributions to each system component
Very data intensive
Commonly utilized by larger systems
AWWA Manual M-54
Costs are less granularly allocated to customer classes through rate structure
Data readily available from utility billing systems, such as meter size, dwelling units, and annual and monthly customer use, are used to establish rate structures that more generally apportion costs to customers
Most common approach by small systems
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Cost of Service Determines Revenue to Be Recovered By Customers
15 Allocate costs to system
functions & review customer types
Apply methods/criteria
best suited for data, circumstances & goals
Review analysis
collaboratively
Key issues, allocation criteria, sensitivity of assumptions, etc. Establish revenue to be
recovered by rates for each customer class
Compare to current rates
Water Cost of Service Wastewater Cost of Service
→ Source of Supply → Treatment & Disposal → Treatment → Collection → Transmission → Reclaimed Water → Distribution → Chemical Oxygen Demand → Meters & Services → Suspended Solids → Billing & Collection → Phosphorus → Residential → Ammonia → General Service → Residential → Residential Irrigation → General Service → General Irrigation → Reclaimed Water → Wholesale → High-Strength/Industrial → Wholesale Cost Functions Cost Functions Customer Classes Customer Classes
Residential Commercial Total Rev (000's) Rev (000's) Rev (000's) Water - FY16 Current Rate Structure 17,803 16,131 33,934 Inside 17,565 11,507 29,072 Outside 21 72 93 Irrigation 217 4,140 4,357 Hydrant
- 412
412 Water - FY16 COS Allocation 18,207 15,727 33,934 Inside 18,000 10,941 28,941 Outside 23 87 110 Irrigation 184 4,330 4,515 Hydrant
- 368
368
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Trend: Ensuring Linkages of Cost of Service to Conservation Rate Structures
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Goal: Capacity costs to higher demands when they occur
Can be easily done with seasonal or
inclining block structures
Goal: Price incentive to conserve when most discretionary use occurs
Typically done in tandem with a fixed
charge for revenue stability
Ensures cost recovery if demand
declines/changes
Water Cost of Service
→ Supply → Treatment → Transmission & Pumping → Customer Billing → Meters & Services → Base Demand → Maximum Day Demand → Maximum Hour Demand → Customer Billing → Meters & Services → Base Demand → Customer Billing → Meters & Services → Base Demand → Maximum Day Demand → Maximum Hour Demand → Customer Billing → Meters & Services Components Functions Non-Peak Peak
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Water Conservation Rate Features
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Most conservation rates are typically inclining block
Ranges of usage, with increasing rates for higher levels of use
Other options: seasonal rates or uniform rate (if high enough) Develop block ranges and pricing based upon your
demographic and usage data, objectives, and costs
Consider carefully crafted temporary adjustments
Drought/water use restriction surcharges to ensure adequate rev.
Consider designating “highest tier” revenues for incremental
spending only once realized
Don’t plan on revenue for any current year required costs
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Examples of Sizing of Inclining Blocks
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Use available
data/resources
US Census EPA (indoor use) Local Property
Data/GIS
TWDB, TCEG, Save
Water, etc.
Review all
customer usage profiles and property types
Consider local
- rdinances
Evaluate options
w/understanding of impacts
Tier 1 - Typical Indoor Usage Amount Tier Range People per Household 2.57 Typical Indoor Use (Gallons per Capital per Day) 70 Typical Essential Domestic Use (Tgal/month) 5,472 First Tier Usage Amount (Total) 5,000 Up to 5,000 gal. Tier 2 - Larger Family Indoor Usage Amount Tier Range Large Family - People per Household 5.00 Typical Essential Domestic Use (Tgal/month) 10,646 Second Tier Usage Amount (Total) 10,000 5,001 - 10,000 gal. Tier 3 - Irrigation for Typical Property Amount Tier Range
Square inches of area in 1/4 acre 1,568,160 % of area that is irrigable 33% Number of inches per watering 0.50 Gallons per cubic inch 0.0043290 Number of gallons per watering 1,131 Number of waterings per week 2.0 Gallons of irrigation per month 9,802 Third Tier Usage Amount 10,000 10,001 - 20,000 gal. Fourth Tier Usage Amount All Add. Use > 20,000 gal.
