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Home My WebLink AboutIR 9655 INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9655 To the Mayor and Members of the City Council August 12, 2014 `�` Page 1 of 3 r SUBJECT: WATER DEPARTMENT FY2015 PROJECTED REVENUE rF 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 FY2015 rate setting process and to provide the projected 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 rate 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 May 29, June 12 and 19, and July 10 to present budget drivers and costs, trends in water and wastewater usage over the last decade, and preliminary FY2015 rates for both water and sewer service. Staff requested feedback on specific issues impacting revenue recovery and rate structure. These topics included raw water costs and the re-calibration of projected water consumption in FY2015, continuation of the fixed vs. variable cost recovery plan for retail water service and the implementation of a similar plan to address fixed cost recovery for sewer service, and the elimination of the cap on the Winter Quarter Average (WQA) calculation for residential sewer service. Budget Drivers The cost of the raw water purchase from the Tarrant Regional Water District (TRWD) continues to be the major cost driver in the Water budget. The raw water rate for FY2015 is projected to increase by 12.02%, resulting in a cost increase of$4,530,875 over FY2014. At a total cost of $75,992,732, the raw water purchase represents 31% of the FY2015 Water budget and 19% of the total FY2015 Water and Sewer Fund budget. The primary driver of the rate increase from TRWD is the cost of the 150- mile Integrated Pipeline project, which will transport additional water from Cedar Creek and Richland Chambers Reservoirs to Tarrant County by 2020 to improve reliability and support growth. Large increases in raw water costs are expected to continue for the next several years as this project moves forward. The primary drivers in the Sewer budget are increases in wastewater treatment services provided by the Trinity River Authority (TRA) and bio-solids treatment and disposal. The TRA treats a small portion of wastewater flows from the northern and eastern sections of the service area and is engaged in a significant capital program to improve and expand its wastewater treatment facilities. These improvements will result in an increase of nearly $2.4 million in Fort Worth's payments to the TRA in FY2015. Increases in bio-solids costs represent a reinstatement of$1.5 million in funding to ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9655 To the Mayor and Members of the City Council August 12, 2014 `�` Page 2 of 3 r SUBJECT: WATER DEPARTMENT FY2015 PROJECTED REVENUE rF REQUIREMENTS provide for additional treatment of bio-solids and to meet new regulations governing disposal through beneficial re-use land application. Water Consumption Re-Calibration In recent years, the Department has experienced lower water volumes from changes in customer behaviors due to conservation efforts; more efficient appliances and plumbing code requirements. Outdoor watering restrictions enacted in FY2014 have lowered demand further, resulting in an 8% reduction in projected retail water volumes used to set rates in FY2015 to reflect more accurate consumption levels. Fixed vs. Variable Revenue In FY2014, a multi-year plan was implemented to increase cost recovery from fixed water revenues from a 17%/83% ratio of fixed to variable revenue collection to a 25%/75% ratio using a phased approach to improve revenue stability. This plan resulted from a study performed by an outside consultant engaged by the Water Department that determined that all customers benefit from a `readiness to serve' and recommended that a portion of the Utility's peaking costs be assigned to the fixed service fee charged to all customers. The specific charge is based on the size of the meter. The FY2015 recommended water rates reflect the second year of this phased revenue stability plan. The consultant further recommended implementing a similar plan to improve the stability of sewer revenues from the current 12%/88% fixed to variable ratio to a 20-25% fixed component. As a result, the FY2015 sewer rates reflect the implementation of the first year of this phased plan. Moving to a higher percentage of fixed revenue collection is a utility industry trend that lessens dependence on weather conditions and improves stability in revenue collection and cash flow. This issue was reviewed in detail with the customer Stakeholder Group, which provided positive feedback. 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 WQA calculation, Fort Worth caps the 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 most cities use WQA only, without providing for a cap. Some cities charge for sewer service based on the total amount of water used year-round. Of the 12 cities surveyed, only one additional city caps WQA. Staff presented this issue to the customer Stakeholder Group during the FY2014 and FY2015 rate processes to provide ample time to perform additional research on the impact of eliminating the cap, to develop a communication plan for the 0.7% of customers with usage above the cap, and to develop a program to assist income-eligible customers who may be experiencing a high WQA because of water leaks. The customer Stakeholder Group supported the recommendation to eliminate the cap. ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9655 To the Mayor and Members of the City Council August 12, 2014 `�` Page 3 of 3 r SUBJECT: WATER DEPARTMENT FY2015 PROJECTED REVENUE rF REQUIREMENTS Wholesale Water and Sewer Rate Process Wholesale rates paid by the Department's 29 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 alternate 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 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, May 22 and June 26, and met with the full Wholesale Advisory Committee on June 5 to present the preliminary FY2015 wholesale water and sewer rates. Final rates were provided to the Wholesale Advisory Committee in mid-July. FY2015 Recommendations and System Adjustments Based on the cost of service studies and the input received from the Stakeholder Group for retail rates and Wholesale Advisory Committee for wholesale rates, staff recommends the following structural changes and system-wide FY2015 recommended adjustments: Fixed vs. Variable Revenue— Staff recommends moving forward with year two of the multi-year plan to increase water fixed revenue recovery, and implementing year one of a new multi-year plan for sewer fixed revenue recovery to improve revenue stability. Winter Quarter Average Cap — Staff recommends aligning practices with other utilities and eliminating the WQA cap. These recommendations result in the following adjustments in revenue requirements for Retail and Wholesale Water and Sewer service. Retail Water: +7.37% Retail Sewer: +4.87% Wholesale Water: +11.10% Wholesale Sewer: +1.98% Additional detailed information about the recommended FY2015 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. David Cooke City Manager ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS