Item 5.1 - Water and Wastewater Rate Study and Public Workshoppo,,
City of Pit
COUNCIL AGENDA REPORT
1A' THS C°t
DATE: October 15, 2019
TO: Honorable Mayor and Members of the City Council
FROM: Aaron Beanan, Director of Finance
CONTACT: Aaron Beanan, Director of Finance
858) 668-4411 or abeanan(c poway.orq
SUBJECT: Water and Wastewater Rate Study and Public Workshop
Summary:
On March 19, 2019 the City Council directed staff to have Raftelis Financial Consultants, Inc.
RFC) conduct a comprehensive cost of service study (COSS), evaluate the city's current water
and wastewater rates, and develop several rate structures for consideration at a public workshop.
The goals of these actions were to help ensure compliance with the law, ensure each rate payer
class was paying their proportionate share of the water and wastewater costs, and ensure
financial sustainability of both the water and wastewater enterprise funds. This staff report outlines
the outcomes of these efforts for consideration by the City Council and the public during the first
of two public workshops.
Recommended Action:
It is recommended that the City Council receive and file this report as an informational item.
Discussion:
During the City Council discussion at the January 8, 2019 Water and Sewer Rate workshop, the
Council expressed interest in conducting a new water and sewer rate study prior to the 2020 rate
setting process, as it had been many years since a COSS had been conducted. During the
discussion the City Council also indicated the consultant and staff should evaluate different rate
structures and how they impact different classes of rate payers.
After issuing a Request for Proposal (RFP) on February 4, 2019 to conduct a comprehensive
COSS, investigate and evaluate different rate structures and their impacts to rate payers, ensure
financial sustainability, and ensure compliance with the law, the city hired RFC. A contract with
RFC was recommended to the City Council for approval on March 19, 2019 based on their
industry expertise, their extensive experience performing similar studies throughout California,
and their familiarity with the city.
As the goal of the workshops is to provide several different rate structures and information about
how each structure impacts rate payers, multiple options are presented in this staff report. A total
of nine different rate design options are presented for water along with four different rate design
options for wastewater. Additionally, all rate design options reflect the proposed revenue
increases for 2020 and 2021 to fully describe the impacts. The proposed revenue increases are
independent of the rate design options and will be more fully discussed in January's Council
meeting. The proposed revenue increases are determined by the costs to operate the water and
wastewater systems while the rate design options represent different ways to allocate those costs
of 30 October 15, 2019, Item #5.1
amongst rate payers. It was very important to Council that multiple rate designs were presented
along with the associated impacts to ratepayers so that each potential option's impacts were
easily understood. As a result, this staff report is substantially longer, more complex and more
technical than normal staff reports. All information described in this report will be presented by
staff at the workshops.
Through the COSS process, RFC accounts for the costs of providing water and wastewater
services and allocates these costs amongst the rate payer classes based on their current
proportional use of the systems. This rebalancing of customer classes' impacts on the system
means there will be uneven impacts to rates in year 1. The rebalancing occurs whenever a cost
of service study is updated. The costs of providing services include the costs of importing water
into Poway's water system, treating and testing the water, distributing the water to its customers,
and transporting any resulting wastewater to San Diego for treatment along with the associated
rehabilitation and repair costs for this infrastructure. This information is combined with the financial
plans for water and wastewater to develop proposed rates and rate designs. The formal COSS
report that outlines this information (i.e. the methodology, cost of service, financial plan, and rate
design) is not part of this workshop. This report will be prepared once a water and wastewater
rate structure has been selected, from either workshop one or workshop two. This is due to the
amount of work that would go into compiling a report for the nine different options for water and
four different options for wastewater that are presented in this report.
This workshop represents the first step in a proposed two-year rate setting process. A two-year
rate setting process strikes a balance between flexibility and efficiency. A two-year period is short
enough to allow rate changes if future projections are different than anticipated while also
reducing the costs of adopting new rates. The following graphic shows the proposed timeline for
the first two-year cycle.
Workshop 1: Workshop 2:
Set Public Mail 218
Oct. 15, 2019 Nov. 19, 2019 Hearing: Notice:
Jan. 7, 2020 By Jan. 17, 2020
Public Year 1 Rates Year 2 Rates
Hearing: Effective: Effective:
Mar. 3,2020 Mar. 3, 2020 Jan. 1, 2021
Legal Compliance
Water and wastewater utilities are governed by numerous laws. Perhaps the most important, and
well known, law governing water and wastewater came about with the passage of the Proposition
218 Omnibus Implementation Act in 1996. This proposition added Articles 13C and 13D to the
California State Constitution. The following are some of the substantive provisions governing a
property-related fee under Article 130:
1. Revenues derived from the fee or charge must not exceed the cost to provide the services,
2. Revenues derived from the fee or charge must not be used for any purpose other than
that for which the fee was imposed,
3. The amount of the fee or charge imposed upon any parcel or person as an incident of
property ownership must not exceed the proportional cost of the service attributable to the
parcel, and
4. The fee or charge may not be imposed for a service unless the service is actually used
by, or immediately available to, the owner of the property subject to the fee or charge.
2 of 30 October 15, 2019, Item #5.1
The COSS is the most common way for a local agency to determine what it costs to provide water
and wastewater service, including the short and long-term operations, maintenance, financial,
and capital expenditures of the systems. The COSS also helps ensure the proportional costs of
the water and wastewater services are reasonably allocated to the city's rate payer classes based
on the cost differentials required to serve each rate payer class. RFC's COSS analysis helps
ensure the city is compliant with these laws.
Cost of Service
Through the COSS process, RFC accounts for the costs of providing water and wastewater
services and allocates these costs amongst the rate payer classes based on their proportional
use of the systems. The City of Poway's water and wastewater systems include $100's of millions
in infrastructure necessary to provide associated services. This infrastructure includes water
assets to transport water from the San Diego County Water Authority's (SDCWA) system to the
city's system, assets to treat the water to safe drinking levels, and assets to deliver safe, reliable
water on demand to each rate payer's property. The following are some facts about the water
system:
294 miles of transmission and distribution pipelines
5,044 water valves, 21 pressure reducing stations and 14 pump stations (designed to raise
water to higher elevations)
19 reservoirs (Lake Poway holds ~one billion gallons of water)
One 24 million gallon/day water treatment plant,
2,435 fire hydrants
Approximately 45,000 tests to ensure Poway water meets or exceeds the State and
Federal standards for water quality
This also includes infrastructure to transport wastewater from the city to various treatment plants
within the County of San Diego in a safe and reliable manner including over 186 miles of
wastewater pipes, five lift stations (designed to raise wastewater material to a higher elevation),
and over 4,000 maintenance covers.
To help ensure the city continues to provide safe, reliable, and affordable water and wastewater
services, the city proactively invests in rehabilitation and repair of its infrastructure. For example,
the city is proactively investing millions of dollars into the water system's Clearwell reservoir and
its associated valves, originally constructed in 1964, to help ensure safe and reliable water
continues to be delivered to rate payers while also helping reduce water loss. When a utility
experiences water loss in its distribution system, the losses increase production costs and force
the utility to buy more water than a rate payer requires. Therefore, reducing water loss helps
reduce costs to rate payers.
Another example is the city's proactive multi-million-dollar investment into upsizing a wastewater
pipe on Martincoit Road. This will help ensure the health and safety of Poway's residents while
reducing the risk of clean-up costs and fines that could result from a wastewater spill. A more
detailed explanation of current water and wastewater infrastructure investment is discussed in the
city's Fiscal Year 2019-20 Comprehensive Financial Plan.
All this physical infrastructure requires highly trained and state-certified city staff to monitor, test,
maintain, and repair the water and wastewater systems in an efficient and effective manner along
with prudent long-term financial management to help ensure the sustainability of the systems.
The city helps maximize the value to rate payers while minimizing the impacts to rate payers by
sharing resources such as financial, human resources, information technology, legal, and
executive staff with the city's General Fund that would normally be solely the responsibility of rate
payers in standalone districts. In Poway, because these resources are shared, rate payers pay a
3 of 30 October 15, 2019, Item #5.1
fraction of the cost for these services helping save money each year. Staff is planning to ask
Council for funding before fiscal year end to update the city's cost allocation plan during Fiscal
Year 2020-21. The cost allocation plan identifies, documents, and allocates costs incurred by the
General Fund that are the responsibility of other funds. Additionally, the city's long-term approach
to prudent financial management allows the city to minimize the impacts of capital rehabilitation
and renewal, changes in usage, and unplanned emergencies with advanced planning and
appropriate reserve levels.
As discussed in the legal compliance section, the proportional costs of the water and wastewater
services need to be reasonably allocated to the city's rate payer classes based on the cost
differentials required to serve each rate payer class. Part of this allocation is based on how a rate
payer class uses the system. Factors such as number of rate payers in each class and the
demand associated with each class are some examples of how their proportional use of the
system is reasonably determined.
The following chart shows how each class of water rate payer's use of the system has changed
since the last comprehensive study was done in 2007, based on RFC's analysis.
Cost of Service by Customer Class (Water)
10%
IL MI0% r
Sngle Famiy M1ut array Landscape City Potable
Residentel Residential Irrigation
Non-ResidentialUsage Recycled Water
a 2007 70.0% 4.4% 1.8% 17.5% 1.0% 5.2%
2019 72.5% 3.7% 2.2% 15.9% 1.9% 3.7%
Since 2007, the single-family residential rate payer class has increased its use of the water
system, relative to some of the other rate payer classes. Based on cost of service principles, and
to ensure compliance with the law, this means the single-family rate payer class bears a slightly
larger share of the overall water system costs, relative to 2007, while the non-residential rate
payer bears slightly less. This shift in cost of service between customer classes means some
rates will increase while others may decrease, all else being equal.
4 of 30 October 15, 2019, Item #5.1
The chart below shows how each class of wastewater rate payer's use of the system has changed
since 2007, based on RFC's analysis.
Cost of Service by Customer Class (Wastewater)
60%
50%
40"-
30%
2036
10%
096
Single Family Residential Muti-Farnity Residential Non-Residentei Churches&Sch.:
2007 68.4% 9.2% 20.1% 2.3%
2019 66.4% 11.0% 20.0% 2. 6%
Since 2007, the single-family residential rate payer class has used proportionally less of the
wastewater system than, for example, the multi-family residential rate payer class. This means
the single-family residential rate payer class bears a slightly smaller share of the overall
wastewater system costs, relative to 2007, while the multi-family residential rate payer class bears
slightly more. This shift in cost of service between customer classes means some rates will
increase while others may decrease, all else being equal.
Water Rate Design
The rate design process develops rates and rate structures that generate revenue from, and
within, the various rate payer classes and is completed once the cost of service has been
determined and these costs have been allocated to the rate payer classes based on their
proportional use of the system. Multiple rate design options may be developed; each compliant
with the law. This is possible because each rate design option is balancing different pricing
objectives within a broader legal framework. For example, one rate design option may favor
sustainability over affordability by increasing the revenue generated from fixed charges. This is
legally compliant as long as fixed charges were reasonably allocated to the city's rate payers
based on the cost differentials required to serve each rate payer class. Based on City Council
direction, RFC has developed several rate design options for Council consideration and public
input. It was very important to Council that multiple rate designs were presented along with the
associated impacts to ratepayers so that each potential option's impacts were easily understood.
As discussed in the Cost of Service section above, the rebalancing of customer classes' impacts
on the system means there will be uneven impacts to rates in year 1. This occurs whenever a
cost of service study is updated. Subsequent years rate increases will be consistent across rate
payer classes. Each option presented is compliant with the law.
5 of 30 October 15, 2019, Item #5.1
Water Residential Rate Payer Class Rate Design Options:
RFC has developed several rate design options for the residential rate payer class. The other rate
payer classes, such as non-residential, were not given multiple rate design options because their
use of the system doesn't lend itself to multiple rate designs. As discussed in the legal compliance
section, any rate designs must be based on how a rate payer class is served by the system.
A total of nine residential rate design options have been provided for discussion purposes. There
are three tier structures: a two tier, three tier, and four tier structure.Within each tier, three different
fixed/variable ratios have been provided. The options are as follows:
Option Residential Tiers Fixed (%) Variable (%)
1a 2 17% 83%
1 b 2 20% 80%
lc 2 25% 75%
Option Residential Tiers Fixed (%) Variable (%)
2a 3 1 83%
2b 3 20% 80%
2c 3 25% 75%
Option Residential Tiers Fixed (%) Variable (%)
3a 4 17% 83%
3b 4 20% 80%
3c 4 25% 75%
Tiers are related to the volumetric, or variable, revenue collected from rate payers and reflect the
increasing costs of supplying more water to residential rate payers who use higher amounts of
water. Only three total tier structure options are being presented because they most reasonably
reflect an appropriate distribution of expenses. In Poway's case, a tier structure with five tiers, for
example, would less reasonably reflect an appropriate distribution of expenses.
The fixed/variable ratio reflects the amount of revenue collected between fixed charges which are
not dependent on water usage and volumetric, or variable, charges which are dependent on water
usage. This ratio is important for understanding the level of revenue stability. The more revenue
is collected via a fixed charge, the less likely the water system will be impacted by changes in
rate payer usage. For example, the more revenue is collected via fixed charges, the less likely a
water system will be to increase rates in times of conservation as less of its revenue is affected
by decreased demand, all else being equal.
The first chart on the following page shows water is currently collecting 16 percent of its revenue
from fixed charges, and 84 percent of its revenue from variable charges. However, as the second
chart shows, the revenue being recovered via fixed charges does not align with water's fixed
costs. As shown in the second chart on the following page, 53 percent of water's expenses are
fixed costs. When the revenue collected from fixed charges does not match the level of fixed
expenses, the water utility is susceptible to revenue volatility (i.e. less revenue stability). The
greater the revenue volatility, the more likely rate increases will be required to ensure sufficient
funding for operations.
6 of 30 October 15, 2019, Item #5.1
FYE 2019 Calculated Rate Revenue
Fixed/Variable Split(Water)
Fixed
4.2M,16%
Variable
21.5M,84%
xed Revenue Varabe Rerenue
FYE 2019 Expenses Fixed/Variable Split(Water)
0.9M,4%
0.4M,1%
4.1M,17%
10.2M,42%
8.6M,36%
xed SOC WA Costs(17%)Faed PcwW Ccs:s 36%)
Varabe SDCWA Costs(42%) Varabe City of San Dego Costs(1%)
e ayCosts(4:_.
Fixed costs do not fluctuate with the amount of water purchased or used and represent 53 percent
of all costs to Poway. The SDCWA portion of the fixed costs include all their charges to member
agencies that do not fluctuate with water purchases including the Metropolitan Water District
MWD) Readiness-to-Serve Charge, the MWD Capacity Charge, the Supply Reliability Charge,
the Rate payer Service Charge, the Storage Charge, and the Infrastructure Access Charge.
Poway's fixed costs include expenses such as salaries and benefits, maintenance costs and
professional services, among others. Variable costs fluctuate with the amount of water purchased
or used represent 47 percent of Poway water's expenses. The SDCWA portion the variable costs
include the Untreated Supply Rate and Transportation Charge. Poway's variable costs include
electricity and water purchases. The variable City of San Diego costs represent the recycled water
purchases.
Previous industry best practice guidance suggested a fixed/variable ratio of 30/70. However, this
is being moved away from because, as the chart above shows, fixed costs often exceed the
previously recommended 30 percent. Instead, best practices suggest balancing revenue stability
with other pricing objectives like affordability. For this reason, three different fixed/variable ratios
are presented to show the different impacts associated with increasing the amount of revenue
collected from fixed charges.
7 of 30 October 15, 2019, Item #5.1
Water Rate Design Option 1a (2-Tier Structure; 17% fixed, 83% variable)
Water rate design Option 1 a is most like the city's existing two-tier rate structure. The only
difference is increasing the revenue collected via fixed charges from 16 to 17 percent. The table
below summarizes the information for this option.
Tier Tier Breakpoints (Units) % of Water Use of Bills
1 199 94% 98%
2 199 6% 2%
Average Usage: j 37 units Fixed: 1 17%
Average Summer Usage: j 56 units Variable: 83%
A 3/
4" meter is used for analysis purposes throughout the water analysis as it represents over 88
percent of residential meters. It should also be noted that 37 bi-monthly units represents average
residential usage while 56 bi-monthly units represents average summer residential usage. A unit
of water is —748 gallons which translates to roughly two hot tubs full of water or almost 50 loads
of laundry with a high efficiency washing machine.
The chart below shows the impacts across various usage levels for this option.
SFR Impacts at Different Usage Levels: 3/4" Meter; 2-Tiered;
17%/83% F/V(Option la)
1,400
1,200
1,000
800
600
400
5200
95.88 $149.48 5240.60 $342.44 $578.28 $846.28 $1,116.57
10 units 20 units 37 units 56 units 100 unts 150 unts 200 units
Current BiI 595.88 5149.48 5240.60 $342.44 5578.28 $846.28 51,116.57
Proposed BiI $105.06 5160.96 5255.99 $362.20 $608.16 $887.66 51,171.87
mpact(5)9.18 511.48 515.39 519.76 29.88 41.38 555.30
mpact(%)9.6% 7.7%0 64% 5.8% 5.2% 4.9% 5.0%
Given that 94 percent of water usage and 98 percent of all bills fall within Tier 1, residential rate
payers falling across all levels of usage see a similar increase and experience a uniform rate per
unit of water used. A two-tier structure provides good revenue stability because of this. While
similar increases occur across usage levels, lower volume users do see greater impacts which
reduces affordability for them. When looking at the impacts to rate payers in a two-tier structure
a fixed charge recapturing 17 percent of revenue increases financial sustainability while
decreasing affordability for lower volume users. Also, in times of state mandated conservation, a
two-tier structure makes it harder for a utility to encourage conservation because there is less
pricing incentive to do so.
8 of 30 October 15, 2019, Item #5.1
Water Rate Design Option lb (2-Tier Structure; 20% fixed, 80% variable)
In this option, the amount of revenue collected via fixed charges is increased to 20 percent.
Tier Tier Breakpoints (Units) % of Water Use of Bills
1 199 94% 98%
2 199 6% 2%
Average Usage: 37 units Foced:20%
Average Summer Usage: 56 units Variable: 80%
Increasing the fixed charges to represent 20 percent of revenue impacts the low volume users
more than the high-volume users. This occurs because the amount collected regardless of water
use (i.e. fixed charge) increases while the amount collected based on water use (i.e. variable
charge) decreases.
The chart below shows the impacts across various usage levels for this option.
SFR Impacts at Different Usage Levels: 3/4" Meter; 2-Tiered;
20%/80% F/V(Option 1b)
1,200
1,000
800
600
400
200 -.
0 $
95.88 $149.48 $240.60 $342.44 $578.28 $846.28 $1,116.57
10 units 20 units 37 units 56 units 100 unts 150 unts 200 unts
Current Bii $95.88 $149.48 $240.60 $342.44 $578.28 $846.28 $1,116.57
Proposed Bil $111. 29 $ 165.19 5256.82 $359.23 5596.39 $865.89 51,139.49
impact($)15.41 15.71 16.22 16.79 18.11 19.61 22.92
impact(%)16.1% 10.5% 6.7% 4.9% 3.1% 2.3% 2.1%
Option 1 b differs from Option 1 a in that it further increases financial sustainability while further
decreasing affordability for low volume users. Similar to Option 1 a, this rate option variation does
not send a strong conservation signal which makes conservation efforts more difficult in times of
mandated conservation.
9 of 30 October 15, 2019, Item #5.1
Water Rate Design Option lc (2-Tier Structure; 25% fixed 75% variable)
In this option, the amount of revenue collected via fixed charges is increased to 25 percent.
Tier Tier Breakpoints (Units) % of Water Use of Bills
1 199 94% 98%
2 199 6% 2%
Avow Usage: 37 units IFoxed:25%
Average Summer Usage: , 56 units i Variable: 75%
Increasing the fixed charges to represent 25 percent of revenue impacts the low volume users
even more than the high-volume users who see a reduction in their bill.
The chart below shows the impacts across various usage levels for this option.
SFR Impacts at Different Usage Levels: 3/4" Meter; 2-Tiered;
25%/75% F/V(Option 1c)
1,200
1,000
800
56 0y0
400
200111 II IIIIIII
595.88 $149.48 $240.60 $342.44 5578.28 $846.28 $1,116.57
10 units 20 units 37 units 56 units 100 unts 150 unts 200 units
Current BE $95.88 5149.48 $240.60 5342.44 $578.28 $846.28 $1,116.57
Proposed Bal $121.72 5172.32 $258.34 5354.48 $577.12 $830.12 51,086.20
impact($)25.84 22.84 517.74 512.04 51.16 516.16 -530.37
impact(96)27.0% 15.3=- 7.4' 3.5% 0.2% 1.9% 2.7%
Between all Option 1 variations, this option creates the greatest financial sustainability for water,
though it is also the least affordable option for low volume users. Affordability is decreased for low
volume users because the amount of the bill they can control (i.e. that portion based on water
usage) decreases significantly. As with the other Option 1 variations, this rate option variation
does not send a strong conservation signal which makes conservation efforts more difficult in
times of mandated conservation.
10 of 30 October 15, 2019, Item #5.1
Water Rate Design Option 2a (3-Tier Structure; 17% fixed, 83% variable)
Water rate design Option 2a creates a three-tier rate structure as shown in the table below.
Tier Tier Breakpoints (Units) % of Water Use of Bills
1 20 42% _49%
2 56 29% 35%
3 16%
Average Usage: 37 units Fixed:17%
Average Summer Usage: 56 units Variable: 83%
In a three-tier rate structure, the tiers more appropriately reflect the costs of providing water based
on how the water is being used. If residential rate payers had consistent water usage throughout
the year, the entire water system (e.g. pipes, pump stations, treatment plant, reservoirs, etc.)
would be sized a certain way. However, residential rate payers do not use water consistently.
Average usage is 37 units of water while average summer usage is 56 units of water. As a result,
the entire system size must be increased to accommodate this higher level of usage, even though
the usage is inconsistent. The costs associated with the increased system size are proportionally
allocated to the higher tiers of water creating a nexus between cost and use. Conservation
measures are supported with a three-tier structure.
Tier 1 corresponds to —60 gallons per capita per day (GPCD) for a 4-person average household.
The 20 units of water represents the amount related to the cost of basic indoor water use, such
as for drinking, cooking, and washing. Tier 2 represents the progressively higher cost of providing
more water to rate payers for less essential uses, such as watering landscapes, and is reflective
of average residential summer usage. Tier 3 represents high water usage and the costs
associated with providing water for this type of use. The chart below shows the impacts across
various usage levels for this option.
SFR Impacts at Different Usage Levels: 3/4" Meter;3-Tiered;
17%/83% F/V(Option 2a)
1,600
1,400
1,200
1,000
800
600
400
200
Ell0 .$
95.88 $149.48 $ 240.60 $342.44 S578.28 $846.28 $1,116.57
10 units 20 units 37 units 56 units 100 unts 150 unts 200 unts
Current Bil S95.88 $149.48 5240.60 $342.44 $578.28 $846.28 $1,116.57
Proposed Bit $95.86 $142.56 $236.74 $342.00 $692.24 $1,090.24 $1,488.24
Impact(5)0.02 6.92 3.86 50.44 113.96 $243.96 $371.67
Impact 1%)0.0% 4.6% 1.6% 0.1% 19.7% 28.8% 33.3%
Lower volume users see small reductions in their bill while higher volume users see increases in
their bills. This occurs because the costs of larger system capacity are more closely aligned with
the rate payer usage patterns that created the need for it.
11 of 30 October 15, 2019, Item #5.1
Water Rate Design Option 2b (3-Tier Structure; 20% fixed, 80% variable)
In this option, the amount of revenue collected via fixed charges is increased to 20 percent.
Tier Tier Breakpoints (Units) % of Water Use of Bills
1 20 42% 49%
2 56 29% 35%
3 56 29% 16%
Average Usage: 37 units Fixed:20% _
AverageSummer 56 units Variable: 80%
Because fixed charges are increasing, the lowest volume users see a moderate increased impact
while the highest volume users see a reduced impact when compared to Option 2a. Low (users
falling into the essential water use category) and average users effectively have no impact.
The chart below shows the impacts across various usage levels for this option.
SFR Impacts at Different Usage Levels: 3/4" Meter; 3-Tiered;
20%/80% F/V (Option 2b)
1,600
1,400
1,200
1,000
800
S600
S400
200
all i I IISO $
95. 88 $149.48 $240.60 $342.44 $578.28 $846.28 51,116.5
10 units 20 units 37 units 56 units 100 unts 150 unts 200 unts
Current Bin $95.88 $149.48 $240.60 $342.44 $578.28 $846.28 $1,116.57
Proposed Bill $103.29 $149.19 $240.14 $341.79 $669.59 $1,042.09 $1,414.59 _
Impact($)7.41 0.29 0.46 0.65 91.31 $195.81 $298.02
Impact(%)7.7% 0.2% 0.2% 0.2% 15.8% 23.1% 26.7% '
When looking at the impacts to rate payers in a three-tier structure, a fixed charge recapturing 20
percent of water's fixed costs helps provide an equitable balance between revenue stability, which
helps support financial sustainability, and affordability. While a higher fixed charge would provide
more revenue stability, increasing the fixed charge all at once instead of incrementally over time
increases the impacts to rate payers. This option, like Option 2a, makes it easier to support
conservation during periods of mandated conservation because higher water use is easily
discernable through the rate structure tiers (i.e. consumption levels) and pricing. However, there
is some risk of demand hardening.
Demand hardening is a phenomenon generally described as the reduction in the ability of a rate
payer to further reduce demand because the more cost-effective water reductions (e.g. low-flow
appliances) have already been implemented. It is believed to occur as a result of long-term
conservation measure such as education, water restrictions, rebate programs, and price structure
changes (e.g. tiers) which make it harder to induce further water use reductions during
drought/mandated conservation periods.
12 of 30 October 15, 2019, Item #5.1
Water Rate Design Option 2c (3-Tier Structure; 25% fixed, 75% variable)
In this option, the amount of revenue collected via fixed charges is increased to 25 percent.
Tier Tier Breakpoints (Units) % of Water Use of Bills
1 20 42% 49%
2 56 29% 35%
3 56 29% 16%
Average Usage: 37 units Fixed:25%
Average Summer Usage: 56 units Variable: 75%
Because fixed charges are increasing, the lowest volume users see an increased impact while
the highest volume users see a reduced impact when compared to Option 2b. Low (users falling
into the essential water use category) have a moderate impact while average users have a small
impact.
The chart below shows the impacts across various usage levels for this option.
SFR impacts at Different Usage Levels: 3/4" Meter;3-Tiered;
25%/75% F/V(Option 2c)
1,400
1,200
1,000
800
600
400
20
11111111 . 0111
95.88 $149.48 $240.60 $342.44 $578.28 $846.28 $1,116.5 7
10 units 20 units 37 units 56 units 100 unts 150 unts 200 unts
Current BII $95.88 $149.48 $240.60 $342.44 $578.28 $846.28 $1,116.57
Proposed Bdl $115.62 $160.12 $245.46 5340.84 $631.24 $961.24 $1,291.24
Impact(5)19.74 510.64 4.86 1.60 52.96 $114.96 $174.67
Impact(%)20.6% 7.1% 2.0% 0.5% 9.2% 13.6% 15.6%
While increasing the revenue collected from fixed charges helps increase the financial
sustainability of the utility, it also impacts low volume users more significantly than Option 2b.
Compared to Option 1 c (2-tier structure; 25% fixed, 75% variable), it does impact low volume
users less. This option also supports conservation though it could lead to demand hardening as
described in Option 2b.
13 of 30 October 15, 2019, Item #5.1
Water Rate Design Option 3a (4-Tier Structure; 17% fixed, 83% variable)
This option is like a three-tier rate structure with the nexus for Tiers 1 and 2 being the same as a
three-tier rate structure. In a four-tier structure, higher water use is broken out into two tiers instead
of only one. An additional high water use category has been added to account for just under 10
percent of residential water use. This four-tier rate structure further aligns the costs associated
with the increased system size to higher water use, further aligning the nexus between cost and
use. Staff and RFC agreed looking at a tier structure with five or more tiers would be unwise given
the challenges and data required to legally create tier structures greater than four tiers.
The chart below shows the impacts across various usage levels for this option.
Tier Tier Breakpoints (Units) % of Water Use of Bills
1 20 42% 49%
2 56 29% 35%
3 150 20% 13%
4 150 9% 3%
Ave 37 unitsFixed:17%
Average Summer Usage: 56 units i Variable: 83%
In a four-tier structure, the impacts at lower water usage levels (i.e. 56 bi-monthly units or less)
will mirror the three-tier structure. As the consumption increases in a four-tier structure beyond 56
bi-monthly units, the impacts to the higher volume users will slowly shift because the per unit cost
of water, or volumetric rate, increases.
SFR Impacts at Different Usage Levels: 3/4" Meter;4-Tiered;
17%/83% F/V(Option 3a)
1,600
1,400
1,200
1,000
800
600
400
200
i ION 0 $
95. 88 $149.48 $240.60 S342.44 $578.28 $846.28 51,116.3
10 units 20 units 37 units 56 units 100 unts 150 unts 200 unts
in Current Brei $95.88 $149.48 $240.60 $342.44 $578.28 $846.28 $1,116.57
Proposed Br( $95.96 $142.76 $237.62 $343.64 $651.64 $1,001.64 $1,486.64
impact($)0.08 6.72 52.98 1.20 73. 36 $155.36 $370.07
impact(%)0.1% 4.5% 1.2% 0.4% 12.7% 18.4% 33.1%
A four-tier structure does not offer materially greater benefits than a three-tier structure. Option
2a and Option 3a share very similar impacts across the various usage levels. One risk in a four-
tier structure as compared to a three-tier structure is there is a greater risk of demand hardening.
A higher chance of demand hardening increases the potential to see reduced revenue which
would put upward pressure on rates. This could occur if the amount of anticipated revenue is not
realized due to self-selected conservation.
14 of 30 October 15, 2019, Item #5.1
Water Rate Design Option 3b (4-Tier Structure; 20% fixed, 80% variable)
In this option, the amount of revenue collected via fixed charges is increased to 20 percent.
Tier Tier Breakpoints (Units) % of Water Use of Bills
1 20 42% 49%
2 56 29% 35%
3 150 20% 13%
4 150 ----- - 9% 3%
Average Usage: 37 units Faced:20%
Average Summer Usage: j 56 units Variable: 80%
Similar to a three-tier structure, and because fixed charges are increasing, the lowest volume
users see a moderate increased impact while the highest volume users see a reduced impact
when compared to Option 3a. Low (users falling into the essential water use category) and
average users effectively have no impact. This option does increase revenue stability due to
higher fixed charges which increases the financial sustainability of the utility.
The chart below shows the impacts across various usage levels for this option.
SFR Impacts at Different Usage Levels: 3/4" Meter; 4-Tiered;
20%/80% F/V(Option 3b)
1,600
1,400
1,200
1,000
800
600
400
200
NM. II
95.88 $149.48 $240.60 $342.44 $578.28 $846.28 $1,116.57
10 units 20 units 37 units 56 units 100 unts 150 unts 200 units
Current Bil $95. 88 $149.48 $240.60 $342.44 $578.28 $846.28 $1,116.57
Proposed Bil $103.29 $149.19 $240.65 S342.87 $634.15 $965.15 $1,413.65
mpact(S)7.41 0.29 0.05 0.43 55.87 $118.87 $297.08
Tact(%)7.7% 0.2% 0.0% 0.1% 9.7% 14.0% 26.6%
Similar to Option 2b, a fixed charge recapturing 20 percent of water's fixed costs helps provide
an equitable balance between revenue stability, which helps support financial sustainability, and
affordability. While a higher fixed charge percentage would provide more revenue stability,
increasing the fixed charge all at once instead of incrementally over time increases the impacts
to rate payers.
However, a four-tier structure has increased potential to create demand hardening when
compared to a three-tier structure. As discussed in Option 3a, a higher chance of demand
hardening increases the potential to see reduced revenue which would put upward pressure on
rates. This could occur if the amount of anticipated revenue is not realized due to self-selected
conservation.
15 of 30 October 15, 2019, Item #5.1
Water Rate Design Option 3c (4-Tier Structure; 25% fixed, 75% variable)
In this option, the amount of revenue collected via fixed charges is increased to 25 percent.
Tier Tier Breakpoints (Units) % of Water Use of Bills
1 20 42% 49%
2 56 29% 35%
0315020/o -a 13%
4 150 9% 3%
Usage: uiAverage37 s Fixed:25%
1 Average Summer Usage: 56 units Variable: _75%
Similar to a three-tier structure, and because fixed charges are increasing, the lowest volume
users see an increased impact while the highest volume users see a reduced impact when
compared to Option 3b. Low (users falling into the essential water use category) have a moderate
impact while average users have a small impact. Revenue stability and financial sustainability is
increased as compared to the previous four-tier options.
The chart below shows the impacts across various usage levels for this option.
SFR Impacts at Different Usage Levels: 3/4" Meter;4-Tiered;
25%/75% F/V (Option 3c)
1,400
1,200
1,000 III I800
600
5400
200
II11111$
95.88 $149.48 $240.60 $342.44 $578.28 $846.28 51,116.57
10 units 20 units 37 units 56 units 100 units 150 unts 200 unts
Current 811 595.88 $149.48 $240.60 $342.44 5578.28 $846.28 $1,116.57
Proposed Bal $115.62 $160.12 $245.97 $341.92 $605.04 $904.04 $1,291.54
impact(5)19.74 10.64 5.37 0.52 26.76 57.76 $174.97
moa:t 1%)20.6% 7.1% 2.2% 0.2% 4.6% 6.8% 15.7%
While increasing the revenue collected from fixed charges helps increase the financial
sustainability of the utility, it also impacts low volume users more significantly than Option 3b.
Compared to Option 1 c (2-tier structure; 25% fixed, 75% variable), it does impact low volume
users less.
Further, a four-tier structure has increased potential to create demand hardening when compared
to a three-tier structure. As discussed in Option 3a, a higher chance of demand hardening
increases the potential to see reduced revenue which would put upward pressure on rates. This
could occur if the amount of anticipated revenue is not realized due to self-selected conservation.
16 of 30 October 15, 2019, Item #5.1
Water Financial Plan
The financial plan for providing water services is an important component of the COSS process.
It looks at the financial policies for providing water service, such as how reserve levels are
determined or when debt issuance is appropriate. The financial plan also looks at the current and
projected level of expenses and examines the amount of revenue required to meet the operational
goals of providing water service. The amount of revenue required influences the proposed
revenue, or rate, adjustments needed over time.
Financial Policies:
According to the Government Finance Officers Association (GFOA), financial policies provide
guidelines for financial decision making and set the strategic intent for financial management and
are central to a strategic long-term approach to financial management. As the water utility has no
existing debt and no immediate plans to issue debt, only the reserve policies were examined.
Based on the American Water Works Association 2018 Cash Reserve Policy Guidelines, the level
of reserves maintained by a utility is an important component of short and long-term financial
management and is a key consideration in the rate-setting process. Defining appropriate reserve
levels is important because reserves have the potential to impact rates or tie up current rate payer
dollars that could otherwise be used towards current expenditures. The current reserve policy for
water is to maintain a minimum working capital balance equal to 20 percent of operating
expenditures.
However, the Water Environment Federation recommends three months of operating costs, or 90
days, as a minimum reserve for water utilities. They also indicate higher levels of reserves may
be needed based on the actual operational experiences of water utilities. Therefore, 90 days of
operating costs is the recommended minimum for Poway's water utility. However, setting a
reserve target of six months, or 180 days, is prudent given Poway's bi-monthly billing cycle.
Having a higher target equal to twice the recommended minimum helps moderate the cash flow
associated with a bi-monthly billing process.
Capital reserves generally have less defined guidelines given capital investment varies so much
between utilities. The variation occurs because factors such as the age of the system can vary
greatly. RFC analyzed the water utility's near-term capital plan to find a reserve target appropriate
for Poway. Based on this analysis, a minimum reserve is being recommended at 10 percent of
net capital assets. The following chart shows the estimated operating and capital reserves over
the next 5 years.
Operating&Capital Reserves(Water)
20
0
18
2 $
16
S14
12
S10
8
6
4
52
SO
FYE 2020 FYE 2021 FYE 2022 FIE 2023 FIE 2024
Total Reserves — Minimum Reserve Target Reserve
17 of 30 October 15, 2019, Item #5.1
These reserves will help mitigate potential risks, mitigate revenue fluctuations, and smooth rates.
They are also important to mitigate emergencies such as emergency repairs, droughts, natural
disasters, and unforeseen economic influences.
Revenue Adjustments:
Costs to operate a water utility increase over time. San Diego County has a semi-arid climate.
Before 1947, the San Diego region relied on rainfall and groundwater to meets its water needs
SDCWA, Urban Water Management Plan 2010). As the economy and population grew, local
water resources became insufficient to meet the region's water supply needs and required
imported water from hundreds of miles away to support the growth. Importing water is very energy
intensive. Over-time, the cost to transport this water increases as factors like energy prices
increase. Investment by SDCWA into regional water supply and infrastructure projects to reduce
reliance on imported water and mitigate the effects of natural disasters, such as earthquakes, is
also expensive. For example, SDCWA's investment into the Claude "Bud" Lewis Desalination
Plant cost close to $1 billion, but it gave the region a new drought-proof, locally controlled supply
of water. General inflation and commensurate wage growth also tend to increase over time. The
20-year rolling average increase in the CPI All Urban Consumers — Los Angeles index was over
2.5 percent annually.
As such, revenue adjustments are needed to cover the increasing costs of providing safe, reliable
water on demand to a rate payer. These estimated increases are necessary to fund the costs of
imported water, operational expenses, capital expenses, and appropriate reserve levels and will
be discussed in more detail with the operating financial plan later in this report.
The chart below shows the current estimated increases over the next five fiscal years.
Revenue Adjustments(Water)
6.0 140%
5.0%
120%
10096
E4.090 m
0 `
u
t 3.0%
60% 1;
2.0%
40%
1.0% 20'c
0.0% 0%
FYE 2020 FYE 2021 FYE 2022 FYE 2023 FYE 2024
MINIM Revenue Adjustments(Water)— — Debt Coverage
n Required Cc.erage Coverage Alert
A two-year rate setting process is being recommended. For the first two years, 4.5% revenue
increases are being recommended. These increases are being recommended regardless of which
rate design option is chosen. The rate design options discussed previously determine how the
costs are apportioned and, thus, how the revenue is collected. The revenue, or rate, increases
are based on the funds required to cover anticipated expenses. Based on the financial/operational
performance of the water utility during the first two-year period, the rate increases proposed for
the next two-year period (2022 and 2023) could increase or decrease; currently estimated at 5.25
percent.
18 of 30 October 15, 2019, Item #5.1
Staff would only return to Council for rate approval if the second-year rates were too low to
sufficiently fund operations. Under the law, any increases beyond the previously approved
maximum rate increases require a new public hearing process. If the required second-year rate
increase was lower than the approved rate increase, staff could administratively reduce the rate
increase. If this were to occur, staff would notify Council and rate payers of the change.
Setting two-year rates is more cost-effective. It costs upwards of $10,000 to set rates based on
the printing costs associated with the Proposition 218 notice, the postage costs of mailing the
notice, the staff time involved in administering the process, among other reasons. Moving to a
two-year rate setting process strikes a balance between flexibility and efficiency. A two-year
period is short enough to allow rate changes if future projections are different than anticipated
while also reducing the costs of adopting new rates.
The chart below shows the projected expenses over the next five fiscal years, along with the
current revenue, and the projected revenue based on the proposed increases:
Operating Financial Plan(Water)
40
35
30
25
20
15
S10
5111SO
5
FYE 2020 FYE 2021 FYE 2022 FYE 2023 FYE 2024
Mall Operating Expenses Water Purchases mow Rate Funded Capital
Nola Debt Service Net Cashflow rent Revenue
D'oposed Reve^ue
Several factors are currently driving the need for revenue increases over the next several years.
First, the costs of imported water continue to increase. Imported water costs represent
approximately 60 percent of operating expenditures for Poway's water utility. The SDCWA
untreated water rate is increasing 4.8 percent even though SDCWA is using reserves to mitigate
the rate increase necessary. Had they not used reserves, the rate increase for untreated water
would have been greater. Some drivers in SDCWA's rate increase are Metropolitan Water District
rate increases and Quantification Settlement Agreement (QSA) increases of 6.4 percent. The
QSA was part of SDCWA's supply diversification strategy and will provide up to 200,000 acre-
feet of water to the San Diego County region not previously available.
Second, rate funded capital is increasing over the next five years as the city proactively invests in
rehabilitation and repair of its water infrastructure to ensure is continues to provide safe, reliable,
and affordable water. A more detailed description of current infrastructure investment is discussed
on the city's Fiscal Year 2019-20 Comprehensive Financial Plan.
19 of 30 October 15, 2019, Item #5.1
The chart below shows the cost of the anticipated capital expenditures over the next five years.
Capital Funding Sources(Water)
3.5 53 22
0
53.0 2.81
2-5
52.07
2.0
51.44
51.5
1.
011150.5
50. 0
FYE 2020 FYE 2021 FYE 2022 FYE 2023 FYE 202
Debt Funded Rates/Reserves Funded •Total CIP
Continued investment into operations and system rehabilitation and renewal, along with long-
range prudent financial management, will help ensure the City of Poway continues to provide
safe, reliable, and affordable water on demand to its rate payers.
Wastewater Rate Design
The rate design process develops rates and rate structures that generate revenue from, and
within, the various rate payer classes and is completed once the cost of service has been
determined and these costs have been allocated to the rate payer classes based on their
proportional use of the system. Based on City Council direction, RFC has developed several rate
design options for Council consideration and public input. Each option presented is compliant with
the law.
Wastewater Residential Rate Payer Class Rate Design Options:
RFC has developed several rate design options for the residential rate payer class. The other rate
payer classes, such as non-residential, were not given multiple rate design options because their
use of the system doesn't lend itself to multiple rate designs. As discussed in the legal compliance
section, any rate designs must be based on how a rate payer class is served by the system.
A total of four residential rate design options have been provided for discussion purposes. There
are two different structures: a fixed residential rate and a fixed plus variable residential rate. Within
the fixed plus variable structure, three different fixed/variable ratios have been provided. The
options are as follows:
Option Structure Fixed (%) Variable (%)
1 Fixed N/A N/A
2a Fixed + Variable 20% 80%
2b Fixed +Variable 25% 75%
2c Fixed + Variable 30% j 70%
A fixed, or uniform, residential rate is independent of winter water usage; all residential rate payers
are charged the same bi-monthly rate. In the fixed plus variable rate structure, all rate payers are
billed a fixed charge, similar to water, and have a variable component tied to their winter water
usage. This information will be discussed in more detail on the following page.
20 of 30 October 15, 2019, Item #5.1
Three different fixed/variable ratios are provided because, similar to water, this is an important
component of rate design. The fixed/variable ratio reflects the amount of revenue collected
between fixed charges which are not dependent on wastewater flow and volumetric, or variable,
charges which are dependent on wastewater flow. This ratio is important for understanding the
level of revenue stability. The more revenue is collected via a fixed charge, the less likely the
wastewater system will be to changes in usage by its rate payers. For example, the more revenue
is collected via fixed charges, the less likely a wastewater system will be to increase rates in times
of conservation as less of its revenue is affected by decreased demand, all else being equal.
The chart below shows wastewater is currently collecting 20 percent of its revenue from fixed
charges, and 80 percent of its revenue from variable charges.
FYE 2019 Calculated Rate Revenue
Fixed/Variable Split(Wastewater)
Fixed
1.7M,20%
Variable
6.7M,80%
Fxed Revenue Varabe Revenue
Similar to water, the revenue being recovered via fixed charges does not align with wastewater's
variable and fixed costs. The variable costs, such as chemicals and treatment, vary based on how
much wastewater is produced. As shown in the chart below, approximately 50 percent of
wastewater's expenses are fixed costs. Fixed costs include expenses such as salaries and
benefits, maintenance costs and professional services, among others.
FYE 2019 Expenses Fixed/Variable Split
Wastewater)
Variable
Fixed
4.2M,49.8% 4.3M,50.2%
Fred •Var 8
Similar to water, best practices suggest balancing the various pricing objectives versus having a
set fixed/variable ratio. As such, three different fixed/variable ratios are presented showing the
different impacts associated with increasing the amount of revenue collected from fixed charges.
21 of 30 October 15, 2019, Item #5.1
Wastewater Rate Design Option 1 (Fixed residential rate)
Wastewater rate design Option 1 is a fixed residential rate. All residential wastewater rate payers
would pay the same bi-monthly amount for wastewater services regardless of winter water use,
which is different from the City's current tiered structure. A fixed residential rate structure is easy
for the city to administer helping reduce costs. Revenue stability is increased with this structure
because of the uniform rate. However, this structure does not account for variation in wastewater
flow which can raise questions of fairness and equity. The chart below shows how this structure
visually compares to the current structure.
Bi-Monthly SFR Bills (Wastewater)
5160
5140
5120
60
40
s—Current e—Proposed-New Structure
520
SO
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
Bi-MonthlvWinter Water Use (units)
Under a fixed residential wastewater rate structure, low volume users will see a significant
increase in their bill and higher volume users will see a significant decrease in their bill. These
impacts are shown in the chart below at various usage levels. The usage levels shown represent
the tier breakpoints in the current wastewater rate structure.
SFR Impacts at Different Usage Levels: Option 1
160
140
120 MO
5100
580
560
540
20
50
5 units 12 units 19 units 26 units 37 units 50 units 60 u
Current BiI $50.88 573.46 599.79 $107.33 $122.38 5137.43 $148.73
Proposed BiI $88.76 88.76 88.76 88.76 88.76 88.76 88.76
Impact(5)37.88 15.30 11.03 -518.57 -$33.62 -$48.67 -$59.97
Impact(%)744% 20.8% 11.1%17.3%27.5%35.4%40.3%
22 of 30 October 15, 2019, Item #5.1
Wastewater Rate Design Option 2a (Fixed + variable rate structure; 20% fixed, 80% variable)
This wastewater rate design option includes a fixed plus variable component and mirrors the
existing wastewater structure. In the fixed plus variable rate structure, all rate payers are billed a
fixed charge, similar to water, and have a variable component tied to their winter water usage.
The chart below shows how this structure visually compares to the current structure.
Bi-Monthly SFR Bills (Wastewater)
5140
5120
5100
580
560
Sao
t Proposed-Netr Structure
520
53
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
Si-Monthly Winter Water Use (un `sl
Based on an analysis of winter water use by RFC during this COSS, the average residential rate
payer's wastewater flow is 15 units bi-monthly. Further, they found that residential wastewater
flows should be capped at 24 units bi-monthly. Capping water consumption when determining
wastewater use provides a reasonable estimate of indoor water use that actually enters the
wastewater system and is ultimately processed at the treatment plant. This helps minimize the
impacts of outdoor irrigation-related water use and is a more fair and equitable approach to rate
payers.
To calculate winter water usage on an ongoing basis, the City uses a three-year rolling average
of winter water use data for a residential property covering the November through April bi-monthly
billing periods. This approach provides a less volatile change in annual rates to the property year
over year. The lowest winter billing period for each of the three most recent years is selected and
averaged together. This amount represents the winter water use, or essential water use, for the
property. To reflect that not all indoor water use is returned to the wastewater system, a factor of
85 percent is used. This factors in water use for cooking, cleaning, and other activities that don't
put water down the drain.
To calculate the wastewater rate applicable to a rate payer in this type of structure, the winter
water use for the property is multiplied by the variable rate to provide the variable component of
the wastewater bill. The variable component is then added to the fixed component to provide the
bi-monthly wastewater charge for the rate payer.
While this process mirrors the existing wastewater rate calculation process, it differs in an
important way. Previously, when a rate payer moved into a house, they were placed in Tier 3
because they did not have an individual winter water use history. The rate payer was placed in
Tier 3 because that represented the average usage of all residential customers based on the last
analysis of usage. As shown in the chart above, that could lead to over-charging or under-charging
an individual in many cases. As the new rate payer established winter water use history, their
23 of 30 October 15, 2019, Item #5.1
actual wastewater bill would slowly adjust to their usage patterns. In many cases, this could take
up to three years to mirror their usage patterns.
Based on feedback surrounding the existing residential wastewater rate calculation process, staff
look for a more fair and equitable way to determine a rate payers winter water usage without
significantly increasing the administrative process, and thus cost to rate payers, of doing so. As
such, the calculation of winter water use, which is foundational to determining a rate payer's
wastewater rate, will now focus on the property and not the individual rate payer.
This approach places more value on wastewater flow patterns being a function of the property
characteristics than the rate payers occupying the property. For example, a rate payer moving
into a one-bedroom house is more likely to mirror the wastewater flow pattern of the previous
occupant in that one-bedroom house than a rate payer in a four-bedroom house. The ratepayer
in this example will start at the winter water usage associated with that one-bedroom property
under the new approach. While there will still be fluctuations in wastewater flow patterns, this is a
more fair and equitable approach because it reduces the likelihood of an individual rate payer
paying more or less than they should.
The chart below shows the impacts across various usage levels for this option.
SFR Impacts at Different Usage Levels:20%/80% F/V (Option 2a)
160
140
120
100
S80
560
540 01 ik
520
SO
5 units 12 units 19 units 26 units 37 units 50 units 60 units
n Current Bits $50.88 73.46 99.79 $107.33 5122.38 $137.43 5148.73
Proposed BaI $42.75 77.74 112.74 $137.73 $137.73 $137.73 $137.73
Impact(S)8.13 4.28 12.95 30.40 15.35 0.30 511.00
Impact(%) -16.0% 5.8% 13.0% 28.3% 12.5% 0.2% 7.4%
This option collects 20 percent of the revenue through fixed charges which is consistent with the
city's existing tiered wastewater rate structure. Lower volume users and higher volume users will
see decreases in their bill, while users in the middle will see increased impacts. This is a function
of how a tiered wastewater structure operates compared to a fixed plus variable structure. The
chart on the previous page can help visually explain this phenomenon. The revenue stability is
good under this option and the affordability for the lowest volume customers is high.
24 of 30 October 15, 2019, Item #5.1
Wastewater Rate Design Option 2b (Fixed + variable rate structure; 25% fixed, 75% variable)
In this option, the amount of revenue collected via fixed charges is increased to 25 percent.
Increasing the revenue collected from fixed charges helps increase the financial sustainability of
the utility.
The chart below shows the impacts across various usage levels for this option.
SFR Impacts at Different Usage Levels:25%/75%F/V (Option 2b)
160
140
5120
100
580
560
5401 1 II 11 II II520II111SO
5 units 12 units 19 units 26 units 37 units 50 units 60 units
Current BSI $50.88 73.46 99.79 $107.33 $122.38 $137.43 $148.73
Proposed BaI $45.62 78.43 111.24 $134.67 $134.67 $134.67 $134.67
Impact($)5.26 4.97 11.45 27.34 12.29 2.76 14.06
Impact(%) -10.3% 6.8% 11.5% 25.5% 10.0% 2.0% 9.5%
This option increases the revenue stability over Option 2a by increasing the amount of revenue
collected via fixed charges while still offering good affordability to the lowest volume rate payer.
Users with usage in the middle will start to see some reduced impacts as compared to the impacts
in Option 2a. This occurs because the variable rate per unit decreases as the fixed charges
increase. The more usage occurs, when compared to Option 2a, the lower the per unit cost.
25 of 30 October 15, 2019, Item #5.1
Wastewater Rate Design Option 2c (Fixed + variable rate structure; 30% fixed, 70% variable)
In this option, the amount of revenue collected via fixed charges is increased to 30 percent.
Increasing the revenue collected from fixed charges helps increase the financial sustainability of
the utility.
The chart below shows the impacts across various usage levels for this option.
SFR Impacts at Different Usage Levels: 30%/70%F/V (Option 2c)
160
5140
120
100
580
5:
iiiIIISO
5 units 12 units 19 units 26 units 37 units 50 units 60 units
Current 5 I $50.88 73.46 99.79 $107.33 $122.38 5137.43 $148.73
Proposed Bill $48.50 79.12 109.74 $131.61 $131.61 5131.61 5131.61
Impact(5)2.38 5.66 S9.95 524.28 9.23 5.82 17.12
Impact(96)4.7% 7.7% 10.0% 22.6% 7.5% 4.2% 11.5%
In Option 2c, the lowest volume users still see a reduced impact when compared to the city's
current wastewater structure which helps increase affordability. Almost all users in the middle
usage areas see decreased impacts from either Option 2a or 2b while high volume users see
more of a reduction in impact. As discussed earlier, for high volume users this is driven by the
new cap in usage to recognize water beyond 24 units is more likely than not to be related to
outdoor water usage which does not impact the wastewater system.
When looking at the impacts to rate payers across all wastewater options, a fixed charge
recapturing 30 percent of wastewater's fixed costs helps provide an equitable balance between
revenue stability, which helps support financial sustainability, and affordability.
Wastewater Financial Plan
Similar to the discussion for water, the financial plan for providing wastewater services is an
important component of the COSS process. It looks at the financial policies for providing
wastewater service, such as how reserve levels are determined or when debt issuance is
appropriate. The financial plan also looks at the current and projected level of expenses and
examines the amount of revenue required to meet the operational goals of providing wastewater
service. The amount of revenue required influences the proposed revenue, or rate, adjustments
needed over time.