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Pricing Metrics of Inclining Block Rates
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Evaluate upon setting level of
revenue recovered in usage rates & size/number of tiers Example: 4 Block System 1st Block
Affordability Rate: % of 2nd Block
Local policy/objective
2nd Block
Uniform Cost / TGAL
3rd Block
Between 2nd and 4th Block rates (equidistant or other)
4th Block
Equal to full cost of new water supply, plus transmission
Review w/understanding of
customer impacts
Table 2-3 – Top Block Water Cost Details Cost Component Unit Cost (per 1,000 gal) CAP Water $0.45 Water Purchase Rights $0.61 Plant Expansion $0.75 Debt Service Coverage $1.66 Credit for SDF Paid
- $1.05
Total Marginal Unit Cost of Water $2.71 Unit Cost of Water Transmission $0.56 Total Top Block Rate $3.27
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Key Financial Consideration:
Mitigating Revenue Volatility
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Higher fixed charges provide stability, but reduce cost allocation and conservation message to high volume users Use reserve policies to address declining demands, weather, conservation rates, and/or lower fixed charges Consider local fixed cost recovery practices Rating agencies starting to provide guidance
Fitch: strong systems recover >=30% of revenue in fixed charges
% of Water Bill % of Sewer Bill % of Total Bill
Denton
28.8% 30.4% 29.5%
Min
12.7% 5.3% 12.6%
Max
78.6% 100.0% 74.0%
Average
38.5% 39.4% 39.0%
Median
37.6% 37.4% 39.5%
Description Fixed Charge %'s for 37 Entities Typical User
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Level of Base Charges in North Carolina
(Source: March 2016 UNC EFC Rate Survey)
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Larger systems have lower charges
Residential affordability More non-residential users Economies of scale
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Consumption in Base Charge/First Tier
(Source: March 2016 UNC EFC Rate Survey)
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2,000-6,000 TGAL in Tier 1 Not many w/use in base charges If done, only nominal amount
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Key Sustainability Challenge:
Fixed Cost Recovery
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Difficult to increase % due to disproportionate impact to low volume users Develop a target and multi-year plan to achieve it
Components of FY 2015 Utility Costs Amount % of Total Amount % of Total
Personnel Costs $1,044,517 21.7% $2,348,249 26.7% Variable Operating Costs $638,000 13.3% $1,153,650 13.1% Fixed Operating Costs $807,488 16.8% $1,240,033 14.1% Capital Outlay/Depreciation $230,000 4.8% $240,000 2.7% Administrative & General Expenses $1,685,520 35.0% $3,209,881 36.5% Engineering Expenses $408,812 8.5% $613,218 7.0%
Total Annual Costs
$4,814,337 100.0% $8,805,031 100.0%
Water System Fixed Variable
Operating Expenses 76.5% 23.5% Operating Revenue 50.0% 50.0%
- Avg. Fixed/Usage Fee Split of Other Local Entities
(Based on 6,000 Gal/Month Residential Bill)
35.7% 64.3%
Sewer System Fixed Variable
Operating Expenses 76.8% 23.2% Operating Revenue 50.0% 50.0%
- Avg. Fixed/Usage Fee Split of Other Local Entities
(Based on 6,000 Gal/Month Residential Bill)
34.9% 65.1%
Variable Operating Costs generally increase or decrease as system demand increases/decreases, and include power, chemicals, and sludge removal expenses. All
- ther costs are generally fixed and
independent of system demand.
Water Cost Sewer Cost
0% 25% 50% 75% 100% Water Cost Water Rev Sewer Cost Sewer Rev
Cost vs. Revenue Distribution
Fixed Variable
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Key Financial Considerations:
Reserve Policies
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General rules of thumb for reserves are provided by industry groups like AWWA:
Operating reserve equal >= 2 months of O&M
Capital reserve equal to the average annual cash funded CIP over the next 3 to 5 years
Also, rating agencies publish criteria relative to reserves that they use to evaluate the creditworthiness of utilities
Days of free cash (strong systems >= 365 days)
Reserve levels should be established considering risk from rates and weather:
Use of water conservation rates = more risk
Lower fixed charges = more risk
Exposure to drought conditions = more risk
Result: Typically have separate Operating, Capital, and Rate Stabilization Reserves
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Sustainable Rates Require Ongoing Proactive Financial Management
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Analysis & Outreach Revenue Requirements
- Operating Costs
- Capital Costs
- Financial Policies
- Debt Coverage
- Reserves
Cost Allocation
- Define Classes of
Users
- Fair & Equitable
- Comparison to Current
Revenue Recovery
Rate Design
- Evaluate Objectives
- Conservation
- Identify Structures
- Customer Impacts
- Fee & Policy Review
- Adjustment Drivers
- National Trends
- Local Practices
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Key Financial Consideration:
Impacts of Changes in Water Use
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Must consider to ensure adequate revenue
Review multiple years of use and population data Gather economic data, rainfall, rate changes, timing of conservation, etc… Identify relationship of drivers of use & recent trends Model growth in population & use/person separately (decline in use/person) Include price elasticity factors in revenue forecast Compare actual results to projections to refine assumptions over time
1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000
- 10
20 30 40 50 60 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
Gallons Inches Axis Title
Water Consumption Irrigation Consumption Annual Rainfall (In.)
