RATE SETTING OVERVIEW City of Richmond, VA Department of Public Utilities
VALUE OF UTILITY SERVICES
OVERALL UTILIY PRICING GOAL Design a pricing structure that is consistent with industry practices, responsive to stakeholder objectives, and preserves the financial well-being of the utility
WHO ARE THE UTILITY STAKEHOLDERS? Communicate, Educate, and Empower Policy Makers Customers Regulators Financial Community Environmental Supporters Utilities Local Government Public Works Department Contractors and Vendors Utility Employees Public Officials Developers
WHAT IS COST OF SERVICE? Revenue Requirements Cost of Service by Customer Class The attempt to recover costs from users in reasonable proportion to their use of the system, recognizing the impact of each class on system facilities and operations Each group including wholesale will pay its own way Cost of service is the fundamental benchmark used for establishing utility rates in the United States
RATE - SETTING PROCESS PUBLIC OUTREACH
IDENTIFY FINANCIAL AND PRICING OBJECTIVES Cost-of-Service Based Allocations Financial Sufficiency Customer Understanding Ease of Implementation Administrative Burden Water Efficiency Rate Stability Minimal Customer Impacts Economic Development Revenue Stability Affordability to Disadvantaged Customers Equitable Contributions from New Customers
PRIORITIZE PRICING OBJECTIVES Objectives often compete and must be balanced: Larger fixed charges promote revenue stability but may be contrary to water efficiency and conservation goals Detailed cost of service based allocations may result in complex pricing structures that are difficult for customers to understand
RATE - SETTING PROCESS PUBLIC OUTREACH
UTILITY FINANCIAL PLANNING As an enterprise fund, the utility must run like a self-supporting business Revenues Operating Non-Operating Financial Policies Reserve Levels Coverage Ratios Expenses O&M CIP Debt Multi-year Financial Plan Rate/Revenue Adjustment Forecast Cost increases primarily driven by infrastructure reinvestment, regulatory, and expansionrelated capital needs Revenues based on user charge, customer accounts, and growth projections Financial policies help guide the balancing process
DEMAND PROJECTIONS» Demand projections must be developed recognizing historical trends, weather conditions, conservation practices, and other factors affecting consumption» 1-5 years (short-term); 5-30 years (long-term) 11
RATE SETTING PROCESS PUBLIC OUTREACH 12
COST OF SERVICE CONCEPT The Goal is to Achieve Equity Recover costs from users in proportion to their use of the system by recognizing the impact of each service area or class on system facilities and operations 13
ALLOCATE COSTS (WATER EXAMPLE) SUPPLY RESIDENTIAL BASE DELIVERY PEAKING COMMERCIAL METER MAINTENANCE INDUSTRIAL CUSTOMER SERVICE FIRE PROTECTION GOVERNMENTAL 14
RATE SETTING PROCESS PUBLIC OUTREACH 15
DESIGN RATE STRUCTURE Process that aligns rates and charges with pricing objectives 16
UTILITY SYSTEM COST STRUCTURE* Fixed Costs are High Variable Costs are Low 80 TO 95% of total annual costs 5 TO 20% of total annual costs *Excludes purchased natural gas. 17
WATER AND WASTEWATER SYSTEM COST AND REVENUE IMPARITY (EXAMPLE) 18
RATE SETTING PROCESS PUBLIC OUTREACH 19
WHY ARE COSTS ALWAYS INCREASING? 20
WHY ARE COSTS ALWAYS INCREASING? Increasingly Stringent Regulations Regulated by the U.S. EPA and Virginia Dept. of Public Health Monitors 10 microbial contaminants and substances, along with disinfectants, turbidity, lead, copper, etc. As regulations become more stringent, costs rise Aging Infrastructure Parts of Richmond s utility system are almost 100 years old Historical Cost Natural Gas - $625.9M Water - $552.3M Wastewater - $720.7M Stormwater - $23.4M Almost $2B in assets will require repair and replacement Declining Per Capita Consumption Richmond has seen annual decrease in water and natural gas consumption Forecasting continued decline Because the majority of DPU s costs are fixed, the cost per unit will likely increase 21
HOW DOES DPU ADDRESS AFFORDABILITY? 22
HOW DOES DPU ADDRESS AFFORDABILITY? Customer Assistance Programs» Volumetric rates provide customers with control over their bill Evaluating residential lifeline water rate for non-discretionary consumption» Evaluating additional stormwater rate tiers to mitigate impact on smaller parcels» Current Programs MetroCare Assists families and individuals experiencing special hardships or financial difficulties with their heating bills Assists eligible customers with paying water and wastewater bills Special payment agreements Senior assistance Financial assistance for plumbing repairs and replacements (implementation ongoing) 23
COST OF BOTTLED WATER X = $4,000 4,000 quart bottles of water $1.00 PER BOTTLE FOR 1,000 GALLONS AVERAGE COST OF RICHMOND DPU WATER = $8.64 FOR 1,000 GALLONS* Utility Water Based on monthly bill for a 6 Ccf residential water customer 24
REDESIGNED BILL 25
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