Handout 5: Stormwater Cost of Service
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- Leona Morgan
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1 Handout 5: Stormwater Cost of Service Introduction The purpose of this handout is to describe the current cost allocation methodology for the stormwater program. The existing Stormwater Management Service Charges (SWMS Charges) are designed to recover the annual stormwater cost of service. This handout provides background information on the Philadelphia Water Department s (PWD) Enterprise Fund, the annual stormwater cost of service, the existing methodology used in determining the annual stormwater cost of service, and the stormwater cost of service rates. Fiscal Year (FY) 2011 figures are used in discussing the cost of service, the cost allocation methodology, and the rates and charges. Water Department s Enterprise Fund PWD provides water and wastewater services to the citizens of Philadelphia (referred to as retail service ). In addition, PWD also provides wholesale water and wastewater service to a number of surrounding communities (referred to as wholesale service ). The wastewater retail service also includes the costs associated with the operation and management of the stormwater system within the City boundary. PWD is not responsible for stormwater management outside of the City boundary. Water and Wastewater Cost of Service The revenues and expenditures of the water and wastewater utilities are fully accounted for and supported by an Enterprise Fund referred to as the Water Fund. This kind of fund is established as a separate legal entity in local government to account for operations that are financed and operated in such a way that the costs of providing facilities, goods or services to the public on a continuing basis is financed or recovered primarily through user charges. Through an extensive cost of service analysis that is performed, annual costs are first apportioned between the water and wastewater utilities. The wastewater costs are then further apportioned between Wholesale and Retail Service. The retail wastewater costs are then apportioned between Sanitary Wastewater and Stormwater utilities. Figure 1 presents a graphical illustration of the major phases in the cost of service allocation process. Figure 1 Cost of Service Allocation The total estimated FY 2011 cost of service for the water and wastewater utilities is $559.3 million. Thirty nine percent of the total FY 2011 costs pertain to the water utility and the remaining 61% pertains to the wastewater utility. Figure 2 presents a breakdown of the estimated water and wastewater cost of service for FY As the focus of this handout is on the stormwater cost of service, the following sections present additional details only on the wastewater and stormwater cost of service. Wholesale Service Wastewater Sanitary Wastewater Water Fund Retail Service Stormwater Water May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 1
2 Summary of Wastewater Cost of Service The two major components of the wastewater cost of service include the Operations and Maintenance (O&M) cost (maintaining the facilities and system) and the capital cost (building and replacing the facilities and system). These two costs are further apportioned between wholesale service and retail service. The wholesale service costs are recovered from the 10 wholesale customers via distinct contractual agreements with each one of the 10 wholesale customers. The retail cost of service is recovered from the City s customers. Figure 2 Water and Wastewater Costs FY 2011 Out of the total estimated FY 2011 wastewater costs of $339.9 million, 9% or $31.8 million is recovered from wholesale customers and the remaining 91% or $308.1 million is recovered from retail customers. Figure 3 presents a breakdown of the estimated wholesale versus retail wastewater cost of service for FY Figure 3 Wastewater Wholesale and Retail Cost of Service FY 2011 Description $ % Wastewater Wholesale Costs $ 31,779,000 9% Wastewater Retail Costs $ 308,092,000 91% Total $ 339,871, % Stormwater Cost of Service PWD manages stormwater as an integral part of the wastewater (sewerage) program. The majority of the City is served by combined sewerage systems which carry both sanitary wastewater and stormwater. For many years, sanitary wastewater and stormwater were simply considered one system: wastewater. Years ago, as design standards and stream quality mandates changed, separate stormwater and sewer systems were required and are currently installed primarily in the northeast and northwest areas of Philadelphia. Sewerage systems in areas outside Philadelphia which are tributary to the City s treatment plants are predominately separate sanitary wastewater systems, not combined sewers. The $308.1 million wastewater retail cost presented in Figure 3 reflects the total financial requirements of both the combined and separate sanitary wastewater and stormwater systems. A detailed cost allocation analysis has been performed by PWD and Black & Veatch to allocate the $308.1 million wastewater retail costs between the sanitary wastewater and stormwater components. Based on the detailed cost of service allocation, the estimated FY 2011 cost of service allocated to the stormwater management component of the sewerage program is $124.7 million. May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 2