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Fundamental Challenge of Ratemaking
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Price product such that it encourages customers to use less of it while at the same time recovering enough revenue and not
- vercharging
customers
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Best Practices in Summary
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Understand & prioritize objectives
Adherence to cost of service Promoting conservation Financial sustainability
Identify rate structure of best fit Develop sound financial policies based upon risks of rate structure & system
Utilize available industry resources
Use dynamic forecasting models
Evaluate alternative policies/programs Integrate changes in customer demands Ensure revenue recovery at lowest cost
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Model Example: Water Utility Financial Model Screen Capture
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FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 0.00% 7.00% 7.00% 7.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 29.66% 46.93% 0.00% 7.00% 7.00% 7.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 30.19% 46.80% 2.13 2.40 2.08 1.98 1.91 1.90 2.06 2.11 2.00 1.91 1.84 1.40 1.65 1.50 1.47 1.45 1.45 1.55 1.60 1.76 1.70 1.64 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 3.5 4.0 4.5 5.0 5.5 6.0 6.0 6.0 6.0 6.0 6.0
FINANCIAL ANALYSIS AND MANAGEMENT SYSTEM (FAMS) SUMMARY
Cumulative Change Residential Rate Increases Parity Indebtedness
Key Scenarios/Inputs
Commercial Rate Increases CIP Execution % ► Operating Reserve Mo ► Total Debt Coverage 5 10 15 20 25 30 35 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
Long-Term Borrowing
Current Plan
5 10 15 20 25 30 35 14 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
Operating
Current Plan Target
5 10 15 20 25 30 35 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
CIP Spending
Current Plan SAVE CALC
5 10 15 20 25 30 35 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
CIP Funding
Bonds Tap Fees Revenue Vehicle ROLL
10 20 30 40 50 60 70 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
Rev Vs. Exp
Cash In Cash Out Cash Out Excl. CIP
5 10 15 20 25 30 35 14 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
Contingency/RS
Current Plan Target
Larger near-term increases to achieve reserve and debt coverage targets Leads to inflationary increases in the future Preserves funds to address revenue stability issues Multi-year plan to achieve target balance Serves to reduce future borrowing needs Keeps system sustainable
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FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 0.00% 5.75% 5.75% 5.75% 5.75% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 29.55% 46.83% 0.00% 5.75% 5.75% 5.75% 5.75% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 30.19% 46.80% 2.09 2.29 2.07 1.90 1.93 1.90 2.05 2.09 1.98 1.89 1.82 1.38 1.57 1.49 1.41 1.46 1.45 1.54 1.59 1.75 1.69 1.63 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.0 6.0 6.0
FINANCIAL ANALYSIS AND MANAGEMENT SYSTEM (FAMS) SUMMARY
Cumulative Change Residential Rate Increases Parity Indebtedness
Key Scenarios/Inputs
Commercial Rate Increases CIP Execution % ► Operating Reserve Mo ► Total Debt Coverage 5 10 15 20 25 30 35 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
Long-Term Borrowing
Current Plan
5 10 15 20 25 30 35 14 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
Operating
Current Plan Target
5 10 15 20 25 30 35 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
CIP Spending
Current Plan SAVE CALC
5 10 15 20 25 30 35 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
CIP Funding
Bonds Tap Fees Revenue Vehicle ROLL
10 20 30 40 50 60 70 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
Rev Vs. Exp
Cash In Cash Out Cash Out Excl. CIP
5 10 15 20 25 30 35 14 15 16 17 18 19 20 21 22 23 24 25
Millions ($)
Contingency/RS
Current Plan Target
Model Example: Water Utility Financial Model Screen Capture (Alternative)
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Preserves funds to address revenue stability issues Slightly lower near-term increases to achieve reserve and debt coverage targets Still leads to inflationary increases in the future Extended Multi-year plan to achieve target balance Keeps system sustainable Continues to reduce future borrowing needs
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Implementation of Sustainable Solutions Requires Communication
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Analysis & Outreach Revenue Requirements
- Operating Costs
- Capital Costs
- Financial Policies
- Debt Coverage
- Reserves
Cost Allocation
- Define Classes of
Users
- Fair & Equitable
- Comparison to Current
Revenue Recovery
Rate Design
- Evaluate Objectives
- Conservation
- Identify Structures
- Customer Impacts
- Fee & Policy Review
- Adjustment Drivers
- National Trends
- Local Practices
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Be Able to Identify Key Challenges to Financial Sustainability & Drivers of Rates
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Compare Historical and Projected Increases to National Trends….
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0% 20% 40% 60% 80% 100% 120% 140% 160% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Cumulative Increase
US CPI - Water & Sewerage Maintenance Series
- vs. Manistee Total W/S Rate Increases
W&S CPI Manistee Historical New Structure FY 2015 - 2017 Recommendation
City has been consistently lower than the industry in water/sewer rate adjustments through 2014
Average annual increase of 7% per year for Water & Sewerage Series; City at 5% per year
Recommendations would fund needed improvements with rate adjustments lower than the industry
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Consider Preparing Key Issue Materials and…
(Provided by Payne Communications)
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Identify Ways For Customers to Conserve
(Provided by Payne Communications)
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Sustainable Solutions Are Possible
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What it Requires: Explicit and reality- based assumptions
With ongoing review
Inclusion of relevant staff/experts
Consider all impacts Ensure cost recovery
Use of available industry resources Real stakeholder communication
Involving key groups
early and often
Dedicated education
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Contact Information
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