DRAFT Recycled Water Cost of Service and Rate Study Report Napa Sanitation District December 2011
DRAFT Executive Summary Recycled Water Cost of Service and Rate Study Report 2 The Napa Sanitation District (District) retained Raftelis Financial Consultants, Inc (RFC) to conduct a recycled water cost of service and rate study to determine the appropriate rate for its existing and potential new recycled water customers when the current agreements expire in October 2015. The rate study process was conducted in conjunction with input from District staff and Board members. The study included extensive review of the current and projected recycled water demands, operating and capital expenses, and policy issues related to allocation of costs among recycled water and wastewater enterprises. The following sections document the background, cost of service review, analysis, findings, and recommendations that are the product of the study. Background The District was formed in 1945 to provide wastewater collection, treatment, and disposal services to the residents and businesses within the City of Napa and surrounding unincorporated areas of Napa County. Wastewater from over 35,000 customers is transported through approximately 250 miles of sewer pipelines and 3 lift stations to be treated at the Soscol Water Recycling Facility (SWRF), which is a secondary and tertiary treatment facility with 15.4 million gallons per day (MGD) of total treatment capacity. The total average dry season recycled water capacity is currently 2,000 acre feet (AF) or approximately 3.65 MGD. Treated wastewater is only allowed to be discharged to the Napa River from November 1 through April 30 per the Regional Water Quality Control Board. From May 1 through October 31, treated wastewater is either stored in stabilization ponds or treated further and sold as recycled water, primarily for irrigation purposes to industrial parks, golf courses, and vineyards. Recycled Water System Revenues In fiscal year (FY) 2011, the District provided approximately 850 AF of recycled water to 11 customers under contractual agreements. The current recycled water rate under the agreements is $0.91 per thousand gallons (kgal). The existing recycled water revenue is approximately $0.5 million. Non-billable inside District use in FY 2011 was 780 AF, projected to decrease to only 184 AF in FY 2015. Thus, the total recycled water usage in FY 2011 was approximately 1,630 AF per year and is expected to increase slightly in FY 2012 with the addition of Valley Gate Vineyards. The District expects to add 5 customers using an additional 800 to 1,200 AF per year from FY 2014. Since the agreements will expire in October 2015 and the District plans to expand capacity and add new customers into the recycled water system, the District wanted to evaluate the actual cost of providing recycled water services in order to set a fair and equitable recycled water rate for all customers.
Recycled Water System Expenditures To produce recycled water, wastewater has to be treated through three treatment process: primary, secondary, and tertiary. Typically, since wastewater needs to be treated to secondary standards before discharge (in this case, into the Napa River), therefore historically, only tertiary treatment costs are considered as true recycled water production costs. Tertiary treatment production costs include additional filters and disinfection costs. Additionally, the District incurs operating and maintenance (O&M) costs related to customer service, meter reading, billing, distribution, and maintenance costs. The District also issued debt to build the original distribution system. Since these O&M costs and the annual debt service relate to providing recycled water service, they are included in the total recycled water expenses. Existing O&M costs, including distribution costs, total $0.56 million per year. Existing debt service is $0.6 million per year, as shown in Table 1-1. 3 The District plans to increase recycled water treatment capacity to 3,600 AF in order to provide recycled water to additional customers in FY 2014. Total capital expansion costs are estimated at $13.9 million for Phase 1 and $4.9 million for Phase 2. Annual debt service is approximately $0.9 million per year starting in FY 2014 for Phase 1 expansion. Total increase in O&M costs, including distribution costs, is estimated at $0.55 million per year, starting in FY 2014. In addition, the District expects to spend an average of $0.7 million per year in annual repair and replacement projects. Table 1-1 shows the total existing and projected expenses. O&M costs are inflated at an average 3.5% per year and capital costs are inflated at 3% per year. Table 1-1 Total Recycled Water System Expenditures Description 2012 2013 2014 2015 2016 Operating Cost - Tertiary Component $320,854 $331,919 $343,475 $355,477 $367,942 Distribution & Maintenance Cost $65,082 $66,525 $68,584 $70,706 $72,895 Future O&M Costs $0 $0 $346,990 $359,850 $373,240 Future Distribution Cost $0 $0 $37,500 $38,625 $39,784 Existing Debt Service $412,306 $411,839 $413,065 $410,801 $411,450 Future Debt Service $0 $0 $636,004 $636,004 $636,004 Average Capital Replacement Costs $735,270 $735,270 $735,270 $735,270 $735,270 TOTAL RECYCLED WATER COSTS $1,533,513 $1,545,553 $2,580,889 $2,606,734 $2,636,586 Description 2017 2018 2019 2020 2021 Operating Cost - Tertiary Component $380,891 $394,343 $408,321 $422,845 $437,940 Distribution & Maintenance Cost $75,152 $77,479 $79,879 $82,354 $84,905 Future O&M Costs $387,185 $401,708 $416,836 $432,596 $449,017 Future Distribution Cost $40,977 $42,207 $43,473 $44,777 $46,120 Existing Debt Service $411,752 $411,707 $411,316 $410,578 $412,638 Future Debt Service $636,004 $636,004 $866,554 $866,554 $866,554 Average Capital Replacement Costs $735,270 $735,270 $735,270 $735,270 $735,270 TOTAL RECYCLED WATER COSTS $2,667,231 $2,698,719 $2,961,649 $2,994,975 $3,032,445
Recycled Water Rates Calculation As potable water becomes more scarce and expensive, recycled water becomes a viable and attractive alternative to potable water for irrigation purposes. It provides a more reliable source of water for customers and reduces dependency on groundwater and imported water for agencies. In the initial stages, due to the high capital investment and the small number of users, recycled water is too cost prohibitive for users if the total costs are used to determine the recycled water rate. To encourage recycled water use, agencies price the recycled water rate lower than the potable water rate, in part due to the consumer perception that recycled water is lower in quality than potable water. 