Final Report Rate, Charge, and Cost of Service Study For: December
December 29, Steve Hellman Chief Financial Officer 18100 E. Woodman Drive Parker, Colorado 80134 On behalf of MWH Global, I d like to thank the for the opportunity to complete its water and wastewater rate, charge, and cost of service study. In this study, we completed some important tasks and objectives. Namely, we have consolidated the District s tap fees into three defensible system development fees; projected future revenue needs to complete critical water resource projects, and evaluated an approach to improve the equity of costs allocated to the District s different customer classes. The process of determining the cost of service for each customer class in the District contains its share of complexity and specificity. The tables containing the bulk of our analytical work are included in the Appendix of the report. We discuss the major points and findings in the body of the report and provide several summary tables and exhibits meant to assist the reader(s) in understanding the study results supported by the Appendix. The Executive Summary is meant to present the main findings as succinctly as possible. We hope you will find the report and its organization to be accessible yet thorough. Thank you again for the opportunity to be of service to the District. Sincerely, Carol Malesky Principal Financial Consultant PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 2
Table of Contents Executive Summary... 6 Approach... 6 Summary of Proposed SDFs and Rate Design Options... 6 System Development Fees... 10 System Development Fees... 10 SDF Methodology... 10 Equity Buy In Method... 11 Incremental Cost Method... 11 Combined Method... 11 Methodology Used for PWSD s Proposed SDFs... 11 Equity Buy In Method Calculations... 12 System Demands... 12 System Functions... 12 Valuing System Assets... 12 Debt Service and Contributed Capital... 13 System Capacities... 13 Incremental Cost Method Calculations... 13 System Functions... 13 System Capacities... 13 Capital Improvement Program (CIP)... 14 Proposed SDFs... 14 Assessment Schedule... 15 Water and Wastewater Financial Plans... 16 Long Term Financial Plans... 16 Financial Planning Assumptions... 17 Revenue Requirements... 18 Operating Expenses... 18 Capital Improvement Expenditures... 18 Debt Service and Coverage Requirements... 19 Sources and Uses of Funds... 20 Fund Balances... 21 PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 3
Required Rate Revenues and Proposed Rate Revenue Increases... 21 Cost of Service Study and Rate Design... 22 Cost of Service Analysis and Rate Design Summary... 22 Water Rates and Charges... 23 Wastewater Rates and Charges... 23 Cost of Service Steps... 24 Revenue Requirements... 24 Customer Demand Characteristics... 25 Allocated Costs of Service by Class... 26 Rate Design Alternatives... 27 Rationale for Alternative Rate Structures... 27 Summary Observations... 31 Summary... 32 PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 4
List of Tables and Figures Table 1: Consolidation of Tap and Development Fees... 10 Table 2: Current and Projected Single Family Equivalent Units... 12 Table 3: Functional Categories for SDFs... 12 Table 4: Summary of PWSD System Capacities... 13 Table 5: Summary of Total Growth Related CIP for SDFs (Million $)... 14 Table 6: Comparison of Current Tap and Development Fees and Proposed SDFs... 14 Table 7: Equivalent Meter Ratios for SDF Assessment... 15 Table 8: Proposed 2015 SDF Assessment Schedules... 15 Table 9: Summary of Proposed Water and Wastewater System Revenue Required from Rates... 16 Table 10: Key Assumptions for Forecasting Water and Wastewater Revenues and Expenses... 17 Table 11: Projected Water and Wastewater System O&M Expenses (Million $)... 18 Table 12: Projected Water and Wastewater System Capital Improvement Expenditures (Million $)... 19 Table 13: Projected Water and Wastewater System Annual Debt Service and Coverage Calculations (Million $) 20 Table 14: Projected Water and Wastewater System Sources and Uses of Funds (Million $)... 20 Table 15: Projected Water and Wastewater System Fund Balances and Reserve Targets (Million $)... 21 Table 16: Summary of Water and Wastewater Class Cost of Service 2015 Results... 22 Table 17: Water Rate Design Options for 2015... 23 Table 18: Wastewater Rates for 2015... 23 Table 19: Water and Wastewater System 2015 Revenue Requirements... 24 Table 20: Summary of Water System Units of Service 2015... 25 Table 21: Summary of Wastewater System Units of Service 2015... 26 Table 22: Summary of Water System COS by Class 2015... 26 Table 23: Summary of Wastewater System COS by Class 2015... 26 Table 24: Water Rate Design for 2015 Existing Rate Structure with 2015 COS... 28 Table 25: Water Rate Design for 2015 New Rate Structure with 2015 COS... 29 Table 26: New Rate Structure with Preliminary 2016 COS Rates... 30 Table 27: Summary of Construction Hydrant Water Rate Structure... 30 Table 28: Proposed System Development Fees for 2015... 32 Table 29: Summary of Proposed Water and Wastewater System Revenue Required from Rates... 32 Table 30: Water Rate Design Options for 2015... 32 Table 31: Preliminary 2016 Rate Schedule... 33 Appendix A: System Development Fees Appendix B: Cost of Service & Rate Design PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 5
Executive Summary In March, the (District) authorized MWH Global (MWH) to complete a comprehensive rate, charge, and cost-of-service study (Study). This study: consolidates tap fees into three separate enterprise System Development Fees (SDFs): water, water resources, and wastewater; projects annual revenue requirements in separate financial plans for water and wastewater; calculates rates based on costs of service and determines the true costs of serving the District s customers; and, simplifies the current rate structure by maintaining a fixed service charge per single family equivalent (SFE) but evaluates fewer volumetric tiers. The primary objective of this study was to provide different rate design options to recover annual revenue requirements by customer class based on costs of service for 2015. In addition, preliminary rates for 2016 were calculated for a reduced tier water rate structure. Approach MWH used standard ratemaking practices to calculate the proposed rates and SDFs as recommended by the American Water Works Association (AWWA) and Water Environment Federation (WEF). AWWA and WEF guidelines include the following steps: 1. Calculate costs of growth to be recovered from new connections. Three accepted approaches for calculating system development fees are equity buy-in, incremental cost, and a hybrid of the two approaches. Costs recovered through tap fees in Colorado are defined in the Colorado Revised Statutes (CRS) 29-20. The procedure used to calculate the District s system development fees is outlined in Section 1 of this report. 2. Determine the revenue requirements for a specified annual period referred to as a test year. Revenue requirements are defined as the amount of money the water and wastewater systems must recover from the rates charged to customers in order to meet the funds' operating and capital expenditures anticipated for the test year. The revenue requirements are described in more detail in Section 2 of this report. 3. Allocate revenue requirements to customer classes. Following standard procedures, the revenue requirements are allocated to specific customer classes based on how the various classes actually use the water and wastewater systems. Customer classes and demand characteristics of each class and allocation of revenue requirements to those classes are described in Section 3: COS and Rate Design of the report. 4. Determine rates for service. Rates are based on allocated costs of service for each customer class, meaning that the recommended rates for a given class reflect the cost of serving that class. In this study, MWH evaluated water and wastewater rates for 2015 but focused on designing different rate structures only for the water system. The evaluated rate structures and customer bill impacts are presented in Section 3: COS and Rate Design of the report. Summary of Proposed SDFs and Rate Design Options Currently the District assesses new customer s six different tap and development fees that vary by water meter size. MWH proposes the Board adopt SDFs calculated in this study to replace the current tap and development fees into three separate enterprises: water, water resources, and wastewater. PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 6
To meet the revenue requirements for 2015, MWH proposes a rate increase for water based on sustaining existing operations and projecting expected changes to these operations as a result of system growth and proposed capital facilities. In the process of evaluating the costs of service by customer class, MWH not only reviewed the current rate structure while adjusting the rates to recover total costs of service, but also designed a new rate structure in comparison with the existing rate structure for PWSD. Table A presents a comparison between PWSD s current tap and development fees and the proposed fees. Table B presents a summary of Proposed Water and Wastewater System Revenue Required from Rates over a 10-year period. Table C summarizes the rates under the current rate structure as one option and a new rate structure by reducing tiers as another option for single family, multi-family, commercial, and irrigation customers. TABLE A: Comparison of Current Tap and Development Fees and Proposed SDFs Description Current Fee for ¾ Water Meter Proposed 2015 SDF for ¾ Water Meter Water Tap Fee $3,000 Water SDF $9,800 Water Development Fee $12,725 Renewable Water Fee $750 Water Resources SDF $12,000 Wastewater Tap Fee $5,850 Outfall Dev. Fee $800 Wastewater SDF $3,500 Total Fees $23,125 $25,300 TABLE B: Summary of Proposed Water and Wastewater System Revenue Required from Rates 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Water System Rate Revenues (Million $) $14.42 $15.34 $16.31 $17.35 $18.45 $19.63 $20.88 $22.21 $23.63 $25.14 Rate Revenue Change 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% Wastewater System Rate Revenues (Million $) $9.96 $10.21 $10.47 $10.73 $11.01 $11.29 $11.57 $11.87 $12.17 $12.49 Rate Revenue Change 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 7
TABLE C: Water Rate Design Options for 2015 Alternative Existing Structure Existing with 2015 COS New 2015 COS Rate Structure SF/MF Comm Irr SF/MF Comm Irr SF/MF Comm Irr Res Res Res Service Charge 1 SFE $28.16 $28.16 $28.16 $28.16 $28.16 $28.16 $28.16 $28.16 $28.16 Tier Thresholds (kgal per SFE) Tier 1 10 10 10 10 10 10 6 Tier 2 20 20 20 20 20 20 20 Tier 3 30 30 30 30 30 30 >20 Tier 4 50 50 50 50 50 50 Tier 5 >50 >50 >50 >50 >50 >50 Tier Rates (per kgal) Tier 1 $2.49 $2.49 $2.49 $2.63 $2.63 $2.63 $2.11 $3.39 $6.24 Tier 2 $4.04 $4.04 $4.04 $4.27 $4.27 $4.27 $3.94 Tier 3 $5.97 $5.97 $5.97 $6.31 $6.31 $6.31 $8.15 Tier 4 $7.80 $7.80 $7.80 $8.25 $8.25 $8.25 Tier 5 $8.61 $8.61 $8.61 $9.10 $9.10 $9.10 Average Impact 1 SFE 7 SFE 1 SFE 7 SFE Annual Usage 111 147 1,131 111 147 1,131 Water Bill Change $18.00 $23.94 $301.87 $1.14 $81.15 $1,802 Percent Change 2.76% 3.17% 3.96% 0.17% 10.75% 23.65% PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 8
Table D presents projected 2016 rates for the proposed new rate structure. The Existing Structure 2016 Rates shows the proposed rates for 2015 rates with an across-the-board 3.75% increase to project 2016 rates. The New 2016 COS Rate Schedule presents the preliminary rates for a reduced tier rate structure that are expected to recover 2016 revenue requirements. It is important to note that while these rates are calculated based on projected 2016 revenue requirements, customer accounts, and customer water usage, MWH recommends that cost and customer assumptions are reviewed prior to adopting rates for 2016. TABLE D: Preliminary 2016 Rate Schedule Existing Structure 2016 Rates New 2016 COS Rate Schedule SF/MF Res Comm Irr SF/MF Res Comm Irr Service Charge 1 SFE $29.22 $29.22 $29.22 $29.22 $29.22 $29.2 Tier Thresholds (kgal per SFE) Tier 1 10 10 10 6 Tier 2 20 20 20 20 Tier 3 30 30 30 >20 Tier 4 50 50 50 Tier 5 >50 >50 >50 Tier Rates (per kgal) Tier 1 $2.73 $2.73 $2.73 $2.34 $3.66 $6.60 Tier 2 $4.43 $4.43 $4.43 $4.38 Tier 3 $6.55 $6.55 $6.55 $9.06 Tier 4 $8.56 $8.56 $8.56 Tier 5 $9.44 $9.44 $9.44 PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 9
Section 1 System Development Fees System Development Fees Work Product 1 of MWH s rate study scope for (PWSD) is the system development fee (SDF) analysis. SDFs (or tap fees as currently used) are one-time charges to new connections that recover a proportionate share of investments in capacity to serve new connections. This section outlines the SDF methodology used and proposed water, water resources, and wastewater SDFs for consideration by PWSD s Board of Directors. Tables supporting the proposed SDFs are included in the appendix to this report. For SDFs, the primary policy for the Board to consider is that growth pays for the costs of growth. Such a policy will confirm that existing customers do not subsidize future customers, as well as prevent the subsidization of existing customers by existing customers. In addition to being based on PWSD s goals for recovering costs of growth, SDFs are developed in compliance with CRS 29-20-104.5, Colorado s impact fee law. A local government may recover the costs of development provided that the fees assessed are: 1. Legislatively adopted 2. Applicable to a broad class of property 3. Set to recover the cost impacts on capital facilities caused by new development PWSD s current tap and development fees are consolidated into SDFs according to the following table: Table 1: Consolidation of Tap and Development Fees Current Fee Water SDF Wastewater SDF Water Resources SDF Water Tap Sewer Tap Outfall Development Fee Water Development Fee Renewable Water Water Resource* *stand-alone cash-in-lieu of water rights X MWH proposes the Board adopt SDFs calculated in this study to replace the current tap and development fees. One exception is the current Water Resource fee (or Water Resource Toll defined in PWSD Rules and Regulations) of $5,000 per single family equivalent (SFE) connection for 0.7 annual acre feet of water. This fee is charged if a developer does not have a water resource credit or water rights to convey to PWSD. MWH s recommendation is that this fee is maintained. SDF Methodology The American Water Works Association (AWWA) and Water Environment Federation (WEF) publish recommended industry guidelines for calculating SDFs. The two organizations describe three general approaches: Equity buy-in method Incremental cost method X X X X PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 10
Combined method that includes elements of both of the above Equity Buy-In Method Equity buy-in derives a fee based on the amount of money invested in the existing plant in service. Under the equity buy-in method, new customers pay a proportional amount that is equivalent to what the existing customers have already paid for the plant in service (system facilities). The equity buy-in method is most applicable in instances where the system has sufficient capacity to provide service to existing customers and to foreseeable new connections. Major steps involved in the equity buy-in method are: 1. Determine available capacity in existing facilities 2. Calculate the value of that existing capacity either at its original cost (OC), book value (BV), replacement cost (RC), or replacement cost less depreciation (RCLD) 3. Adjust the value of capacity for outstanding debt and/or contributed assets 4. Calculate unit cost for capacity When followed properly, this process results in a fee for each equivalent unit that reimburses PWSD for its past investments in facilities that are available now to provide capacity to new connections. Incremental Cost Method The incremental cost method is based on costs PWSD expects to incur in order to provide additional capacity for new customers. New customers pay a proportionate share of future capital improvement program (CIP) costs to expand the utility system. The incremental cost approach applies best when the existing system is not capable of providing service for new connections, and new infrastructure and natural resources are needed in order to expand the system. The major steps involved in the incremental-cost method are: 1. Determine proportion of proposed CIP that is allocated for growth/expansion 2. Determine total capacity that each project will add to the system in terms of equivalent units 3. Calculate unit costs for each type of facility Results of the above process produce a proportional fee for each equivalent unit that recovers planned investments in growth-related capital projects. Combined Method In many cases, new customers will use both the existing (or, reserve) capacity and will also require new capacity. The combined method takes both the equity buy-in and incremental cost methods into consideration to derive a single proportional fee that averages the costs of existing and proposed capacity over all new connections. Methodology Used for PWSD s Proposed SDFs The combined method was followed in calculating water, water resources, and wastewater SDFs for PWSD. Analysis and discussion regarding the water and wastewater systems show measurable reserve capacity in the existing systems as well as substantial future costs for system expansion to serve new customers. PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 11
Equity Buy-In Method Calculations Assumptions used to calculate the buy-in component of SDFs include projections of system demands, valuation of assets by system functions, and capacity estimates by system function. System Demands Current and projected water and wastewater demands on PWSD s systems were calculated using the recently completed Master Plan. Demands on the systems are based on engineering analyses of required capacity per SFE. These demands are related to water produced rather than actual billed consumption. In summary: Table 2: Current and Projected Single Family Equivalent Units Description Current () Build Out (post 2035) Water System Average day demand per Capita (gpcd) 148 151 Single Family Equivalent Units (SFEs) 16,813 46,641 Average day demand per SFE 404 397 Wastewater System Average day flows per Capita (gpcd) 70 73 Wastewater SFEs 15,646 45,958 System Functions Allocating PWSD s existing system facilities into functions provides required information for calculating SDFs. Assets were assigned to the functional categories identified in the table below. In addition, a General category captures general and administrative-type assets. The value of assets categorized as General is allocated among the other functions based on the overall direct allocations. Table 3: Functional Categories for SDFs System Development Fee Functional Category Water Water Resources Wastewater Source of Supply Water Rights, Wells, Pumps (nonrenewable) X Source of Supply Water Rights, Alluvial Wells, Pumps (renewable) X Raw Water Storage (RHR) X Water Treatment Plant X Treated Water Storage X Water Pump Stations X Water Transmission & Distribution Lines X Wastewater Interceptors & Collection Lines Lift Stations Wastewater Treatment Plant X X X Valuing System Assets Using PWSD s fixed asset inventory and Engineering News Record (ENR) construction cost indices, the replacement cost less depreciation was calculated. This step is important in the equity buy-in component of the SDF because it determines the system value that recovers a certain proportion of PWSD s investment in its current system. PWSD s SDFs are proposed following the RCLD approach to account for depreciation that has occurred in the system and inflation of assets to today s dollars. RCLD is the most common asset value approach used for SDF purposes. PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 12
Debt Service and Contributed Capital To avoid double-charging new customers for debt service paid in monthly user charges, outstanding debt is subtracted from fixed asset values. In addition, assets contributed by developers or others are subtracted from fixed asset values. For recovering the costs of Rueter-Hess Reservoir (RHR) through the water resources SDF, no credit for debt service is given because new customers are required to reimburse existing customers for the payments these customers made through property taxes. This represents a full buy-in to the water resources facilities. Contributed capital, or infrastructure and water rights turned over to PWSD by developers, are excluded from the facilities values based on PWSD Staff analysis. System Capacities Capacities for PWSD s existing and future system components were calculated based on assumptions in the Master Plan and discussions with Staff. In summary: Table 4: Summary of PWSD System Capacities Description Existing Capacity () Build Out Capacity (post 2035) Source of Supply non renewable (MGD) 15.18 13.30 Source of Supply renewable (MGD) 10.87 27.88 Raw Water Storage (AF) 64,300 64,300 Treatment (MGD) 10.00 40.00 Treated Water Storage (MG) 20.00 55.00 Pumping (MGD) 12.20 32.20 Transmission/Distribution (MGD) 12.20 32.20 WW Treatment (MGD) 4.00 10.60 Interceptors/Collection (MGD) 7.72 10.60 Lift Stations (MGD) 7.72 10.60 Capacities of water transmission and distribution and wastewater collection and interceptors are linked to the capacities of the limiting function; in PWSD, the limiting functions are pumping and lift stations, respectively. Incremental Cost Method Calculations Information used to calculate the incremental cost component of the SDFs is presented below. System Functions The same system functions were assumed for the CIP as for system assets. The Master Plan and Staff CIP summarize capital needs clearly by function. System Capacities The Master Plan prepared CIPs following capacity requirements and build-out population; therefore, the maximum capacities to be served by system improvements are assumed to be limited to the projected build-out SFEs. For water and water resources, this value is 46,641 SFEs and for wastewater, 45,958 SFEs are expected. A fundamental assumption regarding the capacity available for new customers in RHR and new Water Treatment plant is based on the subscription of storage capacity in RHR. Currently, from 75,000 AF of storage capacity less storage rights purchased by others, roughly 64,000 AF remains. Out of that capacity, PWSD projects storage needs of 40,000 AF. Approximately 16,000 AF of capacity is allocated to existing PWSD customers in ; therefore, 40 percent of storage capacity is allocated to existing customers and 60 percent is allocated to new customers. PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 13
Capital Improvement Program (CIP) CIPs for each system by function were obtained from the Master Plan and PWSD Staff s CIP. Discussions of proportion of each capital project required to serve new customers resulted in the following growth-related costs to be recovered through SDFs. Table 5: Summary of Total Growth Related CIP for SDFs (Million $) Description Water SDF Water Resources SDF Wastewater SDF Source of Supply non renewable $42.680 Source of Supply renewable $187.052 Raw Water Storage $0.711 Treatment $106.414 Treated Water Storage $35.150 Pumping $4.100 Transmission/Distribution $4.956 WW Treatment $83.875 Interceptors/Collection $5.360 Total Growth Related Cost $193.300 $187.763 $89.235 The water resources SDF includes a growth-related portion of the capital component of the Water Infrastructure and Supply Efficiency (WISE) delivery rate. This portion represents the cost of capital investments made as part of WISE to deliver the renewable water supply that PWSD would have otherwise invested in to ensure a future renewable water supply. Proposed SDFs Combining the equity buy-in and incremental cost components of the SDF results in the following schedule of SDFs proposed for implementation in 2015. A comparison between PWSD s current tap and development fees and the proposed fees is shown. Full printouts of the calculations are provided as an attachment to this report. Please note the water resources cash-in-lieu fee is not included in this comparison. Table 6: Comparison of Current Tap and Development Fees and Proposed SDFs Description Current Fee for ¾ Water Meter Proposed 2015 SDF for ¾ Water Meter Water Tap Fee $3,000 Water SDF $9,800 Water Development Fee $12,725 Renewable Water Fee $750 Water Resources SDF $12,000 Wastewater Tap Fee $5,850 Outfall Dev. Fee $800 Wastewater SDF $3,500 Total Fees $23,125 $25,300 PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 14
Assessment Schedule PWSD s current tap fee assessment schedule is based on a set of meter equivalency ratios that have been in place for many years. An alternative meter equivalency schedule was evaluated that varied based on hydraulic capacities. It is recommended to continue with PWSD s current equivalent meter ratios for purposes of SDF assessment with the exception of 2 meters. To maintain consistency with PWSD s current ratios and a schedule based on meter area ratios, the proposed ratios in the table below are rounded to the nearest unit. Table 7: Equivalent Meter Ratios for SDF Assessment Meter Size Current Ratios Meter Area (sq.in.) Meter Area Ratios Proposed Ratios 3/4" 1.00 0.44 1.00 1.00 1" 2.00 0.79 1.78 2.00 1 1/2" 4.00 1.77 4.00 4.00 2" 8.00 3.14 7.11 7.00 3" 16.00 7.07 16.00 16.00 The schedule of SDFs following the proposed meter ratios is presented for the Board s consideration. Table 8: Proposed 2015 SDF Assessment Schedules Meter Size Proposed Ratios Water SDF Water Resources SDF Wastewater SDF 3/4" 1.00 $9,800 $12,000 $3,500 1" 2.00 $19,600 $24,000 $7,000 1 1/2" 4.00 $39,200 $48,000 $14,000 2" 7.00 $68,600 $84,000 $24,500 3" 16.00 $156,800 $192,000 $56,000 PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 15
Section 2 Water and Wastewater Financial Plans Long-Term Financial Plans Work Product 2 of MWH s rate study scope for (PWSD) provides long-term financial planning tools for its water and wastewater systems. The 10-year tools include total operating and capital requirements that each utility needs to recover from revenue sources based on sustaining existing operations and projecting expected changes to these operations as a result of system growth and proposed capital facilities. The tools are comprehensive cash-flow analyses incorporating financial goals that are maintained by PWSD. This section summarizes the assumptions and calculations supporting rate revenue increases over a 10-year period proposed for consideration by PWSD s Board of Directors. Throughout the financial planning tasks, MWH worked with PWSD Staff to refine budget inputs, assumptions, and analyzing alternative funding scenarios. Revenue requirements for 2015 will be used to evaluate the costs of service by customer class and calculate alternative rate structures. Renewable water resource funding sources and expenditures are analyzed as a sub-fund of the water fund. A summary of proposed changes to revenues recovered from rates is presented below. Table 9: Summary of Proposed Water and Wastewater System Revenue Required from Rates Water System Rate Revenues (Million $) Rate Revenue Change Wastewater System Rate Revenues (Million $) Rate Revenue Change 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 $14.42 $15.34 $16.31 $17.35 $18.45 $19.63 $20.88 $22.21 $23.63 $25.14 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% $9.96 $10.21 $10.47 $10.73 $11.01 $11.29 $11.57 $11.87 $12.17 $12.49 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 16
Financial Planning Assumptions Estimating future revenues and expenses requires various assumptions to be applied in the financial plans. The following table summarizes the key assumptions used in the analysis. Table 10: Key Assumptions for Forecasting Water and Wastewater Revenues and Expenses 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Water System Avg. Customer Growth (SFEs) 2.65% 2.65% 2.66% 2.66% 2.67% 2.67% 2.67% 2.68% 2.69% 2.68% O&M Expenses Labor 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% Benefits 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Chemicals 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Power 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% General Inflation 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% Fund Balance Interest Rate 0.35% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.25% Wastewater System Avg. Customer Growth (SFEs) 2.65% 2.65% 2.66% 2.66% 2.67% 2.67% 2.67% 2.68% 2.69% 2.68% O&M Expenses Labor 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% Benefits 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Chemicals 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Power 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% General Inflation 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% 2.30% Fund Balance Interest Rate 0.35% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.25% Additional assumptions were included throughout the financial planning period. 1. The 10-year capital improvement plan (CIP) was derived from Master Plan documents that projected project costs over the planning period. No additional inflationary factor was applied to project costs. 2. Typical projections of rate revenues for future years are based on revenue under existing rates for the current year. The current year is not representative of a normal water use year; therefore, it is assumed rate revenues in 2015 would be 8 percent higher than rate revenues after growth and before proposed rate revenue increases. 3. System development fees are held at the proposed 2015 level for the study period in the financial plan. MWH recommends that the Board of Directors increase these fees by capital inflation estimates annually. The Engineering News Record (ENR) publishes construction indices to use for this purpose. 1 4. For projected debt issues, we have assumed a 1.5% cost of issuance, a debt reserve requirement equal to one year of normal payments, 30-year repayment terms, and coupon rates between 3.75% and 4.0% for revenue bonds. For state revolving fund loans (SRF), 1% issuance costs with 20-year terms, one year of debt service as a reserve, and interest rates between 2.75% and 3.0% are used. The structure and timing of any bond issues or loans are at the discretion of the Board. These amounts are estimates provided by MWH for planning purposes and do not represent any decisions made by the Board or PWSD. 1 http://enr.construction.com/ PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 17
Revenue Requirements Revenue requirements for PWSD s water and wastewater systems are the total operating and capital expenditures (including debt service requirements, funding of reserve accounts and cash funding of capital expenditures) that must be recovered from the revenues provided from its rate and fee structure to adequately protect, operate, maintain and develop the water and wastewater systems. Determining the revenue requirements for what is called the test year is important because the calculated rates need to recover the revenue requirements in the appropriate year. For this analysis, the first test year for which rates will be developed is 2015. The financial planning analysis projects revenue requirements for multiple test years. For each year in the analysis, subsequent tables present components of the revenue requirements. Operating Expenses Operating expenses include the expected operating and maintenance expenses for operations. PWSD s operating budget is organized by cost categories that can also be referred to as functions or departments. Cost categories were escalated by applying one of the escalation values presented previously in Assumptions. It is important to note that some costs escalate partially due to growth in addition to the escalation factor used. A portion of electricity, chemical, and laboratory supplies are expected to increase annually due to the increased demands from growth in customers. O&M expenses are summarized below. Water expenses include annual WISE O&M costs, including the take-or-pay subscription amount, are identified. Table 11: Projected Water and Wastewater System O&M Expenses (Million $) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Water System General O&M $10.50 $10.64 $11.00 $11.41 $11.79 $12.24 $12.65 $13.13 $13.58 $14.09 WISE O&M $0.23 $0.39 $0.64 $1.02 $1.09 $1.47 $2.09 $2.53 $2.58 $2.63 Total Water O&M $10.73 $11.03 $11.64 $12.43 $12.88 $13.70 $14.75 $15.66 $16.16 $16.72 Wastewater System Total WW O&M $7.78 $8.10 $8.38 $8.71 $9.00 $9.35 $9.70 $10.09 $10.46 $10.87 Capital Improvement Expenditures Capital improvement expenditures include any planned expenditures for capital-related items. The capital improvement plan provided by PWSD was included in the financial plans through 2024. As mentioned previously, inflation for CIP projects was assumed to be included in the plan provided. Water system CIP includes renewable water resource projects associated with WISE and is shown separately in the table below. Another characteristic of the CIP values is the allocation between system improvement and new development-related projects. A portion of the capital improvements each year is funded by rate revenues for system improvements and system development fees for growth-related capital. The proportion for system improvement is identified in the table. As the table shows, significant project expenditures are expected for renewable water resource projects early in the planning period. The wastewater system expects significant expenditures in the middle of the planning period for expansion of the North Water Reclamation Facility which is 50 percent growth-related. PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 18
Table 12: Projected Water and Wastewater System Capital Improvement Expenditures (Million $) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Water System General Capital $16.10 $5.89 $4.30 $5.05 $7.54 $7.01 $7.73 $10.17 $21.08 $20.59 Renewable Water $33.74 $0.94 $0.58 $3.59 $0.21 $0.36 $0.08 $0.03 $0.00 $0.20 Total Water Capital $49.84 $6.83 $4.89 $8.64 $7.75 $7.37 $7.81 $10.20 $21.08 $20.79 Percent System Improvement 42.6% 53.1% 56.0% 50.3% 24.1% 55.7% 21.6% 20.8% 31.5% 31.6% Wastewater System Total WW Capital $1.24 $2.71 $4.01 $19.62 $19.70 $14.30 $1.43 $0.22 $0.22 $0.31 Percent System Improvement 79.8% 81.5% 58.8% 51.3% 51.5% 70.3% 100.0% 100.0% 100.0% 100.0% Debt Service and Coverage Requirements Outstanding Debt PWSD currently is obligated to repay a series of Colorado Water Resources and Power Development Authority (CWRPDA) loans and two 2012 refunding bond issues (one revenue bond issue and one general obligation (GO) issue). PWSD will begin repaying a Colorado Water Control Board (CWCB) loan in 2015, issued for WISE expenditures. Just as capital improvement expenditures are allocated between system improvement and development, so are annual debt service payments. A portion of the 2012 GO issue is paid from tax revenues. Proposed Debt MWH is currently projecting needs for future debt issues for each system. The proceeds needed are projected after considering fund balances, debt service coverage ratios, and rate revenues. In general, debt issues have been delayed to later in the planning period. In the water system, renewable water resource fund balances have been used as interim financing for general capital projects. Proceeds from the proposed debt issue in water repay renewable water resource fund balances and fund the remaining projects not covered by cash. Coverage Requirements PWSD s rate covenant for its outstanding debt requires a specific calculation of debt service coverage. Specifically, revenue available for debt service on water and sewer revenue bonds and CWRPDA loans must be greater than or equal to 110% of that total debt service. Revenue available for debt service in this calculation is equal to gross revenues when allowing for system development fees at a maximum of 15% of operating revenue. Operating expenses are then subtracted from total allowable revenues to determine revenue available for debt service. Coverage calculations excluding system development fees must result in revenue available for debt service no less than 100% of total revenue bond and CWRPDA loan debt service. The financial plan meets this coverage requirement with the exception of 2019 when debt service coverage drops to 99% then raises to 106% in 2020. Allowing this one-time drop for planning purposes has been agreed on by District staff. An additional total debt service coverage calculation includes tax revenues from mill levies and compares revenue available for debt service to total revenue bond, GO bond, and CWRPDA debt service. A formal rate covenant test does not exist for this calculation; however, ensuring revenue available for debt service is 100% of the total debt including GO bonds provides further proof of PWSD s sustainability. Existing and proposed annual debt service and coverage test results are presented below. PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 19
Table 13: Projected Water and Wastewater System Annual Debt Service and Coverage Calculations (Million $) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Water System Existing Debt $12.37 $12.79 $13.18 $13.42 $13.62 $13.44 $14.17 $14.12 $11.27 $11.25 Proposed Debt $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $2.10 Total Water Debt $12.37 $12.79 $13.18 $13.42 $13.62 $13.44 $14.17 $14.12 $11.27 $13.35 Wastewater System Existing Debt $1.94 $1.91 $1.81 $1.67 $1.70 $1.46 $1.09 $1.60 $2.66 $2.60 Proposed Debt $0.00 $0.00 $0.00 $0.00 $1.57 $1.57 $1.57 $1.57 $1.57 $1.57 Total WW Debt $1.94 $1.91 $1.81 $1.67 $3.27 $3.03 $2.67 $3.18 $4.23 $4.18 Coverage Requirements Combined DSC per Rate Covenant 152% 154% 157% 161% 143% 154% 153% 155% 197% 152% (minimum 110%) Combined DSC w/out System Fees 105% 107% 109% 111% 99% 106% 105% 106% 137% 105% (minimum 100%) Combined DSC, with GO Debt 168% 168% 170% 173% 160% 169% 169% 169% 197% 168% Sources and Uses of Funds Part of determining revenue requirements involves balancing the sources of funds for each system and the uses of funds for each system. Sources of funds include rate revenues, operating revenues such as installation fees and farm income, system development fees and inclusion fees, and bond and loan proceeds. Beginning fund balances and interest income are also sources of funds. Uses of funds include O&M expenses, debt service payments, cash funded capital improvements, and transfers to other funds. Additions to fund balances are also a use of funds. In years where sources of funds are greater than the uses of funds, fund balances are increasing. In years where uses of funds are greater than sources of funds, fund balances are being drawn down, typically for capital improvements. The net difference between sources and uses of funds each year represents the change in fund balances. Each year, the goal is to balance the need for rate revenue increases and debt issues with sources and uses of funds. The table below shows the annual sources and uses, including additions to and subtractions from fund balances. Table 14: Projected Water and Wastewater System Sources and Uses of Funds (Million $) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Water System Sources $61.60 $35.60 $35.70 $40.13 $37.80 $42.07 $41.54 $43.98 $50.37 $94.45 Uses $73.93 $34.22 $32.21 $37.40 $36.03 $38.75 $38.41 $42.10 $55.14 $78.61 Change in Fund Balance ($12.33) $1.38 $3.49 $2.73 $1.77 $3.33 $3.13 $1.88 ($4.77) $15.83 Wastewater System Sources $13.28 $13.65 $13.47 $13.79 $59.09 $14.45 $14.74 $15.15 $15.57 $15.96 Uses $10.96 $12.72 $14.20 $29.99 $31.98 $26.69 $13.79 $13.49 $14.94 $15.36 Change in Fund Balance $2.32 $0.93 ($0.72) ($16.20) $27.12 ($12.24) $0.94 $1.65 $0.64 $0.60 PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 20
Fund Balances PWSD s water and wastewater system projected cash and investment balances and its annual unrestricted cash flow was needed to determine the amount of existing fund balance was available for uses of funds. Fund balances include the operating, renewable water resources, and capital funds for the water system and operating and capital funds for the wastewater system. By policy, PWSD has specific fund reserves. For example, operating reserves are 25% of annual O&M expenses. Debt service reserves are equal to one year of debt service on each issue or loan. Fund reserves ensure PWSD maintains healthy fund balances to address unexpected drops in revenues due to weather or emergency capital improvement needs. Reserves restrict the use of fund balances each year. In addition to PWSD s current reserves, MWH recommends that renewable water resource fund balances are restricted to enable PWSD to pay for future renewable water project costs. The following table presents the projected year-end fund balances versus the target reserves. Table 15: Projected Water and Wastewater System Fund Balances and Reserve Targets (Million $) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Water System Ending Balance $40.05 $41.43 $44.85 $47.39 $48.87 $51.79 $54.34 $55.53 $50.06 $65.20 Target $16.33 $17.51 $23.24 $26.10 $31.91 $37.82 $32.11 $26.43 $20.77 $65.20 Operating $1.92 $2.12 $2.23 $2.38 $2.47 $2.63 $2.83 $3.00 $3.10 $3.21 Debt Service $9.44 $7.96 $7.96 $7.96 $7.96 $7.96 $7.96 $7.96 $7.96 $9.91 Employer Vacation/ Sick $0.14 $0.14 $0.14 $0.14 $0.14 $0.14 $0.14 $0.14 $0.14 $0.14 Rate Stabilization $1.62 $1.62 $1.62 $1.62 $1.62 $1.62 $1.62 $1.62 $1.62 $1.62 Certificate of Deposit $3.16 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Renewable Water Resources $0.05 $4.68 $9.79 $11.99 $17.72 $23.47 $17.56 $11.71 $5.96 $48.62 Repair & Replace $0.00 $1.00 $1.50 $2.00 $2.00 $2.00 $2.00 $2.00 $2.00 $2.00 Wastewater System Ending Balance $34.95 $35.88 $35.15 $18.95 $23.36 $11.13 $12.07 $13.72 $14.36 $14.96 Target $9.16 $9.24 $9.31 $9.39 $11.04 $11.13 $11.21 $11.31 $11.40 $11.51 Operating $1.95 $2.02 $2.09 $2.18 $2.25 $2.34 $2.42 $2.52 $2.61 $2.72 Debt Service $2.64 $2.64 $2.64 $2.64 $4.32 $4.32 $4.32 $4.32 $4.32 $4.32 Employer Vacation/ Sick $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 Rate Stabilization $4.38 $4.38 $4.38 $4.38 $4.38 $4.38 $4.38 $4.38 $4.38 $4.38 Required Rate Revenues and Proposed Rate Revenue Increases As presented in Table 1, required rate revenues are projected to increase by 3.75% for the water system from 2015 through 2024 given the projections presented in this report. No rate revenue increases for the wastewater system are anticipated during the study period. This forecast forms the basis for determining whether any adjustments need to be made to the actual user rates as the total revenue requirements change from year to year. Depending on the rate structure, a 3.75% increase in rate revenues does not necessarily mean a customer s bill will increase by 3.75%. The next steps in the rate study include evaluating the proposed revenue requirements under the existing and alternative rate structures for each of PWSD s customer classes. PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 21
Section 3 Cost-of-Service Study and Rate Design Cost-of-Service Analysis and Rate Design Summary Following the determination of revenue requirements for 2015 in the long-term financial planning models, Work Products 3 and 4 of MWH s rate study scope for (PWSD) comprise the cost-ofservice (COS) analysis and alternative rate structure review. This section outlines the steps completed in the COS analysis and presents the rates resulting from small changes to PWSD s water rate structure proposed to better achieve PWSD s goals. The COS analysis was completed by following generally accepted utility ratemaking methodologies as described by the American Water Works Association (AWWA). Costs to serve each class of PWSD s customers were calculated in the COS analysis. MWH s rate design model was used to calculate rates that recover those costs. In addition, impacts to representative customers bills were calculated to show the effect of alternative rate designs on current bills. A summary of results for 2015 compared with revenue under existing rates is presented below for water and wastewater costs of service. Table 16: Summary of Water and Wastewater Class Cost of Service 2015 Results Customer Class 2015 COS Revenue Under Existing Rates Difference from COS Percent Difference from COS Water Single Family $9,309,446 $9,105,288 ($204,157) 2.24% Multi Family 1,000,802 1,019,126 18,324 1.80% Commercial 1,000,744 1,095,314 94,570 8.63% Irrigation 2,875,714 2,573,628 (302,086) 11.74% Construction Hydrant Water 234,539 245,000 10,461 4.27% Total Water $14,421,245 $14,038,356 ($382,888) 2.7% Wastewater Single Family $7,478,267 $7,441,474 ($36,793) 0.49% Multi Family 1,260,603 1,253,905 (6,698) 0.53% Irrigation HOA 42,224 41,987 (238) 0.57% Commercial 1,138,671 1,132,648 (6,022) 0.53% Sewer Only 21,679 21,604 (75) 0.35% High Strength Surcharges 15,513 19,610 4,097 20.89% Total Wastewater $9,956,957 $9,911,228 ($45,729) 0.46% With PWSD Staff feedback, MWH evaluated two water rate structure options for single family, multi-family, commercial, and irrigation customers. One option for the Board to consider is maintaining the current rate structure for all customers and adjusting the rates to recover total costs of service. The second option is a new rate structure for all customers that consists of a three tiers for residential (single family and multi-family) customers and a uniform rate per thousand gallons (kgal) for commercial and irrigation customers. Rates developed under each rate structure are expected to recover the COS by class for 2015 given account and consumption projections for 2015. The table below summarizes the rate structure alternatives and average bill impact for typical customers. PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 22
Water Rates and Charges Table 17: Water Rate Design Options for 2015 Alternative Existing Structure Existing with 2015 COS New 2015 COS Rate Structure SF/MF Comm Irr SF/MF Comm Irr SF/MF Comm Irr Res Res Res Service Charge 1 SFE $28.16 $28.16 $28.16 $28.16 $28.16 $28.16 $28.16 $28.16 $28.16 Tier Thresholds (kgal per SFE) Tier 1 10 10 10 10 10 10 6 Tier 2 20 20 20 20 20 20 20 Tier 3 30 30 30 30 30 30 >20 Tier 4 50 50 50 50 50 50 Tier 5 >50 >50 >50 >50 >50 >50 Tier Rates (per kgal) Tier 1 $2.49 $2.49 $2.49 $2.63 $2.63 $2.63 $2.11 $3.39 $6.24 Tier 2 $4.04 $4.04 $4.04 $4.27 $4.27 $4.27 $3.94 Tier 3 $5.97 $5.97 $5.97 $6.31 $6.31 $6.31 $8.15 Tier 4 $7.80 $7.80 $7.80 $8.25 $8.25 $8.25 Tier 5 $8.61 $8.61 $8.61 $9.10 $9.10 $9.10 Average Impact 1 SFE 7 SFE 1 SFE 7 SFE Annual Usage 111 147 1,131 111 147 1,131 Water Bill Change $18.00 $23.94 $301.87 $1.14 $81.15 $1,802 Percent Change 2.76% 3.17% 3.96% 0.17% 10.75% 23.65% Wastewater Rates and Charges Given the stability of wastewater system revenue requirements and the sufficiency of existing wastewater rates, MWH recommends no change in either the wastewater rate structure or rates for 2015. High strength surcharges, however, should be reviewed as costs to treat certain constituents have changed over time. High strength surcharges include biochemical oxygen demand (BOD) or chemical oxygen demand (COD), phosphorus, and total suspended solids (TSS). MWH recommends the Board adopt these COS-based surcharges. Table 18: Wastewater Rates for 2015 Existing Rates 2015 COS Rates Difference Percent Difference Sewer Rates Fixed Rate per SFE $8.75 $8.75 $0 0.00% Flow Rate per kgal $8.63 $8.68 $0.05 0.60% Sewer w/o Winter Avg Usage $52.76 $53.03 $0.27 0.51% High Strength Surcharges (per pound) BOD $2.17 $1.35 ($0.82) 37.58% COD $0.86 $0.54 ($0.32) 37.00% Phosphorus $41.31 $62.89 $21.58 52.24% TSS $1.79 $0.44 ($1.35) 75.14% PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 23
Cost-of-Service Steps The following steps were used to prepare the COS analysis: 1. Determine the revenue requirements for a specified annual period referred to as a test year. Revenue requirements are defined as the amount of money the water and wastewater utility must recover from the rates charged to customers in order to meet all of the funds' operating and capital expenditures anticipated for the test year. The revenue requirements were described in more detail in the financial planning results section. For purposes of evaluating alternative rates and rate structures, 2015 is set as the test year. 2. Allocate the revenue requirements to customer classes. Following cost allocation guidelines, revenue requirements are allocated to specific customer classes based on how various classes actually use the systems. Demand characteristics of customer classes and allocations of costs to customer classes are summarized in this section. 3. Determine rates for service. Rates are based on the allocated costs of service for each customer class, meaning that recommended rates for a given class reflect the cost of serving that class. In this study, MWH prepared different rate structures only for the water system and recommends the wastewater rates and rate structures remain unchanged for 2015. Revenue Requirements Revenue requirements for PWSD s water and wastewater systems include total operating and capital expenditures (including debt service requirements, funding of reserve accounts and cash funding of capital expenditures) that must be recovered from the revenues provided from its rate and fee structure. Revenue requirements for 2015 are summarized below. Non-rate revenues include miscellaneous fees and charges that reduce the revenue required from rates. These revenues include meter installation fees, suspension fees, land leases, inspection fees and other miscellaneous fees, internal transfers, Build America Bonds (BAB) subsidies, interest earnings, wastewater operating tax revenues, and specific ownership taxes. The total user-charge requirement is the amount allocated to PWSD s customer classes in the COS analysis. Table 19: Water and Wastewater System 2015 Revenue Requirements Water System Wastewater System Operating and Maintenance Expenses $10,725,919 $7,784,334 Annual Debt Service Outstanding Debt 3,418,627 734,787 Annual Debt Service Projected Issues 0 0 Transfers for Capital Projects 1,000,000 2,000,000 Change in Fund Balance 2,978,321 642,186 Total Revenue Requirement $18,122,866 $11,161,307 Less Non Rate Revenues Other Revenues $748,000 $1,138,754 Total of Other Capital Funding 955,236 0 Internal Transfers 1,996,385 0 Interest Earnings 2,000 65,596 Total User Charge Requirement $14,421,245 $9,956,957 PARKER WATER AND SANITATION DISTRICT // NOVEMBER // 24