HomeMy WebLinkAboutIR 9586 INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9586
To the Mayor and Members of the City Council August 13, 2013
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SUBJECT: Water Department FY2014 Projected Revenue Requirements
Each year the Water Department completes cost of service studies for Retail and Wholesale
customer classes for both water and sewer services. Those studies are used to determine the rates
that will be recommended to the City Council. The purpose of this Informal Report is to outline the
process and topics addressed in the FY2014 rate setting process and to provide the preliminary
change in water and sewer revenue requirements.
Retail Water and Sewer Rate Process
Retail rates paid by Fort Worth residents and businesses are based on the Department's cost of
service, which is established as part of the annual budget process using industry approved standards.
Once the cost of service is determined, the preliminary rates, and specific topics that might affect the
rates structure, are presented to the Department's informal Water and Wastewater Retail Rate
Structure Stakeholder Group for input and feedback. This group is comprised of customers
representing the various retail customer classes; residential, commercial, industrial, irrigation and
super users. The group is charged with ensuring equity among customer classes and making
recommendations on how costs are distributed within established rate structures.
Water Department staff met with the Stakeholder Group on June 5, 12 and 19 to present budget
drivers and costs, trends in water and wastewater usage over the last decade, and preliminary
FY2014 rates for both water and sewer service. Staff requested feedback on specific issues
impacting revenue recovery and rate structure. These included the distribution of fixed vs. variable
revenue for retail water service, phase-in of a correction in budgeted retail sewer volumes, and the
elimination of the cap on the Winter Quarter Average (WQA) calculation for residential sewer service.
Budget Drivers
The Department began FY2013 with a $5,940,698 adopted budget deficit and a planned use of debt
service reserves to offset the shortfall. To overcome this deficit and prevent further use of reserves in
FY2014, the FY2014 revenue requirement for retail water service exceeds the expenditures to be
recovered through FY2014 rates. In addition to the operating deficit, the cost of the raw water
purchase from the Tarrant Regional Water District (TRWD) will increase in FY2014 by 14.9%, or
$9,268,140 over FY2013, for a total cost of$71,461,857. This increase includes a 10% increase in
the rate from TRWD and 4.9% increase in projected volumes. The primary driver of the rate increase
from TRWD is the cost of the Integrated Pipeline project, which will transport additional water from
Cedar Creek and Richland Chambers Reservoirs to Tarrant County by 2020 to support growth.
Fixed vs. Variable Water Revenue
Currently, 17% of retail water revenue is derived through fixed monthly service charges while 83% is
variable based on volume usage, which is weather dependent and leads to instability in revenue
collection and cash flow. Current water demands are flat or declining on a per account basis due to
conservation efforts and more water-efficient appliances and plumbing code requirements, while the
Department's fixed costs continue to grow. Staff engaged Red Oak Consulting to analyze this issue,
as well as the impacts of conservation efforts on revenue. Red Oak compared the Department's fixed
vs. variable revenue distribution to that of the water industry and concluded, based on industry trends,
that the Department should increase its share of revenues from more stable fixed monthly charges
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9586
To the Mayor and Members of the City Council August 13, 2013
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SUBJECT: Water Department FY2014 Projected Revenue Requirements
and decrease its share from more volatile volume charges. The study argued that all customers
benefit from a `readiness to serve' and recommended that a portion of the Utility's peaking costs be
assigned to the base fee charged to all customers based on the size of the meter. The consultant
recommended adjusting the fixed/variable ratio to 25%/75% and further recommended that the shift
be phased in over a five-year period beginning in FY2014. In accordance with the recommendation,
staff incorporated 5% of peaking costs into the FY2014 retail base monthly fee. This resulted in a
fixed/variable ratio of 19%/81%. This issue was reviewed in detail with the customer Stakeholder
Group, which provided positive feedback.
