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Home My WebLink AboutCOW 2023-10-23 Item 4 - Presentation - Utility Rate Study 101Utility Rate Setting Basics Part of the Tukwila Financial Plan 2024 FCS GROUP Solutions -Oriented Consulting •:J Agenda Background Revenue Requirement Cost of Service Rate Design FCS GROUP Slide 2 w Background • FCS GROUP Solutions -Oriented consulting •:J Existing Water Rates SFR-MFR / DU 3/» 4 1" 1 1/" 2 2" 3" 4" 6" 8" 10" 12" $21.00 $56.00 $68.00 $98.00 $129.00 $185.00 $246.00 $372.00 $495.00 $619.00 $740.00 Consumption I ccf Commercial / Industrial Single Family Multiple Family Oct — May $6.15 $3.39 $4.08 Jun — Sep $7.38 $4.18 $5.02 FCS GROUP Slide 4 •:J Existing Sewer & Surface Water Rates Sewer Commercial / Industrial $57.02 / RCE $52.11 / RCE $109.13 / RCE Single Family $31.00 / RCE $52.11 / RCE $83.11 / RCE Multiple Family $31.00 / DU $52.11 / RCE 1 RCE = 750 cf Surface Water SFR All other $215.00 Tiered Rates by Percent Coverage cn FCS GROUP Slide 5 •:J Why Are Rate Studies Important? Your Utility Is A Business Revenues need to cover utility costs Revenues dedicated to utility purpose Quantifies policies, priorities, and initiatives • Tells the "true" cost of providing service Communicates impact of financial decisions Public meetings FCS GROUP Slide 6 •:J Comprehensive Rate Study: Start to Finish Communication Plan What level of communication is needed? N Do your rate structures align with your objectives? I Financial Policy Evaluation Rate Study Components Rate Design Are you adequately protected against financial risks? Revenue Requirement Forecast Cost -of - Service Analysis Are your revenues sufficient to achieve full cost recovery? Are you charging your customers equitably? -.1 FCS GROUP Slide 7 Revenue Requirement •:> FCS GROUP Solutions -Oriented Consulting •:J Revenue Requirement Introduction Utility rates are set to recover the cost of providing service Financial policies Operating costs (regular I ongoing) Employee salaries and benefits Routine inspections & maintenance Professional services Utilities / power Capital costs (periodic) Infrastructure replacement Facility expansions and upgrades I Year 1 Year 2 Year 3 Year 4 Year 5 Operating Capital co FCS GROUP Slide 9 •:J How Much Revenue is Needed? Financial Policy Impacts + Forecasted O&M Costs Rate Funded Capital + Existing & New Debt Service } J Annual Revenue Needs FCS GROUP Slide 10 •:J Example Financial Policies Operating Reserve* Capital Reserve Rate Funded Capital Debt Service Coverage Purpose Accommodate variations in revenue & expenses Emergency repairs, unanticipated capital, & project cost overruns Annual rate funded capital mechanism Compliance with existing debt covenants; Maintain credit worthiness Policy Examples Water - 90-120 days O&M Sewer = 45-60 days O&M Storm** = 120 days O&M 1-2% of the original cost of capital assets Annual depreciation Target 2.0 or higher; Minimum 1.5 *The City's current policy is to hold 20 percent of the previous year's revenue as an operating reserve, exclusive of non -operating, non -recurring revenues. **For stormwater utilities with monthly billing, 45-60 days is typical FCS GROUP Slide 11 •:J Capital Funding Philosophy Cash (pay-as-you-go) Higher near -term rates Existing customers pay 100% of costs Cr Debt Lowest near -term rates...but interest cost F, Spreads cost between existing / future customers Execute projects sooner; reduce effects of inflation Hybrid Cash fund repair and replacement projects Debt fund large expansion projects i; iddi FCS GROUP Slide 12 •* Revenue Requirement Summary (Example) $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- 15.00°9, 15.00% 8.00% i IOW 8.00% 111, 5.00% 4.00% -IMO 2.00% Ella MOO 2.00% 2.00% 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Operating Expenditures — Existing Debt Service New Debt Service Rate Funded Capital Current Revenue — —Revenue w/ Incr. w FCS GROUP Slide 13 Cost of Service *• FCSGROUP Solutions -Oriented Consulting • How Will Costs Be Equitably Distributed? Revenue requirement: How big is the pie? Jr Cost of service: How should the pie be sliced? Multi- family 5% Existing Structure (Example) Single- family 34% Commercial 1 Industrial 61% c i FCS GROUP Slide 15 •:J Sample Customer Classer% Single Family Residential (SFR) Multi -family Residential (MFR) Commercial 1 Industrial • Typically, largest customer group • Relatively low usage per unit • High peak demand • Lowest fire flow requirement; domestic sewer strength • Lower usage per dwelling unit • Usually master metered • Relatively constant use • Domestic sewer strength • Diversity in use per account • Can have relatively constant use • Highest fire flow requirement • Varying sewer strength FCS GROUP Slide 16 • Allocating the Costs of Service (Example) $1 million Flow Rate Revenue Requirement 60% of average monthly flow, $600,000 Single Family I Customer 25% of average 15% of average monthly flow, $250,000 monthly flow, $150,000 Multi Family Commercial FCS GROUP Slide 17 •:J Cost of Service Equity Shift Existing Structure (Example) Single- family 34% Multi- fami Multi- 5% family Commercial I Industrial 61% Cost -of -Service Structure (Example) Single- family 55% Commercial I Industrial 40% 5% FCS GROUP Slide 18 �•►> FCS GROUP Solutions -Oriented consulting •:J Rate Design = Revenue Collection Main goal is to recover target level of revenue Primary communication tool with customers Typically fixed and/or variable charges CONSUMPTION HISTORY Sep Nov Jan Mar May . Jul Sep 2020 2021 PREVIOUS BALANCE PAYMENTS PAST DUE BALANCE BASE CHARGE CONSUMPTION SUMMERSURCHARG E KC ROW FEE TOTAL NEW CHARGE 92.25 -92.25 0.00 62.50 15.00 4.00 6.00 87.50 FCS GROUP Slide 20 •:J Types of Rate Structures $ Flat Rate Fixed Charge $40Imo. Seasonal Rate $ Fixed Charge $101mo. Winter Charge $1.00/ccf Summer Charge $1.501ccf Uniform Rate $ Fixed Charge $10Imo. Volume Charge $0.601ccf Inclining/Tiered Rate $ Fixed Charge $101mo. 0-10 ccf $0.50 I ccf 10-20 ccf $0.75 I ccf >20ccf $1.00/ccf Allowance Rate $ Fixed Charge $12/mo. 0 -10 ccf $0.00/ccf Use >10 ccf $1.00/ccf Fixed charges for water utilities are typically charged by meter size Flat rates are common for Sewer and Stormwater rates Sewer moving to volume -based rates FCS GROUP Slide 21 Thank you! Questions? John Ghilarducci (425) 336-1865 JohnGfcsgroup.com Zech Hazel (503) 374-0688 ZechariahH@fcsgroup.com www.fcsgroup.com **• FCS GROUP Solutions -Oriented consulting