Wastewater Collection Method:
Staff looked at how wastewater revenue could be collected for residential rate payers. This
analysis was done given upcoming legislation relating to the discontinuation of residential water
service titled Senate Bill No. 998 (SB 998). It was contemplated that collecting residential
wastewater bills on the property tax rolls could help reduce the impact to a rate payer's monthly
26 of 30 October 15, 2019, Item #5.1
bill. The idea was an individual may be more likely to pay their water bill and avoid discontinuation
of service if their bill did not include the wastewater portion (i.e. it was lower).
There are several challenges associated with collecting wastewater bills via the tax rolls. It would
be administratively challenging because a full year's worth of bills must be calculated and
submitted to the County Auditor Controller by August 10th of each year. This would increase the
staff resources needed to administer such a collection method increasing costs to rate payers.
It would be financially challenging because residential wastewater revenue represents 77 percent
of total wastewater revenue and the cash received is generally in two large installments, after the
December 10 and April 10 property tax delinquency dates. Higher reserve levels would need to
be maintained to deal with the cash flow timing issues under this collection method increasing
costs to rate payers.
Upon completion of this analysis, staff does not recommend collecting residential wastewater bills
via the property tax roll.
Financial Policies:
Similar to water, the current reserve policy for wastewater is to maintain a minimum working
capital balance equal to 20 percent of operating expenditures. Consistent with the newly proposed
water operating reserve levels, and for the same reasons, the recommended minimum operating
reserves are 90 days of operating costs with a target reserve of 180 days. As discussed in the
financial policies section for water, capital reserve levels generally vary based on conditions
specific to each utility. In the case of wastewater, a minimum reserve based on the 5-year average
capital improvement program (CIP) is recommended because it more closely matches the
estimated debt service payments for the San Diego Pure Water program, a large portion of
wastewater's overall CIP. San Diego's Pure Water project is a multi-year project that is projected
to supply one-third of San Diego's water supply locally by 2035.
The following chart shows the estimated operating and capital reserves over the next 5 years.
Operating&Capital Reserves(Wastewater)
51L
0
512
510
58
55
52
S0
FYE 2020 FYE 2021 FYE 2022 FYE 2023
ctai Reserves — — M numum Reserve —Target Reserve
Reserve levels are well in excess of the newly established targets. This was a strategic financial
management decision in preparation for San Diego Pure Water. Funds to help cover Poway's
estimated share of this regional project have slowly been set aside to mitigate impacts to rate
payers. As the chart shows, the reserves are going to be drawn down over the near-term to help
pay Poway's share of the Pure Water project.
27 of 30 October 15, 2019, Item #5.1
Similar to water, wastewater reserves will also help mitigate potential risks, mitigate revenue
fluctuations, and smooth rates. They are also important to mitigate emergencies such as
emergency repairs, droughts, natural disasters, and unforeseen economic influences.
Revenue Adjustments:
As with water, the costs to operate a wastewater system increase over time. Part of the upward
pressure on costs relate to general inflation and aging infrastructure, like water. However, the cost
to treat wastewater is also increasing. A wastewater treatment plant is designed to treat certain
types of waste. As people dispose of pharmaceuticals, food waste, cooking oil, industrial
chemicals, etc. down the wastewater system, the treatment process gets extended which
increases costs. It also increases the maintenance of the system driving operating costs higher.
Revenue adjustments are needed to cover the increasing costs of providing safe and reliable
wastewater services to rate payers.
The chart below shows the current estimated increases over the next five fiscal years.
Revenue Adjustments(Wastewater)
7.0% 140%
6.0% Emim 120%
5.0% 100%
111
a+
3 4.0% 80% l
a
3.0% 60% „
s 2.0% 40%
1.0% 20':
0.0% 0%
FYE 2020 FYE 2021 FYE 2022 FYE 2023 FYE 2024
Revenue Adjustments(Wastewater)— — Debt Coverwe
Peau,ed Cevera e CoverageA'ert
These estimated increases are necessary to fund the costs of wastewater treatment, operational
expenses, capital expenses, and appropriate reserve levels. Increases are being proposed even
though reserves are being drawn down. This is a long-range financial management approach to
mitigating impacts to rate payers of the Pure Water project. If reserves were used until they were
below recommended minimum levels, multi-year double digit rate increases would be required to
fund Poway's share of the Pure Water project and replenish reserves. Using a combination of
reserves and rate increases reduces the overall rate increases needed to fund operations which
reduces costs to rate payers.
Similar to water, a two-year rate setting process is also being recommended for wastewater. This
approach will help save wastewater rate payers money while still providing flexibility in the
financial management of the utility.
28 of 30 October 15, 2019, Item #5.1
The chart below shows the projected expenses over the next five years, along with the current
revenue and projected revenue based on the projected increases.
Operating Financial Plan(Wastewater)
514
C
512
510
5s
56
54
52
SO
52
54
FYE 2020 FYE 2021 FYE 2022 FYE 2023 PIE 2024
Operatire Expenses mom Rae Funded Capital MIMI Debt Service
Net Cashflow —Current Revenue — — Proposed Revenue
As the chart shows, even with the recommended rate increases, revenues are not sufficient to
fund operations and capital investment. As discussed previously, reserves are being drawn down
to help cover the shortfalls shown in the chart.
Several factors are currently driving the need for revenue increases over the near term. First, San
Diego's Pure Water project is a multi-year project that is projected to supply one-third of San
Diego's water supply locally by 2035. Based on projections from April 2019, Poway's estimated
share of the project is over $4 million annually for the next five years. Second, rate funded capital
is being proactively invested in the rehabilitation and repair of the wastewater infrastructure to
ensure Poway continues to provide safe, reliable, and affordable wastewater services. A more
detailed description of current infrastructure investment is discussed in the City's Fiscal Year
2019-20 Comprehensive Financial Plan. The chart below shows the anticipated capital
expenditures over the next five years.
Capital Funding Sources(Wastewater)
Sl E S1.70
51.e
51.4
51.29
51.2 S1 CC
51.0
SO.8 50. 61
50.6 50.45
50.4
50.
211150.0
FYE 2020 PIE 2021 FYE 2022 FYE 2023 FYE 2024
Debt Funded I Raes/Reserves Funded •Total C IP
Continued investment into operations and system rehabilitation and renewal, along with long-
range prudent financial management, will help ensure the City of Poway continues to provide
safe, reliable, and affordable wastewater services to its rate payers.
29 of 30 October 15, 2019, Item #5.1
Environmental Review:
This action is not subject to review under the California Environmental Quality Act (CEQA).
Fiscal Impact:
There is no direct fiscal impact associated with this staff report because it only contains
information related to the workshop.
However, based on the information contained in this staff report, sufficient revenues to fund
operations, investment in capital infrastructure, and appropriate reserve levels will be generated
from the recommended water and wastewater revenue increases staff will present to the City
Council on January 7, 2020 when it is anticipated the City Council will set the public hearing for
rate adoption on March 3, 2020. The proposed revenue increases are independent of what rate
design Council ultimately pursues. The revenue increases are determined by the costs to operate
the water and wastewater systems while the rate designs deal with how those costs are allocated
amongst rate payers. Over the next two-year period, it is estimated approximately $2 million in
additional water revenues will be generated while approximately $900 thousand in additional
wastewater revenues will be generated.
Safe reliable water delivered on demand to an average residential rate payer costs less than nine-
tenths of one penny per gallon. Treating the average residential rate payer's wastewater in a safe
and reliable fashion also costs less than nine-tenths of one penny per gallon.
Public Notification:
None.
Attachments:
None.
Reviewed/Approved By: Reviewed By: Approved By:
l‘ff/4
Wend Kaserman Alan Fenstermacher Ch s H_'-Itine
Assistant City Manager City Attorney City Manager
30 of 30 October 15, 2019, Item #5.1