How High is Up?Setting Realistic Utility FeesIowa League of Cities Annual ConferenceSeptember 28, 2012Brad Potter, I&S Group
I&S Group, Inc. - www.is-grp.com
Presentation Topics• Water• Sanitary Sewer/Wastewater• Electric, Natural Gas, Stormwater, andRefuse will not be discussed in thepresentation, but many of the principlescan be applied.
Best Practices for Setting RatesSource: Darts (Wikipedia)• Many factors will be considered in determiningrates including…..
What do our communities think?• Late Summer 2012 we surveyed central andnorthern Iowa communities about their currentpractices
Survey Summary continued…• Do your rates cover expenses on an annual basis?Yes 93.8%No 6.3%• Does your budget plan for long term systemexpenditures?Yes 60.6%No 39.4%
Survey Summary continued…• Rates by PopulationPopulation Water Base Rate Rate per 1000 Gallons Wastewater Base Rate Wastewater per 1000 gallons0-500 $17.21 $5.82 $17.71 $4.37501-1000 $14.74 $5.12 $13.66 $4.971001-3000 $12.02 $4.87 $15.39 $5.143000+ $9.58 $4.32 $10.78 $4.43
Best Practices• Finances and Current Practices• Planning• Modeling/ForecastingAnytime is a good time to conduct a Utility Rate Review.
Finances and Current Practices• Revenue• Expenses• Current Practices
Water & Sanitary Sewer Funds• Start with Water Fund• Past Financial Practices– Review past three years of actual expensesand revenues along with current year budget
Water & Sanitary Sewer Funds• Revenues – Customer Sales, Late Fees, Hookup Fees• Customer Sales• Base Rate – Minimum fee that a city charges for service.This can vary among residential, commercial and industrialcustomers.• Consumption Rate – Cost per 1,000 gallons for waterand wastewater.
Expenses• Labor(make sure to count Clerk/Utility Billing and Public Works Staff)• Testing• Utilities• Debt Service
Current Practices• Understanding Utilities at the City level• The City should have a full understandingof the system so they realize the trueoperational revenues and expenses.– City staff (Administrative and Public Works)– City Council– Knowledge Management
Accurate Data - Unaccounted WaterExample: the City of Reality Heights pumps 15,000,000gallons of water on an annual basis and only bills for10,000,000.• 33% of water pumped is not billed.• 10% or less is acceptable for flushing hydrants,backwashing water treatment plants, and fire events.• Cause is usually inaccurate, aging meters in homes andbusinesses.• Water Audit Spreadsheet – Iowa Rural Water Associationhttp://www.iowaruralwater.org/technical_tips_n_tools.htm
Climate Data• The weather will affect water and wastewaterrevenues and expenses• Important to take this in consideration whenlooking at past revenues and expenditure• Weather data can be tracked in past years fromthis website:http://climate.engineering.iastate.edu/DataArchive.html
Who is paying their “Fair” Share?• Number of residential, industrial and commercialusers should be taken into consideration andwho is paying for system improvements.
Planning• What future projects should a Cityconstruct?• Capital Improvement Planning is a greatcomplimentary study when examiningrates.
Projects Should Consider…• Need– Compliance Driveni.e. DNR and EPA– Customer Driveni.e. Basement Backups• End of Life Cycle– Year to be Implementedand Project Cost
Modeling/Forecasting• Forecasting Revenue and Expensesthrough budget worksheet• Can be forecasted for 1 to 30 years• City Demographics should be consideredif the City is:– Growing– Shrinking– Maintaining
Model Forecasting Revenue Input• Revenue Base Rate• Number of Gallons sold at User Rate• Late Fees
Ways to Increase Revenues• Increase Rates• Examine New Water Meter System– Initial Cost of System– Usage may initially decline after installation– Administrative time could be saved withprocess
Expenses• 3 year average of expenses• Consider cost of large capital projects inmodel and new debt service payments• Inflation for Expenses
Items to be Reviewed Decrease Expenses• Review proper Labor expense allocation• Energy Efficiency Improvements• Cooperative Agreements with NeighboringCities
Reserves – How much is enough?• At a minimum a City needs to cover basicexpenses.• Ideally, reserves should be at least one totwo years of annual budget.
Run the ModelExample: Reality Heights has a $600,000wastewater project that they need tocomplete next year.• They will use SRF 20-year loan to finance.• 250 users are charged $35 base rate and no user rate.• Expenses are $85,000 per year with inflationary increaseof two years, and they have $90,000 in reserves.
Run the Model continued…The project will cost users $12.23 per month.$250,000Cumulative Sanitary Sewer Fund Balance$200,000$150,000$100,000$50,000$02010 2015 2020 2025 2030 2035 2040 2045 2050 2055-$50,000-$100,000-$150,000-$200,000-$250,000
Re-examine Inputs on Model• Re-examine ways to increase revenues and expenses• Analyze Base Rate vs. Cost per 1,000 gallons– Larger Base Rate will provide more stable income however maynot be equitable.• Review Commercial /Industrial User Rates• Large Capital Project– Are there economies scale to replacing other utilities as well asstreet?– Examine funding agency options such as CDBG grants, SRFLoans and USDA Rural Development.
Rate Raising Scenarios• Gaint Leap – May double and sometimes triple rates• Incremental – Raise rates 20 to 40 % for 3 to 5 years• Inflationary increases should be incorporatedevery one to two years.• Peer Review – Do not rely on what surroundingcommunities are charging.– Different Cities, different systems and circumstances
Public Education Component• Most of the time the public will understandan increase in fees if it is explained why itis needed.
Public Education Component
Public Education Component• Demonstrate the problem to the public,and detail the age of infrastructure.
Public Education Component• Water, Wastewater, Stormwater are valuableservices with high value compared to otherutilities.Monthly Utility Item ComparisonsWater/Sewer $55Electric Bill $65Natural Gas $85Cable/Phone/Internet $140• Bottled Water is $1,200 for 1,000 gallons
QuestionsFeel free to contact me at:firstname.lastname@example.org