Wilderness Rim Association Water Rate and Reserve Study Board - - PowerPoint PPT Presentation
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
Board Meeting April 23, 2014
Presented By: Chris Gonzalez, Project Manager
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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
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Utility rates are set to recover the cost of providing service Utilities incur two primary types of costs:
Operating costs (regular/ongoing)
Capital costs (inconsistent/limited)
Year 1 Year 2 Year 3 Year 4 Year 5
Operating Capital
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Rate Revenue Requirement
Revenues
Expenses
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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
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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
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The Association maintains a separate ‘Water Reserve’ for capital
Potential Purpose Sample Balance Target Segregating funds designated for capital purposes
Protecting against capital cost overruns
improvement program Providing funding for emergency infrastructure replacement
$250,000 for original water system) Providing funding for a long-term asset management program
(could be ≈ $1 million based on current system valuation)
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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)
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Other common reserves not currently in place for the Water Utility: Operating Reserve
Intent: Manage short-term fluctuations in revenue and expense cycles Benchmark: 30 – 45 days (8 – 12%) of budgeted operating expenses
Rate Stabilization Reserve (Not Funded In This Study)
Intent: Protect against revenue loss during low-sales years Benchmark: 20 – 25% of annual rate revenue
Jul-Aug Sep-Oct Nov-Dec Jan-Feb Mar-Apr May-Jun Water Sales Revenue Expenses
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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)
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Assumptions:
Cost of original water system (1986): $247,061
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 – $21,677 per year
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$- $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000
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
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.
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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
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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
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Water Sales $222,467 81%
Surcharges $37,062 14% Other $13,500 5%
2013-2014 Revenue
Water Sales:
2013-14 sales revenue and prevailing water rates
Surcharges:
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:
Budget (with no growth) ‒ Late Fees: $10,500 ‒ Transfer Fees: $2,000 ‒ Lock/Reconnect Fees: $1,000
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Sallal Water Purchases $119,137 44%
Sallal O&M Contract $42,772 16%
Other Water Operations $5,200 2%
Water Reserve Transfers $37,062 13% Administrative Costs $69,296 25%
2013-2014 Revenue
Sallal O&M Contract:
reduced to reflect WRA’s assumption of billing responsibilities as of Jan 2014
negotiated with Sallal
per year beyond FY 2014-15 Administrative Costs:
based on FY 2013-14 Budget
assumption of billing responsibilities as of Jan 2014
4.0% per year; other costs increase with inflation (1.7 – 2.5% per year). Sallal Water Purchases:
Budget
negotiated with Sallal
per year beyond FY 2014-15 Water Reserve Transfers:
surcharge revenues to reserve Other Water Operations:
inflation (1.7 – 2.5% per year)
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10000 20000 30000 40000 50000 2014 2015 2016 2017 2018 2019
Cash $84,913 100%
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
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Revenue at existing rates is insufficient to fully cover costs
Partially due to increase in allocation of admin costs to water utility
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
Assumed $71,000 interfund loan from the Water Reserve
increases over several years
policies with near-term financial reality
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Forecast Summary Current FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Annual 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 $81.76 Plus: Surcharges 9.34 9.34 9.34 8.00 8.00 8.00 Total Bimonthly Bill $63.46 $68.33 $73.64 $78.09 $83.70 $89.76 Change 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%
$- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Interfund Loan Repayment Cash Operating Expenses Revenue @ Existing Rates Revenue @ Proposed/Projected Rates Existing Operating Deficit 17% Future Operating Cost Increases 40% Funding Operating Reserve 12% Phasing In Rate Increases 31%
Breakdown of Cumulative Increase
Alternative: Upfront rate increase of ≈ 28%
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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