Wilderness Rim Association Water Rate and Reserve Study Board Meeting April 23, 2014 Presented By:...
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Transcript of Wilderness Rim Association Water Rate and Reserve Study Board Meeting April 23, 2014 Presented By:...
Wilderness Rim Association
Water Rate and Reserve Study
Board MeetingApril 23, 2014
Presented By: Chris Gonzalez, Project Manager
Page 2
Agenda
Overview of Utility Rate Making
Discussion of Utility Financial Policies
Sources & Uses of Funds
Utility Reserve Structure
System Reinvestment (Funded by Surcharge)
Financial Performance Standards
Summary of Financial Forecast & Rate Strategy
Questions/Discussion
Page 3
Introduction to Utility Rate Making
Utility rates are set to recover the cost of providing service Utilities incur two primary types of costs:
Operating costs (regular/ongoing) • Employee salaries and benefits• Power and chemicals• Asset repair and maintenance
Capital costs (inconsistent/limited)• Infrastructure replacement• Facility expansions and upgrades Year 1 Year 2 Year 3 Year 4 Year 5
Operating Capital
Page 4
General Methodology
3. Define
Rate Revenue
Requirement
2. Forecast Revenues
2. Forecast Expenses
1. Establish Policy Framework
Page 5
Policy Framework
Fiscal policies provide a sound basis for financial management of a utility, addressing various topics including (but not limited to):
Sources & Uses of Funds
Utility Reserves (Structure & Levels)
Rate-Funded Capital Reinvestment
Financial Performance Standards
Page 6
Sources & Uses of Funds
The water utility is an “enterprise” Water rates are set based on the cost of providing service Water utility costs are funded by water utility revenues, without
support from the General Fund or assessment revenues
The utility maintains a separation of capital and operating resources/expenditures Current budget reflects an allocation of surcharge revenue to the Water
Reserve (for capital) Revenue from water sales and other operating revenues must fund the
cost of system operation and maintenance
Page 7
Utility Reserve StructureThe Association maintains a separate ‘Water Reserve’ for capital expenditures. Potential purposes for this reserve include:
Potential Purpose Sample Balance Target
Segregating funds designated for capital purposes • (No explicit minimum balance)
Protecting against capital cost overruns • 10% of rolling six-year capital improvement program
Providing funding for emergency infrastructure replacement
• 2% of fixed asset cost (≈ $8,500)or
•Cost of most expensive asset (could be ≈ $250,000 for original water system)
Providing funding for a long-term asset management program
•Linked to water system replacement cost (could be ≈ $1 million based on current system valuation)
Page 8
Considerations for Sizing Water Reserve
Potential exposure to financial liability Regulatory changes (e.g. water quality or fire flow standards) Other capital investment needs identified in Water System
Management Plan Accumulating infrastructure replacement liability
Availability of other funding sources Limited access to external funding can justify a larger fund balance
Potential impacts to ratepayers Reserve funding comes from monthly surcharges imposed on
customers (currently $8.00 per bimonthly billing period per customer)
Page 9
Other Utility ReservesOther common reserves not currently in place for the Water Utility:
Operating Reserve Intent: Manage short-term
fluctuations in revenue andexpense cycles
Benchmark: 30 – 45 days (8 – 12%) of budgeted operating expenses• 2013-14 Budget Target balance of $19,500 – $29,250
Rate Stabilization Reserve (Not Funded In This Study) Intent: Protect against revenue loss during low-sales years Benchmark: 20 – 25% of annual rate revenue
• Goal: Cover a 10% revenue shortfall for up to 2.5 years• 2013-14 Budget Target balance of $42,300 – $52,900
Jul-Aug Sep-Oct Nov-Dec Jan-Feb Mar-Apr May-Jun
Water Sales Revenue Expenses
Page 10
System Reinvestment
The Association’s water rates are set to cover the cost of system operation and maintenance
Funding for asset replacement is an important part of a long-term rate-management strategy Infrastructure replacement can be costly Deferred maintenance also has costs
Potential benchmarks for annual system reinvestment funding Depreciation expense (based on original cost) Depreciation expense (based on replacement cost) Sinking fund (based on anticipated needs)
Page 11
System Reinvestment: WRA Example Assumptions:
Cost of original water system (1986): $247,061
• 50-year useful life replace original water system in 2036
• 3% annual cost inflation estimated 2036 replacement cost = $1.3 million 1% investment interest rate 2013 Reserve Balance: $502,937 Projected 2014 – 2019 capital expenditures: $75,510
Potential benchmarks for annual system reinvestment funding: Original-Cost Depreciation: $247,061 50 years = $4,941 Replacement-Cost Depreciation: $4,941 × (1.03)Asset Age
Sinking Fund: $27,382
Annual transfer needed to fully cover projected replacement cost in projected year of replacement, given other projected expenses
Annual transfers escalate with inflation, ranging from $10,983 – $21,677 per year
Page 12
System Reinvestment: WRA Example
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
Asset Replacement Cost Original-Cost DepreciationReplacement-Cost Depreciation Sinking Fund
Cash Accumulated for Replacement of Original Water System
Replacement-cost basis funds ≈ 81% of replacement liability
Original-cost basis funds ≈ 52% of replacement liability
Replacement Cost in 2036: $1.3 Million
System reinvestment policies intend to generate a reasonable level of cash funding, considering near-term financial impacts.
Page 13
WRA Surcharge for System Reinvestment
The Association currently charges its customers a bimonthly surcharge of $8.00 per account Projected to generate ≈ $31,000 per year 2013-2014 Budget: Revenue goes to reserve for capital
Annual transfer of ≈ $36,000 would be needed to cash-fund replacement of all current water system assets Based on projected infrastructure replacement needs, assuming that
assets need to be replaced 50 years from their acquisition date Relies on available water system asset records and assumptions (see
previous WRA system reinvestment example) Would equate to a bimonthly surcharge of ≈ $9.30 per account
Page 14
Financial Performance Standards
Goal: Water utility generally maintains non-negative cash flow Water revenues are adequate to cover the water utility’s expenses Short-term deficits may be allowed as part of a multi-year rate strategy
Goal: Maintain reserves at or above targeted levels Rate studies should plan to meet reserve targets If a reserve’s balance falls below its target level, the Association should
plan to replenish it over several years
Goal: Comply with financial performance requirements established by debt agreements Not currently (or expected to be) an issue for the Association May become an issue if the Association needs to secure external
financing (e.g. bank loan) to fund capital projects
Page 15
Revenue Forecasting
Water Sales222467
81%
Surcharges3706214%
Other13500
5%
2013-2014 Revenue
Water Sales:
• Based on estimated FY-2013-14 sales revenue and prevailing water rates
• Assumes no growth
Surcharges:
• Estimated based on customer statistics and prevailing surcharges
‒ Water surcharge ($8.00 per billing period) – ongoing
‒ Reserve study surcharge ($1.34 per billing period; expires in mid-2016)
Other Operating Revenues:
• Based on FY 2013-14 Budget (with no growth)
‒ Late Fees: $10,500
‒ Transfer Fees: $2,000
‒ Lock/Reconnect Fees: $1,000
Page 16
Expense Forecasting
Sallal Water Pur-
chases119137.4
44%
Sallal O&M Contract42772.2
16%Other Water Operations
$5,200 2%
Water Reserve Transfers37062.1869333637
14%
Administrative Costs69296.4777377924
25%
2013-2014 Revenue
Sallal O&M Contract:
• Based FY-2013-14 Budget, reduced to reflect WRA’s assumption of billing responsibilities as of Jan 2014
• 4% increase for FY 2014-15 negotiated with Sallal
• Assumed to increase by 3% per year beyond FY 2014-15
Administrative Costs:
• Water utility’s allocation based on FY 2013-14 Budget
• Increased to reflect WRA’s assumption of billing responsibilities as of Jan 2014
• Labor costs increase by 2.5 – 4.0% per year; other costs increase with inflation (1.7 – 2.5% per year).
Sallal Water Purchases:
• Based on FY 2013-14 Budget
• 4% increase for FY 2014-15 negotiated with Sallal
• Assumed to increase by 3% per year beyond FY 2014-15
Water Reserve Transfers:
• Reflects transfer of surcharge revenues to reserve
Other Water Operations:
• Based on FY 2013-14 Budget
• Assumed to increase with inflation (1.7 – 2.5% per year)
Page 17
Capital Needs Forecast
2014 2015 2016 2017 2018 20190
10000
20000
30000
40000
50000
Cash84913.3568473
257100%
Capital Costs Through 2019*: Sampling Stations: $37,250 Hydrant Modifications: $9,403 Meter Replacements: $5,321 Water System Plan Update: $32,939 Total: $84,913
Planned Funding Strategy: $84,913 in cash funding from
existing Water Reserve resources and surcharge revenue
*Reflects adjustments for future cost inflation at ≈ 3.2% per year
Page 18
Water Revenue Requirement Analysis
Revenue at existing rates is insufficient to fully cover costs Partially due to increase in allocation of admin costs to water utility
• Driven by assumption of meter reading/billing duties by WRA
Operating deficit is expected to grow as costs increase over time
Recommended financial policies also have an impact… Water utility does not currently have an operating reserve
• General Fund operating reserve can be used in emergencies
• Goal is for the water utility to be self-sustaining
Assumed $71,000 interfund loan from the Water Reserve• Funds water utility operating reserve and enables the phasing of rate
increases over several years
• Balances recommended “sources and uses” and “financial performance” policies with near-term financial reality
Page 19
Water Utility Financial Forecast
Forecast Summary Current FY 2015 FY 2016 FY 2017 FY 2018 FY 2019Annual Rate Increase 9.0% 9.0% 9.0% 8.0% 8.0%Bimonthly Bill @ 1,100 CF $54.12 $58.99 $64.30 $70.09 $75.70 $81.76Plus: Surcharges 9.34 9.34 9.34 8.00 8.00 8.00Total Bimonthly Bill $63.46 $68.33 $73.64 $78.09 $83.70 $89.76Change From Prior Year $4.87 $5.31 $4.45 $5.61 $6.06% Change From Prior Year +7.7% +7.8% +6.0% +7.2% +7.2%
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 $-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
Cash Operating ExpensesInterfund Loan RepaymentRevenue @ Existing RatesRevenue @ Proposed/Projected Rates
Existing Op-erating Deficit
17%
Future Op-erating Cost
Increases40%
Funding Operating Reserve
12%
Phasing In Rate
In-creases31%
Breakdown of Cumulative IncreaseAlternative:
Upfront rate increase of ≈ 28%
Page 20
Recommendations
Establish a separate operating reserve for the water utility
Consider establishing a rate stabilization reserve as resources allow Provides protection against revenue risk resulting from low-sales years
Maintain surcharge of $8.00 per month per account Continue to allocate surcharge revenue to the Water Reserve System reinvestment is an ongoing need consider integrating into the
“basic” water rate (rather than as a separate “surcharge”)
Increase water rates by 9% for FY 2015
Review utility rates annually