3 Figure 4 presents the total capital and O&M costs allocated to the stormwater utility. The SWMS charges have been designed to reflect the cost of service associated with stormwater capacity demands and treatment of stormwater. In other words, the FY 2011 Gross Area and Impervious Area Rates and the Billing and Collection rate have been designed to recover the $124.7 million stormwater cost of service. Stormwater Cost Allocation Methodology Figure 4 Water and Wastewater Costs FY 2011 Description Wastewater Retail Costs Stormwater Costs SW as % of WW Capital Costs $ 119,965,000 $ 61,628,000 51% O&M Costs $ 188,127,000 $ 63,079,000 34% Total $ 308,092,000 $ 124,707,000 40% This section presents a high level overview of the steps involved in allocating the retail wastewater costs ($308.1 million from Figure 4) to the stormwater utility. The $308.1 million wastewater retail costs include annual capital related costs and operation and maintenance expenses. Figure 5 presents a breakdown of the FY 2011 estimated wastewater retail capital and O&M costs. Figure 6 and Figure 7 present the allocation of the Wastewater retail Capital and Wastewater retail O&M Costs to stormwater capital and stormwater O&M costs respectively. These allocations are described in more detail starting on page 5. It should be noted that these are current costs. As the future projected stormwater program shifts, the allocation, or even the basis for allocation, may also shift to better reflect the changing and growing functions of stormwater. Overview Capital Costs The capital cost reflects the annual depreciation 1 and the return on rate base. 2 To allocate the capital costs to the stormwater utility, the capital costs are first aggregated under three functional components as shown in Figure 6: Conveyance Pipes: Annual capital costs associated with major rehabilitation and replacements of combined sewers and/or separate sanitary sewers or storm sewers. Also includes costs associated with stormwater storage tunnels, sewer separation and other collection system related investments. Conveyance Pumping: Annual capital costs associated with major repairs, rehabilitation, and upgrades to pumping facilities. Treatment: Annual capital costs associated with major upgrades, expansions, and rehabilitation of the three wastewater treatment facilities. O&M Costs To allocate the O&M costs to the stormwater utility, the O&M costs are first aggregated under five functional areas as shown in Figure 7: Inlet Cleaning: Annual O&M associated with the inspection, cleaning, and repairs to stormwater inlets and the disposal of debris removed from the inlets. Conveyance Pipes: Annual O&M associated with the inspection, maintenance, and repairs to the collection system. 1 Depreciation: The loss in service value not restored by current maintenance as applied to depreciable plant and conveyance facilities. 2 Return on rate base: The ratio of net operating income earned by a utility, calculated as a percentage of its rate base. Rate base refers to the value of the total assets in the wastewater system. May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 3
4 Conveyance Pumping: Annual O&M associated with the inspection, maintenance, repairs of the pump stations and the operations of the pump stations. Treatment: Annual O&M associated with the operations and maintenance of the three wastewater treatment and disposal facilities. Customer: Annual O&M associated with billing, collection, and customer service functions. Figure 5 Wastewater O&M and Capital Costs (FY 2011) FY 2011 Description Costs Percent Wastewater Retail Capital Costs $ 119,965,000 39% Wastewater Retail O&M Costs $ 188,127,000 61% Total $ 308,092, % Figure 6 Stormwater Capital Cost Allocation Summary (FY 2011) Description WW Retail Capital Costs FY 2011 SW Capital Costs SW as % of WW Conveyance Pipes $ 80,421,000 $ 56,294,000 70% Conveyance Pumping $ 2,496,000 $ 535,000 21% Treatment $ 37,048,000 $ 4,799,000 13% Total $ 119,965,000 $ 61,628,000 51% Figure 7 Stormwater O&M Cost Allocation Summary (FY 2011) Description WW Retail O&M Costs FY 2011 SW O&M Costs SW as % of WW Inlet Cleaning $ 14,044,000 $ 14,044, % Conveyance Pipes $ 30,744,000 $ 21,521,000 70% Conveyance Pumping $ 17,543,000 $ 3,672,000 21% Treatment $ 87,838,000 $ 10,580,000 12% Customer Cost $ 37,958,000 $ 13,262,000 35% Total $ 188,127,000 $ 63,079,000 34% May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 4
5 Allocation of Capital Functional Costs Figure 8 describes the allocation basis used in allocating each of the three capital functional costs (conveyancepipes, conveyance pumping, and treatment) to the stormwater utility. Capital Functional Cost Figure 8 Allocation Basis for Capital Functional Costs Allocation Basis Allocated 70% to stormwater utility and 30% to sanitary sewer utility. This allocation ratio is based on the relative investment in sanitary sewers versus storm sewers based on sizing of the pipes for peak flow. Combined sewers, separate sanitary sewer and storm sewer collection systems are designed to handle peak flow capacity needs. Hence the relative difference in pipe sizing is used to apportion conveyance capital costs between sanitary sewer and stormwater utilities. Conveyance Pipes Conveyance Pumping Treatment The total inch feet, which is a product of the diameter