4 There are two general methodologies to price recycled water: a cost of service approach, where users are charged the actual costs of providing service, and a market pricing approach, where recycled water rate is set at a percentage of potable water rate. Most agencies in California use the market pricing approach and set recycled water rate as a percentage of potable irrigation water in the range of 50 to 90 percent to promote recycled water use. However, as potable water rates have increased significantly over the last few years, a review of the cost of service is justified. Cost of Service Recycled water rates are calculated for FY 2016 and beyond since the current agreements and rates expire in October 2015. The cost of providing service can be determined on an average basis or incremental basis. Under the average method, all the costs shown in Table 1-1 above are considered and spread over the total sales of approximately of 1,800 to 2,000 AF per year from FY 2016 to 2021. Under this method, the recycled water rate ranges from $4.00 to $4.49 per kgal. Under the incremental method, only the costs of the recycled system expansion are considered. The rationale for this method is the fact that the District is restricted from discharging wastewater into the Napa River during the summer months and selling recycled water during those months helps the District meet that requirement. Thus, it can be argued that sewer customers should pay for the existing recycled water costs. Moreover, since the recycled water expansion is exclusively for recycled water customers, the incremental method provides a strong nexus for determining the recycled water rate. Under this method, only the future costs (excluding average capital replacement costs) are included in the calculation. Ideally, the incremental cost would consider just the incremental capacity created. However, the resultant rates in the range of $2.71 to $3.38 per kgal may be too high. To encourage recycled water use, the District may want to evaluate the modified incremental cost method, in which average capital replacement costs would be included in the total costs, and total sales would be used instead of incremental sales. The resultant recycled water rate under the modified methodology ranges from $2.69 to $3.08 per kgal. Table 1-2 shows the recycled water rate under the average rate and modified incremental rate methods. Table 1-2 Recycled Water Rate Calculation 2016 2017 2018 2019 2020 Total Sales (kgal) 593,968 633,968 675,431 675,431 675,431 Method 1: Average Rate $4.44 $4.21 $4.00 $4.38 $4.43 Method 2: Modified Incremental Rate $3.00 $2.84 $2.69 $3.05 $3.08
Market Pricing A market pricing approach was also considered. Through discussion with District staff, three sources of potable water rates to which the District could reasonably peg the recycled water rate were selected. All three rates are irrigation rates for potable water since recycled water is predominately used for irrigation and landscaping purposes. Since some current and future recycled water users are inside the City of Napa, some are outside the City of Napa and some are within the City of American Canyon s water service district boundary, the irrigation rate from each agency was considered and compared to the cost of service rate. As stated in the section below, a majority of the group during the public outreach session voted for a cost of service approach. Moreover, as potable water rates continue to increase, the cost of service rate for recycled water may eventually be lower than a fixed percentage of potable water. Additionally, it is easier to explain to customers and gain their approval under the cost of service approach since the rates are calculated using the actual costs the District incurred rather than as a percentage of an outside agency potable water rate. Therefore, the market pricing approach was dropped from the analysis in favor of the cost of service approach. 5 Public Outreach During the course of the study, District staff conducted a public outreach session to obtain customers input regarding the different policy options in determining recycled water rate. Initially, a total of 5 options were presented to the public for their opinion. The options were as follows: Option 1: Cost of Service Rates Total Costs Option 2: Cost of Service Rates New Costs Only Option 3: Market-based Rates Percentage of City of Napa Outside City Irrigation Rate Option 4: Market-based Rates Percentage of City of Napa Inside City Irrigation Rate Option 5: Market-based Rates Percentage of City of American Canyon Outside City Irrigation Rate At the end of the presentation, the group was asked for their opinion regarding each of the options. The overwhelming majority favored Option 2. Other policy options were also presented for public opinion, which are discussed in detail in the Appendix. Recommendations Since the District was able to separate recycled water costs from wastewater costs, it would be more equitable to price recycled water at the cost of providing service. Moreover, due to the District s zero discharge requirements, it would not be unreasonable for existing wastewater customers to continue to pay the existing recycled water costs to the extent that the wastewater users still needed water to be recycled to meet the zero discharge requirements of the permit. Given the District s characteristics, RFC recommends that the District implements the recycled water rate under the modified incremental cost of service approach in order to recover the additional costs as well as provide an incentive for future customers. The average 5-year recycled water rate for FY 2016 to 2020 is $2.93 per kgal.
Other Issues During the course of the study, RFC also examined differential Inside District vs. Outside District recycled water rate, different winter and summer rates, interruptible rate, and a monthly meter charge in addition to the unit rate. Outside District customers do not pay for wastewater service; thus, they should pay the recycled water rate under Method 1. However, higher rates would discourage recycled water use and would lower the total usage thus increasing rates for everyone. Since total expected recycled water use from Outside District customers equal approximately 25 percent of total expected usage, it may be more beneficial to charge one rate to all customers. 6 In our experience, while it might seem to make sense to have interruptible service, it conflicts with customer needs since water will not be available when they need it most and requires customers to have storage capacity. Having differential rates for winter and summer periods would incentivize winter use to maximize overall recycled water use while using existing capital facilities in the winter months. Winter water would only be an option for those customers with existing storage, which is estimated at 400 to 1,000 acre feet. RFC conducted a recycled water rate survey of the surrounding agencies and found that most agencies charge a fixed meter charge in addition to the unit rate. It would not be imprudent for the District to consider implementing a fixed meter charge to collect fixed costs such as meter reading that do not vary by customer. Based on our initial analysis, the District would need to collect approximately $29 per customer per month to recover the meter reading costs in FY 2016.