Sewer Volumes Correction
In recent years, the Department has experienced lower sewer volumes due to conservation, and
more efficient appliances and plumbing code requirements. Lower sewer volumes by account were
not immediately recognized, resulting in a divide between the volumes used to set the unit rates and
the actual billed volumes. Staff brought this issue to the Stakeholder Group last year and the group
recommended that the impact of reducing budgeted volumes be phased in over a three-year period.
This issue was also brought forward to the City Council during last year's budget process. As outlined
in M&C G-17679, the 2.6% sewer rate increase approved by the City Council for FY2013 was the first
step in the three-year phase-in, with additional increases programmed for 2014 and 2015. In light of
FY2014 expenditure budget reductions, the Department incorporated a two-year phase-in into the
recommendations presented to the Stakeholder Group. Taking this approach, no additional volume
adjustment will be needed in 2015.
Winter Quarter Average (WQA) Cap
Currently, residential sewer billing is based on a customer's winter quarter water use. Three months
of winter water usage are averaged to set a baseline volume for domestic service. That calculated
volume is used for billing purposes for the remainder of the year. In addition to the calculation, Fort
Worth caps WQA so that no residential customer, regardless of winter quarter water use, will pay for
more than 30ccf of volume on their sewer bill. The cap was initially established in the late 1990s
following an abnormally dry winter to ensure that customers were not paying for irrigation use on their
sewer bill. The initial cap was set at 15ccf but was increased to 30ccf in FY2011. More than 99% of
customers fall below the 30ccf cap. Recent benchmarking shows that Fort Worth is the only city
surveyed that uses both a WQA and a cap. Many cities use WQA and some cities charge for sewer
service based on the total amount of water used year-round. Staff provided preliminary findings to
the customer Stakeholder Group, which recommended that staff do some additional research on the
impact of eliminating the cap and return to the Stakeholder group during the 2015 rate process.
Wholesale Water and Sewer Rate Process
Wholesale rates paid by the Department's 30 water customer cities and 23 sewer customer cities are
based on cost of service studies performed on a three-year rotation using consultant services,
alternating water and sewer, with Department staff completing the study the other years. The process
and methodology are established within the Uniform Wholesale Contracts for water and sewer
services. Studies are based on test year expenditure data, adjusting for known and measurable
changes. Volumes used to calculate the rate change are based on prior year actual use. Results of
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9586
To the Mayor and Members of the City Council August 13, 2013
Page 3 of 3
r
SUBJECT: Water Department FY2014 Projected Revenue Requirements
the cost of service studies and preliminary rates are presented to the Wholesale Advisory Committee,
comprised of representatives of each of the customer cities. Staff met with the Cost of Service
Subcommittee of the Wholesale Advisory Committee on February 13 and May 16, and met with the
full Wholesale Advisory Committee on June 18 to present the preliminary FY2014 wholesale water
and sewer rates. Final rates were provided to the Wholesale Advisory Committee in late July.
FY2014 Recommendations and System Adjustments
Based on our cost of service studies and the input received from our Stakeholder Group for retail
rates and Wholesale Advisory Committee for wholesale rates, staff recommends the following
structural changes and system-wide FY2014 recommended adjustments:
Fixed vs. Variable Revenue— Staff recommends moving forward with year one of the five-year plan,
adjusting the fixed/variable revenue to 19%/81% to improve revenue stability.
Sewer Volume Correction— Based on discussions with the retail customer Stakeholder Group, and
the resulting rate impact, staff recommends aligning budgeted volumes with projected flows in
FY2014 instead of phasing in that impact over FY2014 and FY2015.
These recommendations result in the following adjustments in revenue requirements for Retail and
Wholesale Water and Sewer service.
Retail Water: +6.41%
Retail Sewer: +5.27%
Wholesale Water: +16.21%
Wholesale Sewer: -3.79%
Additional detailed information about the recommended FY2014 rates will be provided in August
during the budget workshops. Should you have any questions about the retail or wholesale rate
processes, please contact Water Director Frank Crumb at 817-392-8246.
Tom Higgins
City Manager
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS