HomeMy WebLinkAboutAdopt Resolution Nos. 2018-17, 2018-19 and 2018-20 to set mu2018 Water Rate Study
Report
amity of Huntington Beach
Draft Report / January 31, 2018
2018 Water Rate Study Report 12
HB -205- Item 16. - 29
445 S. Figueroa Street
Suite 2270
Los Angeles, CA 90071
January 31, 2018
Mr. Kenneth J. Dills
Phone wwmv,.raftelis.cam
213.262.9300
Fax 213.262.9303
Project Manager
City of Huntington Beach Public Works Department, Utilities Division
19001 Huntington Street, P.O. Box #190
Huntington Beach, CA 92648
Subject: 2017 Water Rate Study Report
Dear Mr. Dills:
Raftelis Financial Consultants, Inc. (Raftelis) is pleased to provide this Water Rate Study Report for
the City of Huntington Beach (City) that develops a sustainable financial plan and establishes rates
that are equitable and in compliance with Proposition 218 for water service delivered within the
District's service area.
The study's major objectives include the following:
Develop a 5-year financial plan to ensure revenue sufficiency, which includes funding for
operation and maintenance, capital expenses, and water supply costs.
Conduct a cost -of -service analysis for water services, and equitably allocate the costs of
providing service.
Develop fair and equitable water rates and perform customer impact analyses.
Develop an administrative record that demonstrates the nexus between the City's costs and
rates, in compliance with Proposition 218.
This Report summarizes the key findings and recommendations of the study. It has been a pleasure
working with you, and we thank you and City staff for the support provided during this study.
Sincerely,
RAFTELIS FINANCIAL CONSULTANTS, INC.
Sanjay Gaur Khanh Phanh Karter Harmon
Vice President Senior Consultant Consultant
Item 16. - 30 HB -206-
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY............................................................................................................ 1
l.l. INTRODUCTION ........................................................................................................................................1
1.2 PROPOSED FINANCIAL PLAN_, ....................................................... ............. 1_1 ... I . ......... I. ................ 1
1.2.1 Fixed Charge Revenue Adjustment..................................................................................................................1
1.2.2 Commodity Charge Pass-Through....................................................................................................................2
1.2.3 Capital Surcharge...................................................................................................................................................2
1.2.4 Proposed Financial Plan......................................................................................................................................2
.`' PROPOSED WATER RATES...................................................................................................................3
1.3.1 Customer Impacts..................................................................................................................................................4
2. INTRODUCTION........................................................................................................................ 6
2.1 AGENCY BACKGROUND.........................................................................................................................6
2.2 STUDY BACKGROUND............................................................................................................................6
2.3 LEGAL FRAMEWORK AND RATE SETTING METHODOLOGY.................................................I...7
2.3.1 California Constitution - Article XIIID, Section 6 (Proposition 218).....................................................7
2.3.2 Cost -Based Rate Setting Methodology.............................................................................................................7
2.4 DISCLAIMERS................................................................................................................. .....7
......................
3. FINANCIAL PLAN....................................................................................................................... 9
3 ?
KEY ASSUMPTIONS.................................................................................................................................9
3.1.1
Inflation Factors.....................................................................................................................................................9
3.1.2
Financial Policies...................................................................................................................................................9
3.2
REVENUE FROM CURRENT WATER RATES ............ ................:..................... .........................:......
10
3.3
...............
PROJECTED EXPENSES................................................................................................... ......
12
3.3.1
Water Supply Costs............................................................................................................................................12
3.3.2
Water O&M Expenses........................................................................................................................................14
3.3.3
Capital Improvement Plan(CIP)....................................................................................................................14
3.4
STATUS QUO FINANCIAL PLAN........................................................................................................
15
3.5
PROPOSED FINANCIAL PLAN..... .......................................................................................................
16
3.5.1 Fixed Charge Revenue Adjustment...............................................................................................................16
3.5.2 Commodity Charge Pass-Through.................................................................................................................17
3.5.3 Capital Surcharge................................................................................................................................................17
3.5.4 Proposed Financial Plan...................................................................................................................................18
2018 Water Rate Study Report 14
HB -207- Item 16. - 31
4. COST OF SERVICE ANALYSIS...............................................................................................20
1 METHODOLOGY .................................................................................................................................... 20
1) Determine Revenue Requirement................................................................................................................21
2) Cost of Service Analysis (COS)........................................................................................................................ 21
3) Rate Design and Calculations..........................................................................................................................22
4) Rate Adoption......................................................................................................................................................22
.2 .= NAL`YSB................................................................................................................................................. 22
4.2.1 Revenue Requirement Determination........................................................................................................ 22
4.2.2 Allocation of Functionalized Expenses to Cost Causation Components ............................................ 23
4.2.3 Distribution of Cost Causation Components to Rate Categories.......................................................... 28
S. RATE DERIVATION.................................................................................................................30
5.1 PROPOSED OAIL�' S11R ICE; to-iARGE........................................................... ........................ 31
5.2 PROPOSED DAILY CAPITAL SURCHARGE..................................................................................... 32
5.3 PROPOSED WATER USAGE CHARGES............................................................................................ 32
5.4 CUSTOMER IMPACT ANALYSIS........................................................................................................ 34
Item 16. - 32 HQ -208-
LIST OF TABLES
Table 1-1: Proposed Fixed Charge Adjustments..........................................................................................1
Table 1-2: Proposed Capital Surcharge........................................................................................................2
Table 1-3: Proposed FY 2019 Rate Schedule..............................................................................................3
Table 1-4: Average Customer Monthly Bill Impacts......................................................................................4
Table3-1: Inflation Factors...........................................................................................................................9
Table 3-2: Proposed Reserve Policies........................................................................................................10
Table 3-3: Current Meter Charges & Number of Accounts.........................................................................11
Table 3-4: Water Sales (FY 2017 — FY 2023).............................................................................................11
Table 3-5: Projected Water Revenues from Current Rates and Charges..................................................12
Table 3-6: Fund 506: Projected Non -Operating Revenue..........................................................................12
Table 3-7: Projected Water Production.......................................................................................................12
Table 3-8: Projected Water Supply Costs...................................................................................................13
Table 3-9: Projected Water Fund 506 Water Operating Expenses............................................................14
Table 3-10: Proposed Fixed Charge Adjustments......................................................................................17
Table 3-11: Proposed Capital Surcharge....................................................................................................17
Table 3-12: Proposed Water Fund 506 Financial Plan..............................................................................A9
Table 3-13: Proposed Water Master Plan Fund 507 Financial Plan..........................................................20
Table 4-1: FY 2019 Revenue Requirements..............................................................................................23
Table 4-2: Systemwide Peaking Factors and Allocation Percentages.......................................................24
Table 4-3: Allocation Percentage for Fire Service......................................................................................
24
Table 4-4: Allocation Percentages Including Fire.......................................................................................25
Table 4-5: O&M Functions and Allocation Bases.......................................................................................25
Table 4-6: Capital Functions and Allocation Bases....................................................................................
26
Table 4-7: O&M Allocations to Cost Causation Components.....................................................................
26
Table 4-8: Capital Allocations to Cost Causation Components..................................................................27
Table 4-9: Cost Causation Component Allocation Percentages.................................................................27
Table 4-10: Allocation of Revenue Requirement to Cost Causation Components.....................................28
Table 4-11: Cost Causation Components by Rate Category... ...................................................................
29
Table 5-1: Equivalent Meter Units and Equivalent Dwelling Units..............................................................31
Table 5-2: Development of Daily Fixed Service Charge.............................................................................31
Table 5-3: Development of Daily Capital Surcharge...................................................................................32
Table 5-4: FY 2019 Proposed Daily Fixed Charges by Meter Size............................................................
32
Table 5-5: Development of Water Usage Charges.....................................................................................33
Table 5-6: Proposed FY 2019 Rate Schedule............................................................................................
33
Table 5-7: Average Customer Monthly Bill Impacts....................................................................................
34
2018 Water Rate Study Report 16
Hs -209- Item 16. - 33
LIST OF FIGURES
Figure 1-1: Water Operating Financial Plan with Capital Surcharge............................................................3
Figure 1-2: Projected Reserve Balances......................................................................................................
3
Figure 1-3: Projected Residential Bill Impacts..............................................................................................5
Figure 3-1: Projected CIP Expenditures.....................................................................................................15
Figure 3-2: Status Quo Operating Financial Plan.......................................................................................16
Figure 3-3: Status Quo Projected Reserve Balances (Funds 506 & 507)..................................................16
Figure 3-4: Water Operating Financial Plan with Capital Surcharge..........................................................18
Figure 3-5: Projected Water Fund Ending Balances..................................................................................18
Figure 5-1: Projected Residential Bill Impacts............................................................................................35
Item 16. - 34 HB -2 1 0-
GLOSSARY
Terms
Descriptions
AF
Acre foot Acre feet, I AF = 435.6 CCF
AWWA
American Water Works Association
CCF
Hundred cubic feet, 1 CCF = 748 gallons
CIP
Capital Improvement Projects
City
........... .... . . .. . .. .. ...................
City of Huntington Beach
Cos
Cost of Service
CPI
Consumer Price Index/Indices
....... ..... . .............................. . ... ....... I ....................... . ...... . . . .................... .. . . ...... ................. . .... . . ......... . .. . ... . ......................
CY
Calendar Year
EMU
Equivalent Meter Unit
ENR CCI
Engineering News -Record Construction Cost Indices
.... . ...... . .. .......... .... . ...... ... ... . ..... .................. . .. ... . ... .............. . . ...................... .
FY
Fiscal Year ....... .
. . ..... . ..... . ......... .
GPCD
....................... ... ................... . .................. ... .. - ------
Gallons per capita per day
MBC
Meter Basic Charges
M1 Manual
"Principles of Water Rates, Fees, and Charges: Manual of Water Supply Practices
M 1 6d, edition published by AWWA
MD
Max Day Peaking Factor
MFR
Multi -Family Residential
MH
Max Hour Peaking Factor
MWD
Metropolitan Water District of Southern California
MWDOC
Municipal Water District of Orange County
MWRF
Mesa Water Reliability Facility
0C
Orange County
OCWD
Orange County Water District
O&M
Operations and Maintenance ... . ................ . . . ................................... . .... . . . .......................
PAYGO
... ....... . .. . . . . . . . . ... ........... ...... ........... . ..... ... . . . . ......................... ..
Pay -As -You -Go
R&R
Repair and Replacement
Raftelis
Raftelis Financial Inc. Consultants, ....................... ........ I ................................. . . .. I ........................ . ... . . ........ . . . .............. ................
2018 Water Rate Study Report 18
1113 -211- Item 16. - 35
EXECUTIVE SUMMARY
INTRODUCTION
In 2017, the City of Huntington Beach (City) engaged Raftelis Financial Consultants, Inc. (Raftelis) to
conduct a cost of service analysis and rate study for the water utility. This report documents the
methods, results, and proposed rates developed in the study.
The major objectives of the study include the following:
1. Ensure Revenue Sufficiency to meet the operation and maintenance (0&M) and capital needs
of the City's water utility.
2. Ensure that rates are Fair and Equitable, in accordance with Cost of Service guidelines used
in the industry.
3. Plan for Rate and Revenue Stability to prevent rate spikes, preserve the overall financial
health of the utility, and maintain adequate operating and capital reserves under varying
conditions.
This Report provides an overview of the Study and includes a recommended water rate schedule
for the fiscal years (FY) 2019 through 2023.
1.2 PROPOSED FINANCIAL PLAN
To maintain fiscal solvency, fund 0&M and capital expenses, maintain reserve fund balance targets,
and avoid the need for debt issuance, we make several recommendations regarding the City's
current rate structure and financial plan. These recommendations include re-evaluation of annual
adjustments to the fixed meter charges, implementation of a pass -through methodology for water
supply costs, and the introduction of a capital surcharge to fund CIP.
1.2.1 Fixed Charge Revenue Adjustment
Currently, the City escalates its fixed charge each year based on the change in Consumer Price Index
(CPI). However, for FY 2019 the City plans to increase its fixed charges by $0.88 per EMU per month
(equivalent to a 0.10% revenue adjustment). We propose that the City continue to increase its fixed
charges based on CPI increases. For the purposes of our financial plan, we assume an annual CPI
adjustment of 2.50%1. We also recommend 1.50% in supplemental fixed charge adjustments to
account for overall increases in revenue requirements, above and beyond the increased CPI. We
propose implementing this new structure of revenue adjustments beginning in FY 2020.
Table 0-1: Proposed Fixed Charge Adjustments
FY 2019 0.10%
FY 2020 CPI + 1.50%
FY 2021 CPI + 1.50%
FY 2022 CPI + 1.50%
1 30-year average annual increase for CPI since 1987 to 2016 = 2.65% per year. We round to 2.50% to provide a
conservative estimate of fixed charge revenues for financial planning purposes.
1 1 ON of Huntington Beach
Item 16. - 36 H B -212-
FY 2023 CPI + 1.50%
1.2.2 Commodity Charge Pass -Through
The commodity charge is designed to recover the variable costs of providing water, including water
supply costs and unrecovered water system fixed costs2. We recommend that the City continue its
current policy of increasing the commodity charges in each year based on a "pass -through" of water
supply costs, so that the total change in water supply costs from year to year is the basis for
changing the commodity rates. Under this policy, the City increases its commodity charge based on
the increment of water supply costs in each fiscal year. Note that the City will calculate the annual
pass -through cost in each year, which may differ from our estimated cost based on inflation
assumptions. In keeping with industry standard pass -through methodologies, the City will calculate
the actual change in water supply costs in each year as new purveyor rates become available.
1.2.3 Capital Surcharge
Given that the City's CIP is projected at $6 million or more in every year of the study period, we
recommend that the City implement a capital surcharge as a new component of its rate schedule.
We propose that the capital surcharge fund a portion of CIP at first and then increase over time
until revenues from the surcharge fund 75 percent of the estimated CIP revenue requirement by FY
2023. This also lessens the burden on the City's customers as the new surcharge is phased in. The
capital surcharge is based on equivalent meter units (EMUS) per month and on EDUs for MFR
customers. For example, 1-inch meter is equivalent to 1.67 3/4-inch meters (or 1-inch = 1.67 EMUs).
Table 0-2: Proposed Capital Surcharge
FY 2018
-
FY 2019
$3.00
FY 2020
$3.00
FY 2021
$3.50
FY 2022
$3.50
FY 2023
$4.00
1.2.4 Proposed Financial Plan
Based on the recommended revenue adjustments, forecasts of costs and other revenues, Raftelis
projects the proposed financial plan for the study period. The fixed charge revenue adjustment,
commodity charge pass -through, and capital surcharge result in significantly smaller reductions in
reserves, allowing the City to fully fund its 0&M and capital obligations while maintaining adequate
reserves through FY 2023. Figure 0-1 and
Figure 0-2 display the proposed financial plan and projected end -year reserve balances.
Z A portion of water system fixed costs is recovered in the fixed service charge.
2018 Water Rate Study Report 12
I113 -213- Item 16. - 37
Ln $60
$50
$40
$30
$20
$10
$0
(S10)
$50
0
$30
$ 20
$10
$0
�`il :'e 0-1: Water Operating Financial Plan with Capital Surcharge
Water Operating Financial Plan
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Water Purchased Costs O&M Expense +GF Cost Allocations
Debt Service Reserve Funding
Current Revenue Proposed Revenue
Figure 0-2: Projected Reserve Balances
Projected Water Fund Ending Balances (506 + 507)
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Total Ending Balance w/o Debt Proceeds Fund 507 Debt Proceeds
Total Reserve Target M Alert Balance
1.3 PROPOSED WATER RATES
Table 0-3 shows the proposed rate schedule for FY 2019. The rates are based on the COS analysis
and rate derivations detailed in Sections 4 and 5 of this report. In the future years of the study
period (FY 2020-2023), the fixed charges will increase at the rate specified in Table 0-1. The
commodity charge will increase at the estimated unit pass -through rate, to be calculated by the City
in each year based on the change in effective rates for OCWD and MWDOC.
able 0-3: Proposed FY 2019 Rate Schedule
3 1 Citv of Huntington Beach
Item 16. - 3 8 HB -214-
Charge Surcharges
Service
Charge
Rates
3/4"
$0.4175
$0.0987
$0.5162
$0.3886
$0.1276
i"
$0.6957
$0.1644
$0.8601
$0.7772
$0.0829
11/2"
$1.3914
$0.3288
$1.7202
$1.1657
$0.5545
2"
$2.2262
$0.5261
$2.7523
$1.9429
$0.8094
3"
$4.8698
$1.1507
$6.0205
$4.2744
$1.7461
4" Compound
$6.9568
$1.6439
$8.6007
$6.6059
$1.9948
4" FM
$9.7395
$2.3014
$12.0409
$12.8231
-$0.7822
6" Compound
$13.9136
$3.2877
$17.2013
$12.8231
$4.3782
6" FM
$22.2617
$5.2603
$27.5220
$26.0348
$1.4872
8" FM
$38.9579
$9.2055
$48.1634
$45.4638
$2.6996
10" FM
$61.2196
$14.4658
$75.6854
$71.1100
$4.5754
MFR by EDU
$0.4175
$0.0987 :
$0.5162
$0.3886
$0.1276
Commodity Rate ($ per CCF)
$2.1490
$2.0839
$0.0651
1.3.1 Customer Impacts
Table 0-4 compares bills under the current FY 2018 rate schedule with those projected under the
proposed FY 2019 rates. We compare bills for an average residential customer with a 3/4" meter
(or single multifamily EDU) using 12 CCF of water per month. For these calculations, we multiply
the daily fixed charges by the average number of days per billing cycle (30.423).
Table 0-4: Average Customer Monthly Bill Impacts
Bill Characteristics Current Proposed $
Rates Rates Change
1 Fixed Service Charges & Capital Surcharges $11.82 $12.70 $0.88
(3/4" meter)
Capital Surcharges
2 (3/4" meter) $0.00 $3.00 $3.00
3 Usage Charges $25.01 $25.79 $0.78
(12 CCF monthly usage)
4 Total Bill (111 + [21) $36.83 $41.49 $4.66
Figure 0-3 shows a breakdown of monthly customer impacts for customers with a 3/4" meter (or
typical for single family service or 1 EDU multi -family) at various levels of usage, including the 12
CCF example from Table 0-4.
3 365 days / 12 months = 30.42 days per month
2018 Water Rate Study Report 14
1-113-215- Item 16. - 39
$80
$70
$60
$50
$40
$30
$20
$10
$0
R Current Bill
AV Proposed Bill
$ impact
Z.T� ......................................... " ............... MM
Single Family Sample Mwithly Bills, 3/4" MeteF, Effective FY 2019
fm 1
5 ccf
$22.24
$26.44
$4.20
12 ccf
S ccf
20 ccf
$36.83
$43.O8
$53.50
$41.49
$47.93
$58.68
$4.66
S426
$5.18
25 ccf
$63.92
$69.42
$5.51
5 1 Citv of Huntington Beach
Item 16. - 40 HB -216-
INTRODUCTION
..0 AGENCY 13ACKGROIJN
The City of Huntington Beach Public Works Department is responsible for the design, construction,
maintenance, and operation of public facilities and infrastructure within the City of Huntington
Beach. This includes the water utility which, as of 2017, serves a population of over 200,600
residents through approximately 52,900 metered connections. The City's top priorities and goals
for the water enterprise include providing safe drinking water, fighting fires and protecting
property, and maintaining a reliable and dependable water system for current and future
generations.
The City currently provides water from two sources: local groundwater serviced by the Orange
County Water District (OCWD) and imported purchased water from the Metropolitan Water District
of Orange County (MWDOC). In FY 2017 the City provided 75% of its water supply from OCWD and
the remaining 25% from MWDOC. The City anticipates significant costs to maintain and replace its
substantial water infrastructure, which includes 10 wells, 611 miles of distribution mains, four
reservoirs, five booster pump stations, and three import connections. The City also maintains 5,801
public hydrants, 17,749 large valves, 20 miles of shared large mains, and over $20 million in
machinery, vehicles, and equipment. The City estimates the full replacement cost of its water
infrastructure at over $1.4 billion.
The City currently charges customers a uniform commodity rate based on its water supply costs
and a monthly fixed meter charge based on meter size, as measured in equivalent meter units
(EMUS). For multifamily customers, meter charges are based on the number of equivalent dwelling
units (EDUs). Traditionally the City has utilized an annual adjustment formula to increase both the
fixed and variable charges in each year. Under current policy, both fixed and variable charges
increase at the same rate as the change in consumer price index (CPI) from year to year. However,
the current rate schedule and adjustment mechanism have fallen short of adequately providing for
the City's water utility, due to changing supply and demand dynamics and aging infrastructure with
very high replacement costs. For example, CPI increased 9.7% from FY 2012 to FY 2017, while the
City's operation and maintenance (0&M) costs increased by 13% over the same period. These
substantial increases in both capital and 0&M obligations necessitate a thorough study of the water
utility's financial plan and rates.
STUDY " A.CKGROTIN
In 2017, the City of Huntington Beach (City) engaged Raftelis Financial Consultants, Inc. (Raftelis) to
conduct a cost of service analysis and rate study for the water utility. The study should develop new
rates for FY 2019-2023 The major objectives of the study include the following:
1. Ensure Revenue Sufficiency to meet the (0&M) and capital needs of the City's water utility.
2. Ensure that rates are Fair and Equitable, in accordance with Cost of Service guidelines used
in the industry.
2018 Water Rate Study Report 16
HB -21 7- Item 16. - 41
3. Plan for Rate and Revenue Stability to prevent rate spikes, ensure adequate capital
replacement funding, preserve the overall financial health of the utility, and maintain
adequate reserves under uncertain conditions.
This report documents the methods and results of the study, and concludes with a recommended
water rate schedule for FY 2019-2023.
2.2 LEGAL FRAMEWORK AND FATE SETTING METHODQLOGV
This section of the report describes the legal framework that was considered during rate
development to ensure that the calculated cost of service rates provide a fair and equitable cost
allocation to the different customer classes.
2.2.1 California Constitution - Article XIIID, Section 6 (Proposition 218)
Proposition 218, reflected in the California Constitution as Article XIII D, was enacted in 1996 to
ensure that rates and fees are reasonable and proportional to the cost of providing service. The
principal requirements for fairness as they relate to public water service are as follows:
Water rates shall not exceed the funds required to provide the service.
Revenues derived by the charge shall not be used for any other purpose other than that for
which the charge was imposed.
The amount of the charge imposed upon any parcel shall not exceed the proportional cost of
service attributable to the parcel.
No charge may be imposed for a service unless that service is used or immediately available
to the owner of property.
No charge may be imposed for general governmental services including, but not limited to,
police, fire, ambulance or library services, where the service is available to the public at
large in substantially the same manner as it is to property owners.
2.2.2 Cost -Based Rate Setting Methodology
Raftelis' rate setting methodology is based on the American Water Works Association (AWWA) M1
Manual. The methods detailed in the M1 Manual align with the Proposition 218 requirement that "a
utility's full revenue requirement should be equitably recovered from classes of customers in
proportion to the cost of serving those customers." To develop utility rates that comply with
Proposition 218 and industry standards while meeting other emerging goals and objectives of the
utility, we follow the "Base -Extra Capacity" methodology as outlined in the M1 Manual. Section 4 of
this report includes details of the methods and calculations involved in the cost of service analysis,
while Section 5 details the derivation of rates.
2.3 DISCLAIMERS
In performance of the services, it is understood that the City and/or others may supply Raftelis with
certain information and/or data and that Raftelis will rely on such information. Raftelis shall not be
liable for the accuracy of such information, nor for its verification, except to the extent that
verification is expressly a part of Raftelis 's scope of services.
7 1 Citv of Huntington Beach
Item 16. - 42 HB -218-
Raftelis 's opinions, estimates, projections, and forecasts of current and future costs, revenues,
other levels of any sort, and events shall be made on the basis of available information and Raftelis'
expertise and qualifications as professionals. Raftelis does not warrant or guarantee that its
opinions, estimates, projections or forecasts of current and future levels and events will equal the
City's estimates or forecasts or actual outcomes. Raftelis identifies costs, allocates costs to customer
classes, and provides rate models. It does not establish rates, which is the legislative responsibility
of City.
The numbers shown in the tables listed in this report may be rounded, thus they may not add up to
the precise numbers as shown.
2018 Water Rate Study Report 18
HB -219- Item 16. - 43
FINANCIAL PLAN
3.0 KEYAssuMPTIONS
The first step in developing the financial plan is to identify the growth assumptions used to project
costs, usage, and revenues over the study period. Key assumptions of the study include anticipated
growth in costs over the study period, inflation factors for account growth and demand growth,
debt financing assumptions, and reserve policies. Raftelis developed these assumptions based on
the City's data and projections. These assumptions represent our projections of the most likely
scenario over the study period, to the extent that data are available.
3.0.1 Inflation Factors
Table 0-1 lists the anticipated change in accounts and usage over the study period. It also lists the
annual inflation factors for each of the City's cost categories, including C&M, capital, and water
supply costs. Note that the City does not have any outstanding bonds and does not plan to issue any
new debt during the study period.
Table 0-1: Inflation Factors
Demand Growth
Account Growth 0% 0%
Demand Factor 6% 0%
Non -Rate Revenue Increases
Reserve Interest Rate 1.% 1%
Miscellaneous 1% 1%
Cost Inflation Factors
Salary
2%
2%
Benefits
7%
7%
Chemicals
5%
5%
Energy
2%
2%
General 0&M Costs
3%
3%
Water Supply Costs
5%
5%
Capital Costs
3%
3%
The City's water system is currently built out, so we do not assume any change in number of
accounts over the study period. We assume a 6% increase in average demand in FY 2018 as the City
recovers from the effects of the recent drought and associated mandatory water use restrictions.
3.0.2 Financial Policies
A reserve policy is a written document that establishes reserve goals/targets. It provides guidelines
for sound financial management with an overall long-range perspective to maintain financial
solvency and mitigate financial risks associated with revenue instability, volatile capital costs, and
9 1 Citv of Huntington Beach
Item 16. - 44 1413 -220-
emergencies. Adopting and adhering to a sustainable reserve policy enhances financial
management transparency and helps achieve or maintain a certain credit rating for future debt
issues. Reserves can offset unanticipated reductions in revenues, offset fluctuations in costs of
providing services, and offset fiscal emergencies such as revenue shortfalls, asset failure, and
natural disaster. Capital reserves set funds aside for replacement of capital assets as they age and
for new capital projects. The appropriate amount of reserves and reserve types are determined by a
variety of factors such as the size of the operating budget, the amount of debt, the type of rate
structure, frequency of customer billing, and risk of natural disaster.
We propose that the City maintain two separate reserve funds: the Water Fund (i.e. Fund 506,
Operating Reserve Fund) and the Water Master Plan Fund (i.e. Fund 507, Capital Reserve Fund). We
also recommend the City maintain an emergency reserve for well replacement, included in Fund
507. Table 0-2 shows the recommended reserve policies for Funds 506 and 507. These are the
policies the City plans to adopt over the study period from FY 2019- FY 2023.
• Fund 506, Operating Reserve Fund - Used for unanticipated operating expenses. This
fund is designated to maintain working capital for current operations and to meet routine
cash flow needs. The target level will equal 25 percent or 3 months of Water Fund's
budgeted total operating expenses. Note that, for Fund 506, this represents a change from
the City's current policy (the operating reserve target is revised to 25%, down from the
current 33%).
• Fund 507, Capital Reserve Fund - Used for the replacement of capitalized assets when
they reach the end of their useful lives. The target level of Fund 507 includes:
o Capital replacement reserve: 150% of 5-year average CIP to allow flexibility in the
timing of projects and/or schedules change.
o Emergency reserve: $5.4M for estimated well replacement costs and the associated
cost of importing additional water during construction.
Cable 0-2: Proposed Reserve Policies
Operations 25% of Operating Budget
Capital
Emergency
150% of 5-Year Average
CIP
$5,400,000
3.1 REVENUE FROM CURRENT WATER RATES
In order to develop a new financial plan for the City, we first calculate the anticipated revenues if
the City were not to make any changes to its current rate schedule. This provides a baseline with
which to compare the proposed financial plan and rate structure. Table 0-3 shows the City's
current rate schedule, as well as the number of accounts billed at each rate. Note that for
multifamily residential (MFR) accounts, the City's fixed charges are based on the number of
equivalent dwelling units (EDUs) rather than meter size. Each EDU is assumed to have the same
usage and capacity demands as a 3/4 -inch SFR meter; therefore, the rate per EDU is equal to the
2018 Water Rate Study Report 110
HB -221- Item 16. - 45
3/4-inch fixed charge as assessed to non-MFR accounts. The total number of accounts is the sum of
non-MFR meters and MFR EDUs.
The City currently updates its rates each year based on the change in CPL Since the future change in
CPI is not known, we use the FY 2018 rates to project status quo revenues across the study period.
able 0-3: Current Meter Charges & Dumber of Accounts
Meter Size
3/4-inch
$0.3886
40,212
1-inch
$0.7772
6,283
1 1/2-inch
$1.1657
818
2-inch
$1.9429
1,479
3-inch
$4.2744
100
4-inch Compound
$6.6059
50
4-inch FM
$12.8231
1
6-inch Compound
$12.8231
11
6-inch FM
$26.0348
3
8-inch FM
$45.4638
13
10-inch FM
$71.1100
5
MFR Charge (per EDU)
$0.3886
MFR Units (EDU) 37,029
Total Meters 52,938
Total current EDU / EMUs 108,865
All Customer Classes
$2.0839
Table 0-4 shows the projected water sales for the study period, along with actual sales in FY 2017.
We do not anticipate any growth in demand after FY 2018.
Table 0-4: Water Sales (F)' 2017 - FY 2023)
FY 2017
11,321,847
25,991
FY 2018
11,978,514
27,499
FY 2019
11,978,514
27,499
FY 2020
11,978,514
27,499
FY 2021
11,978,514
27,499
FY 2022
11,978,514
27,499
FY 2023
11,978,514
27,499
111 City of Huntington Beach
Item 16. - 46 xB -222-
Table 0-5 shows the projected revenues under the current rate schedule, including actual revenues
from FY 2017. We calculate revenues by multiplying the fixed charges by the appropriate number
of accounts at each meter size and by multiplying the uniform commodity rate by total usage. This
is the total revenue the City expects to collect without any changes to the current FY 2018 rates.
Table 0-5: Projected Water revenues front Current Dates and Charges
*perating Revenue
F1201 c
•2�019
F•2r02111F•2�02�Frrtar F711
Daily Meter Charge
$15,441,303
$15,441,303
$15,441,303 $15,441,303 $15,441,303 $15,441,303
Commodity Charge
$24,962,025
$24,962,025
$24,962,025 $24,962,025 $24,962,025 $24,962,025
Total
$40,403,328
$40,403,328
$40,403,328 $40,403,328 $40,403,328 $40,403,328
Table 0-6 displays the projected non -operating revenues for the Water Fund. Note that interest
income is based on the proposed financial plan, not the status quo scenario, as it is entirely
dependent on reserve balances and cash changes.
Table 0-6: Fund 506: Projected Non -Operating Revenue
i.rU Ira 1411V4 z�rsnr�a�•rtI
F:
ar��•rtrrrsj
Interest Income
$208,840
$213,146
$193,841
$175,333
$152,716
$130,910
Other Reimbursement
$685,303
$685,303
$685,303
$685,303
$685,303
$685,303
Other Revenue
$514,728
$519,875
$525,074
$530,324
$535,628
$540,984
Total
$1,408,871
$1,418,324
$1,404,218
$1,390,961
$1,373,648
$1,357,197
3.2 PROJECTED EXPENSES
3.2.1 Water Supply Costs
The City incurs water supply costs, which form the part of the revenue requirement to be recovered
by the commodity rate. The City has two sources of water: local groundwater furnished through
OCWD and imported water from MWDOC. Groundwater from OCWD is the cheaper of the two
sources and, therefore, the most desirable. In each fiscal year the City is allotted a specific basin
pumping percentage (BPP), which determines the proportion of its total water demand that can be
sourced through OCWD. The City's BPP is currently 75%. The City anticipates the percentage to stay
the same through FY 2021 and increase to 80% in FY 2022.
Table 0-7 shows the City's projected water production for the study period. We base these
projections on anticipated demand and water loss (i.e. the percent of supplied water that is not
sold).
Table 0-7: Projected Water Production
FZ41 6
F•rr4119
Frrcatr'F•rtrr.�r
Basin Pumping Percentage (BPP)
75%
75%
75%
75%
Water Loss
4.8%
4.8%
4.8%
4.8%
Water Sales (AF)
27,499 AF
2 7,49 9 AF
27,499 AF
27,499 AF
Water Production (Sales with loss) (AF)
28,885 AF
28,885 AF
28,885 AF
28,885 AF
80% 80%
4.8% 4.8%
27,499 AF 27,499 AF
28,885 AF 28,885 AF
2018 Water Rate Study Report 112
Ha -223- Item 16. - 47
Water Purchased from
OCWD 21,664 AF 21,664 AF 21,664 AF 21,664 AF 23,108 AF 23,108 AF
MWDOC 7,221 AF 7,221 AF 7,221 AF 7,221 AF 5,777 AF 5,777 AF
The costs for each source vary based on season. OCWD's rates are 100% variable, while MWDOC's
rates include both fixed and variable components. For each source, we take a weighted average of
the seasonal variable costs to develop a "blended rate." The blended rate is weighted based on the
proportion of water that the City plans to purchase in each seasonal period. We multiply the
blended rate for each source by the total anticipated purchases to arrive at the total variable water
supply cost in each fiscal year. Finally, we add the MWDOC fixed charges to arrive at the final total
water supply cost. This amount is recovered by the City's commodity rate.
Table 0-8 shows the projected unit costs and total water supply costs for the study period. Water
supply costs are based on each agency's current rate schedule, escalated by the inflation factors
shown in Table 0-1. The bottom row displays the year-to-year projected increase in water supply
costs, to be recovered as a pass -through cost in the proposed rate schedule (see Sections 4 and 5 for
a detailed discussion of the cost of service and rate calculations).
OCWD - Fixed Costs
OCWD - Unit Cost ($/AF)
Oct - Jun
Jul - Sep
MWDOC - Fixed Costs
MWDOC - Unit Cost ($/AF)
Oct - Dec
Jan - Sep
Water Purchased from
OCWD
MWDOC
Effective Unit Cost ($/AF)
OCWD
MWDOC
Total Variable Cost ($)
OCWD
MWDOC
Total Cost by Source ($)
OCWD
MWDOC
TOTAL SUPPLY COST ($)
Water Supply Pass -Through ($)
Table 0-8: projected Water Supply Costs
$0
$0
$0
$0
$0
$0
$445
$476
$500
$525
$551
$579
$476
$500
$525
$551
$579
$608
$407,654
$428,037
$449,439
$471,910
$495,506
$520,281
$979
$1,015
$1,066
$1,119
$1,175
$1,234
$1,015
$1,066
$1,119
$1,175
$1,234
$1,295
21,664 AF
21,664 AF
21,664 AF
2 1,6 64 AF
23,108 AF
23,108 AF
7,221 AF
7,221 AF
7,221 AF
7,221 AF
5,777 AF
5,777 AF
$454
$483
$507
$532
$559
$587
$1,006
$1,053
$1,106
$1,161
$1,219
$1,280
$9,829,232
$10,456,982
$10,979,831
$11,528,823
$12,912,281
$13,557,896
$7,264,293
$7,603,992
$7,984,191
$8,383,401
$7,042,057
$7,394,160
$9,829,232
$10,456,982
$10,979,831
$11,528,823
$12,912,281
$13,557,896
$7,671,947
$8,032,028
$8,433,630
$8,855,311
$7,537,563
$7,914,441
$17,501,179
$18,489,010
$19,413,461
$20,384,134
$20,449,844
$21,472,336
$987,831
$1,912,281
$2,882,955
$2,948,665
$3,971,157
13 1 City of Huntington Beach
Item 16. - 48 HB -224-
3.2.2 Water O&M Expenses
Table 0-9 shows the City's operating and maintenance (0&M) budget. This includes salaries,
benefits, other operating expenses, water purchase costs, operating capital expenses not included
in the CIP, and transfers to the General Fund to pay for services rendered by the General Fund to
the water utility. Note that the water purchase cost projections match those in Table 0-8.
Fable 0-9: Projected Water Fund 506 Water Operating Expenses
Salaries & Benefits
Salaries
$6,590,906
$6,722,725
$6,857,179
$6,994,323
$7,134,209
$7,276,893
Benefits
$3,867,341
$4,138,055
$4,427,718
$4,737,659
$5,069,295
$5,424,145
Other Operating Expenses
Equipment & Supplies
$977,223
$1,006,539
$1,036,736
$1,067,838
$1,099,873
$1,132,869
Other Services
$1,386,380
$1,427,971
$1,470,811
$1,514,935
$1,560,383
$1,607,194
Electricity
$485,463
$509,736
$535,223
$561,984
$573,224
$584,689
Natural Gas
$699,867
$734,860
$771,603
$810,184
$826,387
$842,915
Permit Expense
$797,475
$837,349
$879,216
$923,177
$969,336
$1,017,803
Purchased Water OCWD
$9,829,232
$10,456,982
$10,979,831
$11,528,823
$12,912,281
$13,557,896
Purchased Water MWDOC
$7,671,947
$8,032,028
$8,433,630
$8,855,311
$7,537,563
$7,914,441
Chemicals
$178,601
$182,173
$185,816
$189,533
$193,323
$197,190
Water Wells Maintenance
$352,260
$362,828
$373,713
$384,924
$396,472
$408,366
Water Svs & Other Maintenance
$1,415,724
$1,458,195
$1,501,941
$1,546,999
$1,593,409
$1,641,212
Pump Plant Maintenance
$234,325
$241,355
$248,595
$256,053
$263,735
$271,647
Capital / Equipment
$9,829,232
$10,456,982
$10,979,831
$11,528,823
$12,912,281
$974,347
Cost Allocations to General Fund
$7,671,947
$8,032,028
$8,433,630
$8,855,311
$7,537,563
$6,549,420
TOTAL WATER O&M EXPENSES
$40,976,811
$42,795,566
$44,587,325
$46,463,614
$47,434,118
$49,401,026
3.2.3 Capital Improvement Plan (CIP)
The City's CIP for the study period is based on an escalation of average annual CIP (estimated by
City staff at $6 million) based on the capital inflation factor shown in Table 0-1. The City is
currently completing a Water Master Plan and infrastructure replacement study, which may result
in significant changes to the City's capital plan. The escalated $6 million average is employed as a
conservative estimate and used as a proxy for the actual annual budgeted CIP. The City's capital
expenses and Fund 507 reserve targets are financed entirely by rates (i.e. PAYGO) and the City does
not anticipate issuing any new debt to fund capital projects over the study period. Figure 0-1
shows the capital financing plan.