of the sewer (in inches) times the length of sewer (in feet) reflects the relative investment in sanitary sewer and storm sewers. A sample analysis of separate sewered areas of the City performed several years ago indicated that approximately 70% of the inch feet of sewers is storm sewer related and 30% is sanitary related. This relationship between storm sewers and sanitary sewers was extrapolated to the entire wastewater collection system and used as a basis to allocate conveyance related O&M costs between stormwater and sanitary sewer. Allocated 21% to stormwater utility. The pumping costs are first allocated to Infiltration and Inflow (I&I) based on service demand and then 30% of the I&I costs are allocated to the stormwater utility. Allocated 13% to stormwater utility. Step 1: Treatment costs are first allocated to the four cost drivers of Volume (average flow), Capacity (peak flow), Biochemical Oxygen Demand (BOD), and Total Suspended Solids (TSS). Step 2: Then total units of service for these cost drivers, for all customer classes including I&I, are estimated using assumed flow peaking factors and strength factors. These factors are verified against system operating data. Step 3: Using the units of service and unit costs of each cost driver, the total treatment cost responsibility is determined for each customer class including I&I. Step 4: 30% of the I&I costs are allocated to the stormwater utility. Based on the above allocation methodology, a total of $61.6 million of capital cost is allocated to the stormwater utility. That equates to a 51% allocation of total estimated wastewater retail capital costs (Figure 6). Allocation of O&M Functional Costs Operation and maintenance expenses allocable to the stormwater utility include both direct expenses and indirect or overhead expenses. The direct expenses include costs such as personal services expenses (salaries and wages) plus salary related fringe benefits such as pensions and health insurance, purchase of services (electricity, contract services, etc.), materials and supplies, and equipment directly assignable and identifiable with stormwater functional areas. The indirect expenses include such costs as an allocated share of the administration, finance, human resources, public affairs, and planning and engineering divisions within PWD which provide support functions to all of the operating units. In addition, the indirect expenses also include an allocated share of May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 5
6 the costs of other City departments and functions, such as personnel, finance, legal, purchasing, public properties, and other groups, which also provide support services to PWD. Figure 9 describes the allocation basis used in allocating each of the five O&M functional costs to stormwater utility. Figure 9 Allocation Basis for O&M Costs O&M Functional Cost Inlet Cleaning Conveyance Pipes Conveyance Pumping Treatment Customer Allocation Basis Allocated 100% to stormwater utility. Inlet cleaning is directly related to facilitating stormwater flows and managing stormwater runoff quality. Allocated 70% to stormwater utility and 30% to sanitary sewer utility. Allocation follows the same logic described in Figure 8 for the capital cost allocation. Allocated 21% to stormwater utility. The pumping O&M costs are first allocated to Infiltration and Inflow (I&I) and then 30% of the I&I costs are allocated to the stormwater utility. Allocated 12% to stormwater utility. Allocation follows the same logic described in Figure 8 for the capital cost allocation. Allocated 35% to stormwater utility. Only billing and collection costs are allocated on a one third basis to stormwater. Based on the above allocation methodology, a total of $63.1 million of wastewater O&M retail cost is allocated to the stormwater utility. That equates to a 34% allocation of total estimated wastewater O&M retail costs (Figure 7). Summary of the Stormwater Cost of Service The methodical allocation of each functional component of the Wastewater O&M and Wastewater capital retail cost results in a determination of total FY 2011 stormwater cost of service of $124.7 million. As Figures 10 and 11 indicate, the single largest component of the stormwater cost of service is the capital cost associated with Conveyance Pipes. Figure 10 Stormwater Cost of Service Summary (FY 2011) May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 6
7 Figure 11 Stormwater Cost of Service Summary (FY 2011) FY 2011 Description Stormwater Costs Percent Capital: Conveyance Pipes $ 56,294, % Capital: Conveyance Pumping $ 535, % Capital: Treatment $ 4,799, % O&M: Inlet Cleaning $ 14,044, % O&M: Conveyance Pipes $ 21,521, % O&M: Conveyance Pumping $ 3,672, % O&M: Treatment $ 10,580, % O&M: Customer Cost $ 13,262, % Total $ 124,707, % Stormwater Cost Allocation Factors In the existing methodology used to determine the stormwater cost of service, there are a few Allocation Factors, as discussed in Figures 8 and 9, that are applied to specific capital cost and O&M cost functional components. These Allocation Factors were established using a combination of historical system infrastructure, sanitary sewage and stormwater flow data analysis, engineering science and judgment, and national standards. It would be prudent to review and evaluate the key Allocation Factors to confirm that these factors are still appropriate for allocating the various functional cost components. The key Allocation Factors identified for review are as follows: 1. Conveyance Pipes: The 70:30 allocation ratio used to allocate the wastewater conveyance pipe costs between stormwater and sanitary sewage. 2. Conveyance Pumping and Treatment: The 30:70 allocation ratio used to allocate the I&I pumping and treatment cost between stormwater and sanitary sewage. 3. The peaking factors used to determine the capacity (peak flows) of sanitary sewage and I&I. 4. The strength factors used to determine the BOD and TSS pollutant loading from I&I flows. Stormwater Cost of Service Rates For rate setting purposes, the total stormwater cost of service of $124.7 million indicated in Figure 10 is aggregated into two distinct components: (i) non customer costs and (ii) customer cost. 3 The sum of noncustomer costs equal $111.5 million and the customer cost equals $13.3 million. The stormwater Gross Area (GA) and Impervious Area (IA) rates are designed to recover the non customer costs and the Billing and Collection Charge is designed to recover the customer costs. Summary of GA and IA Rate Development Establishing the GA and IA rates involves a four step process: Allocation of the non customer costs to IA costs and GA costs using the 80:20 allocation factor recommended by the previous CAC. Determination of billable GA and IA units of service. Determination of GA and IA unit rates per 500 square feet. 3 Non customer costs refer to all of the stormwater costs described in this handout (conveyance piping, conveyance pumping, inlet cleaning, and treatment costs) except for administration and billing, which are referred to in the cost allocation methodology as customer costs. May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 7
8 Determination of the Final GA and Final IA rates per 500 square feet after the application of the collection lag factor. 4 Based on the analysis performed, the FY 2011 GA Rate is set at $0.526 per 500 square feet and the FY 2011 IA Rate is set at $4.145 per 500 square feet. Figure 11 provides a graphical illustration of the Rates and Charges development. Summary of Billing and Collection Charge Development Establishing the monthly Billing and Collection Charge involves a three step process: Determination of the billable stormwater accounts. Determination of the Monthly Billing and Collection charge. Determination of the Final Monthly Billing and Collection charge after the application of the collection lag factor. Based on the analysis performed, the FY 2011 monthly Billing and Collection charge is set at $2.53. Figure 11 provides a graphical illustration of the Rates and Charges development. Figure 11 Development of Stormwater Rates and Charges (FY 2011) FY 2011 Stormwater Cost of Service (S124,707,300) GA & IA Costs ($111,445,300) Billing & Collection Costs ($13,262,000) Gross Area (20%) Impervious Area (80%) ($22,289,100) ($89,156,200) # of Bills Issued Gross Area (GA) Impervious Area (IA) (5,759,444 Bills) (1,847,255,000 sf) (936,594,000 sf) = = = GA Rate IA Rate Billing & Collection Charge (S0.503 per 500sf) ($3.966 per 500sf) ($2.42 per Bill) x x x Lag Factor of Final GA Rate (S0.526 per 500sf) Final IA Rate ($4.145 per 500sf) Final Billing & Collection Charge ($2.53 per Bill) 4 Lag Factor: A slight increase in the charge to account for the time lag in collection of the new rates to meet cash and debt service coverage requirements. May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 8
9 Role of the Final GA Rate, Final IA Rate, and Final Billing & Collection Charge The Final GA Rate, the Final IA Rate, and the Final Billing and Collection Charge reflect the system wide unit costs. In other words, every property whether residential or non residential is assessed a stormwater charge based on these specific system wide unit costs. This approach of applying a system wide unit cost in determining charges ensures that residential customers do not subsidize non residential customers and vice versa. Monthly SWMS Charge for an Average Residential Property The average Gross Area for a residential property is 2,090 square feet. The average Impervious Area for a residential property is 1,060 square feet. Based on these average Gross Area and Impervious Area values, a uniform monthly charge has been defined for all residential properties as follows: Monthly GA charge = (2,090 / 500) X $0.526 = $2.20 Monthly IA charge = (1,060 / 500) X $4.145 = $8.79 Total GA/IA Charge = $ $8.79 = $10.99 Monthly Billing & Collection Charge = $2.49 (as per rate ordinance) Total Monthly SWMS Charge = $ $2.49 = $13.48 Monthly SWMS Charge for a Non Residential Property The monthly GA and IA charge for a non residential property is individually calculated based on the property s specific GA and IA values. In addition, the parcel area based charge is phased in over four years. If, for example, a non residential property has a GA of 2,090 square feet and an IA of 1,060 square feet (identical to an average residential property), then that non residential property will pay the exact same $10.99 as the monthly GA/IA charge plus the monthly billing and collection charge of $2.53, for a total of $ However, due to the phased in approach for non residential properties, in FY 2011, only 25% of this $13.52 SWMS charge is assessed, coupled with 75% of the old meter size based stormwater charge. In summary, based on the residential and non residential units of service, about 45% of the total stormwater costs are apportioned to residential customers and 55% of the total stormwater costs are apportioned to nonresidential customers. May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 9
10 GLOSSARY OF TERMS BioChemical Oxygen Demand: Refers to dissolved oxygen used by microorganisms in the oxidation of organic matter. Pollutant found in Sewage and stormwater flows. Capacity: In the context of wastewater, refers to the peak volume of sewage, infiltration and inflow, and/or stormwater conveyed by the system. Capital Expense: Expenditures incurred to acquire, replace, or upgrade physical assets of the water, wastewater, and stormwater utilities such as pipes, pumps, treatment facilities, buildings or equipment. Cash Financed Capital: Capital project expenditures financed through revenues generated from user charges. Collection Mains: Large pipes greater than or equal to 48 diameter that convey sanitary sewage and/or stormwater to the water pollution control facilities. Customer Class: A category of customers classified according to similarities in system use and/or demand characteristics. Debt Service: Periodic cash payments towards the repayment of annual interest and principal on an existing debt. Depreciation: The loss in service value not restored by current maintenance as applied to depreciable plant facilities. Excess Strength: The concentration levels of pollutants in sanitary sewage and/or stormwater that is above and beyond the normal residential strength of pollutants. Gross Area (GA): All of the property area contained within the legally described boundaries of a property and does not include portions of a sidewalk that are in the public right of way. GA Rate: The unit cost of stormwater management services per 500 square feet of Gross Area of a property. Impervious Area (IA): The total square feet of any plane hard surface area, including buildings, any attached or detached structures, paved or hard scaped areas, gravel, compacted dirt, that either prevents or restricts the absorption of water into the soil and thereby causes water to runoff the surface. IA Rate: The unit cost of stormwater management services per 500 square feet of Impervious Area of a property. Inlet Cleaning: The cleaning of stormwater inlets throughout the City, including the retrieving and installing inlet covers, replacing missing covers, installing locking covers, and unclogging choked inlet traps and outlet pipes. Infiltration: Refers to ground water entering the conveyance system through pipe joints, and other cracks and breaks in the collection infrastructure. May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 10
11 Inflow: Refers to surface water entering the conveyance system through manhole covers, catch basins, or roof drains. Lag Factor: An adjustment factor used to adjust the user charge rates to offset revenue reduction due to delays in the payment of user charge bills. Non Residential Property: Any real estate which cannot be classified as either residential or condominium is deemed a non residential property. Parcel: A real property as defined by a polygon with a defined owner. Pump Station: Facilities including equipment for pumping fluids from one place to another. They are used for a variety of infrastructure systems, such as the supply of water to canals, the drainage of low lying land, and the removal of sewage to processing sites. Residential Property: Any building containing one or more dwelling units occupied for residential purposes, but not including dormitories, nursing homes, hotels, or motels. Return on Rate Base: The amount required to pay the annual interest cost of debt capital and provide a fair rate of return on a city s investment in the utility system facilities. Sanitary Sewer: A separate conveyance system that transports sewage from houses and commercial buildings to treatment facilities. Stormwater Management Service Charge (SWMS): A SWMS charge is assessed to recover the costs the City incurs in providing stormwater management services to create a healthy living environment and to comply with state and federal regulations. Stormwater Runoff : Water that runs off from any real property including yards, streets, buildings, parking lots, swimming pools and other surfaces when it rains. Total Suspended Solids: Refers to particles of pollutant suspended in Sewage and stormwater flows. Units of Service: Refers to units of service demands placed on the utility system. For example, in the case of stormwater utility, the square footage of parcel gross area and impervious area reflect the units of service in a parcel. In the context of wastewater, for example, the pounds of BOD reflects the pollutant loading conveyed to the treatment facilities. The units of service provide a defensible basis for apportioning costs to customer classes. Volume: In the context of wastewater, volume refers to the average annual volume of sewage, infiltration and inflow, and/or stormwater conveyed into the system. May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 11
12 Notes: May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 12
13 Notes: May 19, 2011 PWD CAC Allocation Handout 17MAY11 V4.docx 13
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