Wilderness Rim Association Water Rate and Reserve Study Board Meeting April 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 Page 2
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 Page 3
General Methodology 1. Establish Policy Framework 2. Forecast 2. Forecast Revenues Expenses 3. Define Rate Revenue Requirement Page 4
Policy Framework Fiscal policies provide a sound basis for financial management of a utility, addressing various topics including (but not limited to): Sources & Uses of Funds Utility Reserves (Structure & Levels) Rate-Funded Capital Reinvestment Financial Performance Standards Page 5
Sources & Uses of Funds 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 Page 6
Utility Reserve Structure The 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 • (No explicit minimum balance) purposes • 10% of rolling six-year capital Protecting against capital cost overruns improvement program • 2% of fixed asset cost ( ≈ $8,500) Providing funding for emergency or • Cost of most expensive asset (could be ≈ infrastructure replacement $250,000 for original water system) • Linked to water system replacement cost Providing funding for a long-term asset (could be ≈ $1 million based on current management program system valuation) Page 7
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) Page 8
Other Utility Reserves Other common reserves not currently in place for the Water Utility: Operating Reserve Intent: Manage short-term fluctuations in revenue and expense cycles Jul-Aug Sep-Oct Nov-Dec Jan-Feb Mar-Apr May-Jun Water Sales Revenue Expenses 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 Page 9
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) Page 10
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 transfers escalate with inflation, ranging from $10,983 – $21,677 per year Annual transfer needed to fully cover projected replacement cost in projected year of replacement, given other projected expenses Page 11
System Reinvestment: WRA Example Cash Accumulated for Replacement of Original Water System Replacement Cost $1,400,000 in 2036: Replacement- cost basis funds ≈ $1.3 Million 81% of replacement liability $1,200,000 $1,000,000 System reinvestment policies intend to $800,000 generate a reasonable level of $600,000 cash funding, considering near- $400,000 Original- cost basis funds ≈ term financial impacts. 52% of replacement liability $200,000 $- 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 Asset Replacement Cost Original-Cost Depreciation Replacement-Cost Depreciation Sinking Fund Page 12
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 Page 13
Financial Performance Standards 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 Page 14
Revenue Forecasting 2013-2014 Revenue Other Operating Revenues: Surcharges: • Based on FY 2013-14 • Estimated based on Other Budget (with no growth) customer statistics and $13,500 ‒ Late Fees: $10,500 prevailing surcharges 5% ‒ Water surcharge ‒ Transfer Fees: $2,000 Surcharges ($8.00 per billing $37,062 ‒ Lock/Reconnect Fees: period) – ongoing 14% $1,000 ‒ Reserve study surcharge ($1.34 per billing period; expires in mid-2016) Water Sales $222,467 Water Sales: 81% • Based on estimated FY- 2013-14 sales revenue and prevailing water rates • Assumes no growth Page 15
Expense Forecasting Administrative Costs: 2013-2014 Revenue • Water utility’s allocation Sallal Water Purchases: based on FY 2013-14 Budget • Based on FY 2013-14 • Increased to reflect WRA’s Budget assumption of billing • 4% increase for FY 2014-15 responsibilities as of Jan 2014 Administrative negotiated with Sallal • Labor costs increase by 2.5 – Costs • Assumed to increase by 3% 4.0% per year; other costs $69,296 per year beyond FY 2014-15 Sallal Water increase with inflation (1.7 – 25% Purchases 2.5% per year). $119,137 Sallal O&M Contract: 44% Water Reserve Water Reserve Transfers: • Based FY-2013-14 Budget, Transfers • Reflects transfer of reduced to reflect WRA’s $37,062 surcharge revenues to Sallal O&M assumption of billing 13% reserve responsibilities as of Jan 2014 Contract Other Water $42,772 • 4% increase for FY 2014-15 Operations 16% negotiated with Sallal $5,200 Other Water Operations: • Assumed to increase by 3% 2% • Based on FY 2013-14 Budget per year beyond FY 2014-15 • Assumed to increase with inflation (1.7 – 2.5% per year) Page 16
Recommend
More recommend