2018 Water Rate Study Report 114
1--18 -225- Item 16. - 49
Figure 0-1: Projected C11' Expenditures
Water Capital Financing Plan
$8.0 T-
$6.75
$7.0
—_
$6.00 $6.18 $6.37 $6.56
$6.0
$5.18
0
$5.0
$4.0
i
$3.0
$2.0'
$1.0
$0,0
FY 2018
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
0 Rate Funded/PAYGO 0 Debt Funded #Total CIP
13 STATUS QUO FINANCIAL PLAN
We develop the proposed financial plan for the study period by first estimating the status quo
financial plan, if the City were to make zero adjustments to its rates for the next five years. We then
make recommendations for revenue adjustments and changes to the rate structure, in order to
preserve the City's fiscal solvency. Finally, we project the City's operating finances and reserve
balances under the proposed scenario with all recommendations incorporated. This allows for a
comparison of the City's current situation with the potential results of implementing the rate study.
Figure 0-2 and Figure 0-3 illustrate the financial plan under status quo conditions. This is the
anticipated result if the City does not implement any changes to its rates or rate schedules. Without
any adjustments, the City will draw down both its operating and capital reserves below target
levels, resulting in a negative total balance by the end of FY 2022. This projection highlights the
need for adjustments to the City's rates and rate structure if its fiscal solvency is to be preserved in
the future.
15 I City of Huntington Beach
Item 16. - 50 HB -226-
Figure 0-2: Status Quo Operating Financial Plan
Water Operating Financial Plan
o $50
sao
$30
$20
$10
$0 —
(:10)
($20) ------------—
FY 2018 FV 2019 FY 2020 FY 2021 FY 2022 FY 2023
Water Purchased Costs � 0&M Expense +GF Cost allocations
omm Debt Service � Reserve Funding
—Current Revenue —Proposed Revenue
Figure 0-3: Status Quo Projecied Rc - ai"nces (Funds 506 & 50
HIM Total Ending Balance uv/o Debt Proceeds Fund 507 Debt Proceeds
•Total Reserve Target M Alert Balance
3.4 PROPOSED FINANCIAL PLAN
To maintain fiscal solvency, fund 0&M and capital expenses, maintain reserve fund balance targets,
and avoid the need for debt issuance, we recommend several changes to the City's current rate
structure and financial plan. These changes include annual adjustments to the fixed meter charge,
implementation of a pass -through methodology for water supply costs recovered by the commodity
rate, and the introduction of a capital surcharge to fund CIP.
3.4.1 Fixed Charge Revenue Adjustment
Currently, the City escalates its fixed charge in each year based on the change in Consumer Price
Index (CPI). However, for FY 2019 the City plans to increase its fixed charges by $0.88 per EMU per
month (equivalent to a 0.10% revenue adjustment). We propose that the City continue to increase
its fixed charges based on CPI increases. For the purposes of our financial plan, we assume an
2018 Water Rate Study Report 116
HB -227- Item 16. - 51
annual CPI adjustment of 2.50%4. We also recommend 1.50% in supplemental fixed charge
adjustments to account for overall increases in revenue requirements, above and beyond the
increased CPI. We propose implementing this new structure of revenue adjustments beginning in
FY 2020. Table 0-10 displays the revenue adjustments used in this study.
`fable 0-10. Proposed Fixed Charge
FY 2019 0.10%
FY 2020 CPI + 1.50%
FY 2021 CPI + 1.50%
FY 2022 CPI + 1.50%
FY 2023 CPI + 1.50%
3.4.2 Commodity Charge Pass -Through
The commodity charge is designed to recover the variable costs of providing water, including water
supply costs and unrecovered water system fixed costss. We recommend that the City continue its
current policy of increasing the commodity charges in each year based on a "pass -through" of water
supply costs, so that the total change in water supply costs from year to year is the basis for
changing the commodity rates. Under this policy, the City increases its commodity charge based on
the increment of water supply costs in each fiscal year. Note that the City will calculate the annual
pass -through cost in each year, which may differ from our estimated cost based on inflation
assumptions. In keeping with industry standard pass -through methodologies, the City will calculate
the actual change in water supply costs in each year as new purveyor rates become available.
3.4.3 Capital Surcharge
Given that the City's CIP is projected at $6 million or more in every year of the study period, we
recommend that the City implement a capital surcharge as a new component of its rate schedule.
We propose that the capital surcharge fund a portion of CIP at first and then increases over time
until revenues from the surcharge match the full CIP revenue requirement. This also lessens the
burden on the City's customers as the new surcharge is phased in. The capital surcharge is based on
EMUS per month and on EDUs for MFR customers.
Table (1-11. Proposed Cau tal Su—char,,-e
FY 2018
-
FY 2019
$3.00
FY 2020
$3.00
FY 2021
$3.50
FY 2022
$3.50
FY 2023
$4.00
4 30-year average annual increase for CPI since 1987 to 2016 = 2.65% per year. We round to 2.50%, to provide a
conservative estimate of fixed charge revenues for financial planning purposes.
5 A portion of the water system fixed costs is recovered in the fixed service charge.
17 1 City of Huntington Beach
Item 16. - 52 HB -2218-
3.4.4 Proposed Financial Plan
Based on the recommended revenue adjustments, we project the proposed financial plan for the
study period. The fixed charge revenue adjustment, commodity charge pass -through, and capital
surcharge result in significantly smaller reductions in reserves, allowing the City to fully fund its
0&M and capital obligations while maintaining adequate reserve targets through FY 2022. Figure
0-4 and Figure 0-5 display the proposed financial plan.
$60
c
o $50
$40
$30
$20
$10
$0
($10)
Figure 0-4: Water Operating Financial Plan with Capital Surcharge
Water Operating Financial Plan
FY 2018 FY 2019
Water Purchased Costs
goo Debt Service
Current Revenue
Ln $ 50
c
0
MILMA
MM
$20
$10
$0
FY 2020 FY 2021 FY 2022 FY 2023
O&M Expense + GF Cost Allocations
Reserve Funding
-Proposed Revenue
Figure 0-5: Projected Water Fund Ending Balances
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Total Ending Balance w10 Debt Proceeds i Fund 507 Debt Proceeds
-Total Reserve Target ! Alert Balance
Table 0-12 and Table 0-13 show the proposed financial plan, including a breakdown of all
revenues and expenses, for both funds. Note there is a 0.10% adjustment to the revenue
requirement in FY 2019 based on revisions to the City's revenue requirements, as shown in Table
0-10.
2018 Water Rate Study Report 118
HB -229- Item 16. - 53
i'aizp k osed, Water Fan,-! SU6 F titan( aI C'E n
Fund 506 Financial Plan
FY 2018
FY 2019
1712020
213�
Revenue
Total Fixed Meter Fixed Charge
$15,441,303
$15,441,303
$15,441,303
$15,441,303
$15,441,303
$15,441,303
Revenue from Adjustments
$0
$16,187
$634,486
$1,277,518
$1,946,271
$2,641,774
Total Commodity Charge (includes City Water Usage)
$24,962,025
$24,962,025
$24,962,025
$24,962,025
$24,962,025
$24,962,025
Pass -through
$0
$987,831
$1,912,281
$2,882,955
$2,948,665
$3,971,157
Total Revenue from Rates
$40,403,328
$41,407,345
$42,950,096
$44,563,800
$45,298,263
$47,016,258
Interest Income
$208,840
$213,146
$193,841
$175,333
$152,716
$130,910
Other Reimbursement
$685,303
$685,303
$685,303
$685,303
$685,303
$685,303
Other Revenue
$514,728
$519,875
$525,074
$530,324
$535,628
$540,984
Total Revenue
$41,812,198
$42,825,669
$44,354,314
$45,954,761
$46,671,911
$48,373,456
Operating Expense
Salaries & Benefits
$10,458,247
$10,860,779
$11,284,897
$11,731,981
$12,203,504
$12,701,039
Equipment & Supplies
$977,223
$1,006,539
$1,036,736
$1,067,838
$1,099,873
$1,132,869
Other Services
$1,386,380
$1,427,971
$1,470,811
$1,514,935
$1,560,383
$1,607,194
Electricity
$485,463
$509,736
$535,223
$561,984
$573,224
$584,689
Natural Gas
$699,867
$734,860
$771,603
$810,184
$826,387
$842,915
Permit Expense
$797,475
$837,349
$879,216
$923,177
$969,336
$1,017,803
Purchased Water MWDOC
$7,671,947
$8,032,028
$8,433,630
$8,855,311
$7,537,563
$7,914,441
Purchased Water OCWD
$9,829,232
$10,456,982
$10,979,831
$11,528,823
$12,912,281
$13,557,896
Chemicals
$178,601
$182,173
$185,816
$189,533
$193,323
$197,190
Water Wells Maintenance
$352,260
$362,828
$373,713
$384,924
$396,472
$408,366
Water Svs & Other Maintenance
$1,415,724
$1,458,195
$1,501,941
$1,546,999
$1,593,409
$1,641,212
Pump Plant Maintenance
$234,325
$241,355
$248,595
$256,053
$263,735
$271,647
Capital / Equipment
$840,480
$865,694
$891,665
$918,415
$945,968
$974,347
Cost Allocations to General Fund
$5,649,587
$5,819,075
$5,993,647
$6,173,456
$6,358,660
$6,549,420
Total Operating Expense
$40,976,811
$42,795,566
$44,587,325
$46,463,614
$47,434,118
$49,401,026
Net Operating Income $835,387 $30,103 ($233,012) ($508,853) ($762,207) ($1,027,570)
Debt Service
Existing Debt Service (no existing debt)
Proposed Debt Service
Transfers from Fund 506 to Other Funds
Transfers from Fund 506 to Fund 507 (+)
Total Transfers
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
$0 $1,838,669 $1,489,114 $1,637,434 $1,296,648 $1,454,001
$0 $1,838,669 $1,489,114 $1,637,434 $1,296,648 $1,454,001
Net Cash Balances $835,387 ($1,808,565) ($1,722,125) ($2,146,287) ($2,058,855) ($2,481,571)
Fund Balance
Beginning Balance
$20,913,347
$21,748,734
$19,940,168
$18,218,043
$16,071,757
$14,012,901
PERS Liability
$0
$0
$0
$0
$0
$0
Net Cash Balance
$835,387
($1,808,565)
($1,722,125)
($2,146,287)
($2,058,855)
($2,481,571)
Ending Balance
$21,748,734
$19,940,168
$18,218,043
$16,071,757
$14,012,901
$11,531,331
Water Fund506ReserveTarget
$10,244,203
$10,698,891
$11,146,831
$11,615,903
$11,858,530
$12,350,256
19 1 City of Huntington Beach
Item 16. - 54 HB -230-
l i[7{ ' J 1 kyi'oE CkSr'd "t'31.I- =i lex Plan Fund a' Financial �!3Ci
Revenue
Revenue from Capital Surcharge
$0
$3,701,664
$4,318,608
$4,318,608
$4,935,552
$4,935,552
Total Revenue from Rates
$0
$3,701,664
$4,318,608
$4,318,608
$4,935,552
$4,935,552
Interest Income
$226,011
$194,980
$195,418
$193,649
$194,577
$193,281
Total Revenue
$226,011
$3,896,644
$4,514,026
$4,512,257
$5,130,129
$5,128,833
Transfers from Other Funds
Transfers from Fund 506
$0
$1,838,669
$1,489,114
$1,637,434
$1,296,648
$1,454,001
Total Transfers from Other Funds
$0
$1,838,669
$1,489,114
$1,637,434
$1,296,648
$1,454,001
Capital Expenses
Rate Funded
$5,180,000
$6,000,000
$6,180,000
$6,365,400
$6,556,362
$6,753,053
Debt Funded
$0
$0
$0
$0
$0
$0
Total Capital Expenses
$5,180,000
$6,000,000
$6,180,000
$6,365,400
$6,556,362
$6,753,053
Net Cash Balances
($4,953,989)
($264,687)
($176,861)
($215,709)
($129,585)
($170,219)
Fund Balance
Beginning Balance
$22,601,146
$17,647,157
$17,382,470
$17,205,609
$16,989,900
$16,860,315
Net Cash Balance
($4,953,989)
($264,687)
($176,861)
($215,709)
($129,585)
($170,219)
Ending Balance
$17,647,157
$17,382,470
$17,205,609
$16,989,900
$16,860,315
$16,690,096
Water Master Plan Fund 507 Reserve Target
$14,484,529
$14,956,444
$15,243,138
$15,538,432
$15,842,585
$16,155,862
COST OF SERVICE ANALYSIS
4.0 NRTHODOLOGY
As stated in the American Water Works Association (AWWA) M1 Manual, "the costs of water rates
and charges should be recovered from classes of customers in proportion to the cost of serving
2018 Water Rate Study Report 120
HB -2311- Item 16. - 55
those customers." To develop utility rates that comply with Proposition 218 and industry standards
while meeting other emerging goals and objectives of the utility, we follow the Cost of Service (COS)
methodology discussed below.
1) Determine Revenue Requirement
The rate -making process starts by determining the revenue requirement. In this study, the COS
analysis is based on FY 2019 revenue requirements, since this is the year the new rates will go into
effect. The revenue requirement includes the utility's 0&M, debt service, capital expenses, and
reserve requirements. It does not include costs covered by non -operating revenues or other
sources.
2) Cost of Service Analysis (COS)
The annual cost of providing water service is distributed among customer classes commensurate
with their service requirements. For this study, our COS analysis involves the following:
Functionalizing costs. Examples of functions are supply, treatment, transmission,
distribution, storage, meter servicing, and customer billing.
Allocating functionalized costs to cost causation components. Cost causation components
include supply, base delivery, maximum day, maximum hour6, fire, and meter costs.
Calculating costs to be recovered by each rate category. We allocate cost causation
components to the City's fixed charges, variable commodity rates, and surcharges to ensure
that the full cost of service is collected equitably through these rate categories.
A COS analysis considers both the average quantity of water consumed (base delivery costs) and
the peak rate at which it is consumed (peaking or capacity costs as identified by maximum day and
maximum hour demands).? Peaking costs are costs that are incurred during peak times of
consumption. The water system is designed to handle peak demands and additional costs are
associated with designing, constructing, and operating and maintaining larger facilities needed to
meet peak demands.
A COS analysis distributes a utility's revenue requirements (costs) equitably. After determining a
utility's revenue requirements, the next step in a cost of service analysis is to functionalize its 0&M
costs, based on the City's current 0&M budget (see Section 4.2.2). The functionalization of costs
allows us to better allocate the functionalized costs to the cost causation components, the specific
"buckets" of revenue requirements that are recovered by the rates. The cost causation components
utilized in this study include:
Supply - variable costs associated with providing water supply to all customers
Base Delivery - fixed costs associated with providing service under average conditions
Peaking (Max Day and Max Hour) - costs associated with meeting above -average demand
Fire - costs associated with providing fire protection capacity
6 Collectively, maximum day and maximum hour costs are known as peaking costs or capacity costs.
I System capacity is the system's ability to supply water to all delivery points at the time when demanded. It is measured
by each customer's water demand at the time of greatest system demand. The time of greatest demand is known as peak
demand. Operating and capital costs incurred to accommodate the peak demands are allocated to each customer class
based upon the class's peaking characteristics.
21 1 City of Huntington Beach
Item 16. - 56 HB -232-
Meters - costs associated with maintenance of meters and associated capital costs
General - costs that cannot be allocated directly to any one cost causation
Peaking costs are divided into maximum day and maximum hour demand. The maximum day
demand is the maximum amount of water used in a single day in a year. The maximum hour
demand is the maximum usage in an hour on the maximum usage day. Different facilities, such as
distribution and storage facilities (and the 0&M costs associated with those facilities), are designed
to meet the peaking demands of customers. Therefore, extra capacityg costs include the 0&M and
capital costs associated with meeting peak customer demand. This method is consistent with the
AWWA M1 Manual and is widely used in the water industry to perform cost of service analyses.
3) Rate Design and Calculations
Rates do more than simply recover costs. Properly designed rates should support and optimize a
blend of various utility objectives including revenue stability, customer affordability, regulatory
compliance, political feasibility, and fiscal solvency. Rates may also act as a public information tool
in communicating these objectives to customers. The M1 Manual describes a wide variety of
potential rate structures, all of which meet these various requirements to various degrees.
We design rates to fully recover the cost of service for each customer class, as determined in the
COS analysis. Rates include both a fixed and variable component, each of which recovers specific
cost causation components. We derive the rates using the annual units of service and the total
revenue requirement for each cost causation component and for each customer class. Fixed charges
are developed based on meter size (i.e. meter capacity) while variable charges are based on water
use.
4) Rate Adoption
Rate adoption is the last step of the rate -making process to comply with Proposition 218. Raftelis
documented the rate study results in this Study Report to help educate the public about the
proposed changes, the rationale and justifications behind the changes, and their anticipated
financial impacts in lay terms.
4.1. ANALYSIS
Proposition 218 requires a nexus between the rates charged and the costs of providing service.
Based on the proposed financial plan, the COS analysis translates this financial requirement into the
unit costs used to develop rates. This subsection describes each section of the COS analysis in detail.
4.1.1 Revenue Requirement Determination
Table 0-1 shows the revenue requirement derivation, which results in the total revenue required
from rates in FY 2019. The totals shown in the "Operating" and "Capital" columns are the total 0&M
and capital revenue requirements, respectively, that are to be recovered through rates.
8 The terms extra capacity, peaking, and capacity costs are used interchangeably.
2018 Water Rate Study Report J 22
HB -233- Item 16. - 57
Raftelis calculated the revenue requirement using projected FY 2019 expenses, which include 0&M
expenses, water supply costs, rate funded capital expenses, and existing and proposed debt service.
To arrive at the rate revenue requirement, we subtract revenue offsets (e.g. non -rate revenues). We
also adjust for annual cash balances, to ensure the City's net cash flow does not deviate from the
proposed financial plan under the new rates. These adjustments are then added to arrive at the
total revenue requirement from rates. This is the amount that the City's rates are designed to
collect.
k -`iIt' 0- I: 1 `' 0111 1 k.eve nu kir_:Ci€kTi =r }.e'1°%!.
1 Operating Costs
2
Water Supply Costs
$18,489,010
Table 3-8
3
Other Operating Costs
$24,306,555
Table 0-9
4
Subtotal Operating Costs
$42,795,566
5
6
Capital Costs
7
Debt Service
$0
No Debt Service
8
Transfers from Fund 506 to 507 (+)
$1,838,669
Table 0-12
9
Subtotal Capital Costs
$1,838,669
10
11
Less (-) Revenue Offsets
12
Other Operating Revenue
$519,875
Table 0-12
13
Other Reimbursement
$685,303
Table 0-12
14
Interest Revenue
$213,146
Table 0-12
15
Subtotal Revenue Offsets
$1,418,324
16
17
Plus (+) Adjustments
18
Adjustment for Cash Balance
-$1,808,565
Table 0-12
19
Subtotal Adjustments
-$1,808,565
20
21
Annualized Rev from Rates
$41,407,345
[4] + [9] - [151 + [191
22
Revenue from Capital Surcharge
$3,701,664
Table 0-13
23
Total Annualized Rev Requirement from Rates
$45,109,009
Sum of lines
[21] + [221
4.1.2 Allocation of Functionalized Expenses to Cost Causation Components
After determining the City's overall revenue requirement from rates, we begin to allocate costs so
that each cost function is recovered equitably. We first determine the function of all 0&M and
capital expenses and then allocate these functions to "cost causation components", which then form
the basis of the new rates. We use systemwide peaking factors, provided by City staff, to develop
allocation percentages for the City's costs. These allocation percentages in turn are used to allocate
system costs to the peaking components of the rates (Max Day and Max Hour).
The District's Max Day factor is 1.8, which means that Max Day demand is expected to be 180% of
the average day demand. Calculating the Max Day allocation of functionalized costs to the cost
causation components results in the following allocation percentages:
23 1 City of Huntington Beach
Item 16. - 58 HQ -234-
Base 1
Base Allocation = _ — � 56%
Max Day 1.8
Max Day Allocation = 1 — Base/Max Day 44%
Facilities designed for Max Hour peaks, such as distribution system facilities, are allocated similarly.
The Max Hour factor is 2.8, so Max Hour facilities are designed to provide 280% of the average day
demand. Below are the allocation percentages for facilities designed to meet Max Hour demand:
Base 1
Base Alloction = _ — = 36%
Max Hour 2.8
Max Day — Base 1.8 — 1.00
Max Day Allocation = = 29%
Max Hour 2.8
Max Hour Allocation = 1 — 36% — 29% = 35%
Table 0-2 summarizes the systemwide peaking factors and resulting allocation percentages.
Table 0-2: Systemwide Peaking Factors and Allocation Percentages
Base
1.00
100%
100%
Max Day
1.80
56%
44% 100%
Max Hour
2.80
36%
29% 36% 100%
The City's water system provides Max Hour capacity for public fire service. This capacity provides a
benefit to all users of the water system by allowing the instantaneous use of water to fight fires
anywhere in the City. Therefore, we allocate some capacity -related costs to fire service using City
provided data on water storage capacity dedicated to fire protection. Table 0-3 shows the
derivation of the fire Max Hour allocation percentage.
Table 0-3: Allocation Percentage for Fire Sep,. ice
1 Average Day Demand 5.16
2 Max Day Demand 55.00
3 Max Hour Demand 9.4% [1] / [2]
Table 0-4 shows the system peaking factors including fire allocation percentages. These
percentages are then applied to the operating and capital expenses to allocate costs.
2018 Water Rate Study Report 124
HB -235- Item 16. - 59
y 7ti�, 0 S, A11E ';£@'fit',sii Percentages Includi3i`, Fire
Base 1.00 100%
Max Day 1.80 50.3% 40.3% 0% 9.4%
Max Hour 2.80 32.4% 25.9% 32.4% 9.4%
We categorize the City's costs by function in order to allocate them to cost causation components.
The cost causation components include Supply, Base, Peaking (Max Day & Max Hour), Meters, and
Capital (recovered by the proposed Capital Surcharge). Each cost function has a specific basis of
allocation to these cost causation components, following from the Base, Max Day, and Max Hour
percentages shown in Table 0-4. We use the following cost functions in this study:
1. Water Supply Costs: These costs are related to water supply and are recovered by the
commodity rate. They are allocated 100% to the Supply cost causation component
2. Source of Supply: These are capital costs related to facilities which provide water supply.
They are allocated 100% to the Base cost causation component.
3. Storage: Capital costs for system facilities which store water for current or future use. They
are allocated according to Max Day.
4. Pumping: Includes capital costs for pump stations, booster pumps, etc.; and 0&M expenses
for utilities needed to power pumping facilities. Allocated according to Max Hour.
S. Treatment: Includes capital costs for water treatment facilities, and C&M costs for
chemicals. Allocated according to Max Day.
6. Transmission & Distribution (T&D): Capital costs for pipes and other treatment and
distribution facilities. Allocated according to Max Hour.
7. Fire Protection: Costs directly related to fire protection and water system capacity for
firefighting. Allocated 100% to the Fire cost causation component.
8. Meter Service: Includes both capital costs of meters and 0&M costs for service and
maintenance. Allocated 100% to the Meters cost causation component and recovered by the
fixed service charges.
9. General & Administrative Costs: Includes costs related to 0&M payroll expenses, the
value of land owned by the utility, office supplies, and other general costs. These costs are
allocated to a "General" cost causation component, and then reallocated proportional to the
share of total costs by the other components.
Table 0-5: 0&M Functions and Allocation Bases
Salaries G&A General
Benefits G&A General
Equipment & Supplies G&A General
25 1 City of Huntington Beach
Item 16. - 60 HB -236-
Other Services
G&A
General
Electricity
Pumping
Max Hour
Natural Gas
Pumping
Max Hour
Permit Expense
G&A
General
Purchased Water MWDOC
Water Supply Costs
Supply
Purchased Water OCWD
Water Supply Costs
Supply
Chemicals
Treatment
Max Day
Water Wells Maintenance
G&A
General
Water Svs & Other Maintenance
Meter Service
Meters
Pump Plant Maintenance
Pumping
Max Hour
Capital / Equipment
G&A
General
Cost Allocations to General Fund
G&A
General
Table 0-6 shows the functions for the City's capital assets. This information is based on the
replacement cost (RC) of the City's current assets, as provided by City staff.
Table 0-6: Capitai Functions and Allocation Bases
Supply
Source of Supply
Base
Pumping
Pumping
Max Hour
Storage
Storage
Max Day
Treatment
Treatment
Max Day
Transmission
T&D
Max Hour
Distribution
T&D
Max Hour
Meters
Meter Service
Meters
Land
G&A
General
General
G&A
General
Fire
Fire Protection
Fire
Table 0-7 and
Table 0-8 show the functions for each C&M and capital cost item and the allocation percentages to
each of the cost causation components. Functional costs are allocated according to industry
standards based on the nature of each function. For example: water supply costs are allocated
100% to the Supply component, treatment costs are allocated based on Max Day, distribution costs
are allocated based on Max Hour, utility billing costs and conservation program costs are allocated
100% to the Customer component, and meter service costs are allocated to the Meter component.
Costs which cannot be readily functionalized are allocated to General and then spread amongst all
the other cost causation components proportionate to the overall cost allocation.
Table 0- 7: O&M Allocations to Cost Causation 'Components
O&M Expense Function FY 2019 Cost SupplyBase Max Max Fire Meters General
Day Hour
Salaries G&A $6,722,725 0% 0% 0% 0% 0% 0% 100%
Benefits G&A $4,138,055 0% 0% 0% 0% 0% 0% 100%
2018 Water Rate Study Report 1 26
HB -237- Item 16. - 61
Equipment & Supplies
G&A
$1,006,539
0%
0%
0%
Other Services
G&A
$1,427,971
0%
0%
0%
Electricity
Pumping
$509,736
0%
32%
26%
Natural Gas
Pumping
$734,860
0%
32%
26%
Permit Expense
G&A
$837,349
0%
0%
0%
Purchased Water MWDOC
Water Supply
$8,032,028
100%
0%
0%
Purchased Water OCWD
Water Supply
$10,456,982
100%
0%
0%
Chemicals
Treatment
$182,173
0%
50%
40%
Water Wells Maintenance
G&A
$362,828
0%
0%
0%
Water Svs & Other Mtnce.
Meter Service
$1,458,195
0%
0%
0%
Pump Plant Maintenance
Pumping
$241,355
0%
32%
26%
Capital / Equipment
G&A
$865,694
0%
0%
0%
Allocation to General Fund
G&A
$5,819,075
0%
0%
0%
TOTAL
$42,795,566
0%
0%
0%
100%
0%
0%
0%
100%
32%
9%
0%
0%
32%
9%
0%
0%
0%
0%
0%
100%
0%
0%
0%
0%
0%
0%
0%
0%
0%
9%
0%
0%
0%
0%
0%
100%
0%
0%
100%
0%
32%
9%
0%
0%
0%
0%
0%
100%
0%
0%
0%
100%
Table 0-8: Capital Allocations to Cost Causation Components
Supply
Source of Supply
$12,102,707
Pumping
Pumping
$1,452,114
Storage
Storage
$28,524,232
Treatment
Treatment
$332,485
Transmission
T&D
$0
Distribution
T&D
$19,207,265
Meters
Meter Service
$3,551,652
Land
G&A
$5,734,475
General
G&A
$33,883,228
Fire
Fire Protection
$0
TOTAL
$104,788,158
0%
100%
0%
0%
0%
0%
0%
0%
32%
26%
32%
9%
0%
0%
0%
50%
40%
0%
9%
0%
0%
0%
50%
40%
0%
9%
0%
0%
0%
32%
26%
32%
9%
0%
0%
0%
32%
26%
32%
9%
0%
0%
0%
0%
0%
0%
0%
100%
0%
0%
0%
0%
0%
0%
0%
100%
0%
0%
0%
0%
0%
0%
100%
0%
0%
0%
0%
100%
0%
0%
Table 0-9 summarizes the percentage of total costs allocated to each cost causation component for
both 0&M and capital assets. These percentages are based on the functionalized allocations from
Table 0-7 and
Table 0-8 and are used to allocate the revenue requirement from Table 0-1 to the cost causation
components.
'fable 0-9: Cost Causation Component Allocation Percentages
TOT AL SupplyDay Max Hour Fire Meters General
Total 0&M - FY 2019 $42,795,566 $18,489,010 $572,620 $458,096 $480,908 $156,500 $1,458,195 $21,180,236
O&M Allocation % 43% 1 % 1 % 1 % 0% 3% 49%
27 1 City of Huntington Beach
Item 16. - 62 xB -238-
Total Asset RC $104,788,158
Capital Allocation %
$0 $33,316,295 $16,970,871 $6,686,126 $4,645,510 $3,551,652
0% 32% 16%
6% 4%
3%
Note that the replacement cost of capital assets is not recovered by the rates —it is used to develop
percentages for allocating actual capital costs (which include the transfer from Fund 506 to Fund
507 and reserve funding). To allocate the true revenue requirement to the cost causation
components, we first allocate total costs without any of the proposed increases to the current rate
schedule. This provides a baseline allocation of 2019 costs, to which we will then add the proposed
water supply pass -through increase, revenue adjustments, and capital surcharge revenues.
4.1.3 Distribution of Cost Causation Components to Rate Categories
Table 0-10 displays the revenue requirement allocation under current rates. 0&M expenses are
allocated based on the 0&M allocation percentages developed in Table 0-9. Capital expenses are
allocated based on the capital allocation percentages. We subtract pass -through water supply
revenues from the Supply cost causation component, since these are automatically included in the
commodity rate. We also subtract other operating revenues using the 0&M allocation percentages
excluding Fire, other reimbursements using the capital allocation percentages excluding Supply and
Fire, and interest income from the general costs.
After determining the net revenue requirement from current rates, we reallocate General costs
based on the proportion of total costs in each of the other cost components (not including Supply or
Fire). We also reallocate the Fire cost causation component to Meters, to ensure that costs related
to fire protection capacity are recovered by the fixed meter charges. Also note the small adjustment
made to cost components recovered by the fixed charge, as discussed in Section 3.5.4 and shown in
Table 0-10. The result, shown on the bottom row of Table 0-10, is the City's FY 2019 revenue
requirement by cost causation component.
Table 0-10- :'allocation of Revenue Requirement to Cost Causation Components
Revenue Requirement
$39,617,703
38%
0&M Expense
$42,795,566
$18,489,010
$572,620
$458,096
$480,908
$156,500
$1,458,195
$21,180,236
Transfer to Fund 507
$1,838,669
$0
$584,585
$297,780
$117,318
$81,513
$62,319
$0
Reserve Funding
($1,824,752)
$0
($580,161)
($295,526)
($116,430)
($80,896)
($61,847)
$0
2018 Water Rate Study Report 128
HB -239- Item 16. - 63
Subtotal $42,809,483 $18,489,010 $577,045 $460,350 $481,796 $157,117 $1,458,667 $21,185,497
Less Other Revenues
Pass -through Rev
$987,831
$987,831
$0
$0
$0
$0
$0
$0
Capital Surcharge
$0
$0
$0
$0
$0
$0
$0
$0
Other Operating Rev
$519,875
$0
$12,327
$9,861
$10,352
$0
$31,390
$455,944
Other Reimbursement
$685,303
$0
$227,992
$116,136
$45,755
$0
$24,305
$271,115
Interest Income
$213,146
$0
$0
$0
$0
$0
$0
$213,146
Subtotal
$2,406,155
$987,831
$240,319
$125,998
$56,107
$0
$55,695
$940,204
Net Revenue
Requirement from $40,403,328 $17,501,179 $336,726 $334,352 $425,689 $157,117 $1,402,972 $20,245,293
Current Rates
Adjustments
General Cost Reallocation Factors
Reallocation of General Costs
Reallocation of Public Fire Protection
Fixed Charge Adjustment
13% 13% 17%
$2,727,129 $2,707,908 $3,447,636
$2,165 $2,150 $2,738
56 %
$11,362,620 ($20,245,293)
($157,117) $157,117
$9,134
Adjusted Revenue $40,419,514 $17,501,179 $3,066,020 $3,044,410 $3,876,063 $0 $12,931,843 $0
Requirement9
Table 0-11 shows the cost causation components as they will be recovered by the City's proposed
FY 2019 rates, including adjustments. The fixed service charge recovers the Meters component, the
commodity charge recovers the Supply component, and the other components are divided between
the fixed and variable rates. Based on City policy to ensure both revenue stability and affordability,
we allocate approximately 27% of the base and peaking costs to the fixed charge, with the
remaining 73% recovered by the commodity rate.
We take the revenue requirement under current rates, as developed in Table 0-10, and add the
proposed adjustments, which for FY 2019 include the pass -through water supply costs and the new
capital surcharge. The water supply pass -through is calculated by subtracting the total FY 2018
water supply costs from the anticipated FY 2019 costs, as shown in Table 0-8. The capital
surcharge is calculated by multiplying the surcharge amount ($3.00 per billing unit) by the total
number of billing units in each year. This results in the final revenue requirement by cost causation
component. The final revenue requirement allocated to cost components through COS analysis is
equal to the revenue requirement determined in Table 0-1.
Table 0-1 1: Cost Causation Components by Rate Category
9 The adjusted revenue requirement includes the reallocation of general costs and public fire costs, as well as a fixed
charge revenue adjustment as recommended by City staff. It does not include the proposed capital surcharge or estimated
water supply pass -through cost.
29 1 City of Huntington Beach
Item 16. - 64 H B -240-
Cost Components
Supply
$17,501,179
Base
$3,066,020
Max Day
$3,044,410
Max Hour
$3,876,063
Meters
$12,931,843
Subtotal
$40,419,514
Adjustments
Pass-Throughs $987,831
Capital Surcharges $3,701,664
TOTAL FY 2019 REVENUE
REQUIREMENT FROM RATES
$17,501,179
$17,501,179
$839,284
$2,226,735
$3,066,020
$833,369
$2,211,041
$3,044,410
$1,061,023
$2,815,039
$3,876,063
$12,931,843
$12,931,843
$987,831 $987,831
$3,701,664 $3,701,664
$15,665,519 $25,741,826 $3,701,664 $45,109,009
RATE DERIVATION
We develop rates to recover the revenue requirement from each cost causation component, as
determined through COS analysis in Section 4 and summarized in Table 0-11. To determine the
rates, we calculate the units of service for each component. The unit of service for the fixed charge
and capital surcharge is EMU, or EDU for MFR accounts (note that one MFR EDU is considered equal
to one 3/4" EMU). The unit of service for the commodity rate is annual water use, measured in CCF.
2018 Water Rate Study Report 1 30
HB -241- Item 16. - 65
5.0 PROPOSED DAILY SERVICE CHARGE
Table 0-1 shows the number of EMUs (and MFR EDUs) estimated for FY 2019, The monthly units of
service total are a simple sum of the total EMUS and MFR EDUs. The annual units of service total are
the monthly total multiplied by 12, since the City bills monthly (e.g. 12 bills per year per account).
! , a,,tal t r9.h,mi. Vieter Units nci Eclui%a€e.Fit D\,, E'r[iiig E.11PiI
SFR Meters
3/4"
40,212
1.00
40,212
1"
6,283
1.67
10,472
11/2"
818
3.33
2,727
2"
1,479
5.33
7,888
3"
100
11.67
1,167
4" Compound
50
16.67
833
4" FM
1
23.33
23
6" Compound
11
33.33
367
6" FM
3
53.33
160
8" FM
13
93.33
1,213
10" FM
5
146.67
733
Multifamily EDUs
37,029
Total Monthly Units of Service 102,824
TOTAL ANNUAL UNITS OF SERVICE 1,233,888
Taking the total revenue requirement from fixed charges, as calculated in Table 0-11, and the total
annual units of service from Table 0-1, we arrive at the monthly fixed charge per EMU for FY 2019.
We then divide this by the average number of days per month (30.42) to arrive at the daily charge,
matching the City's current rate schedule. The rate is rounded to four decimal places.
Table 0-2: Development of Daily Fixed Service Charge
1 Revenue Requirement $15,665,519 Table 0-11
2 Units of Service 1,233,888 EMUS Table 0-1
3 Monthly Fixed Service Charge $12.70 per EMU per month [1] / [2]
4 Daily Fixed Service Charge $0.4175 per EMU per day [3] / 30.42
311 City of Huntington Beach
Item 16. - 66 HB -242-
S, T PROPOSED DAILY CAPITAL SURCHARGE
We calculate the proposed capital surcharge using the same methodology and units of service as the
daily fixed charge. Table 0-3 shows the derivation of the daily capital surcharge. The final rate is
rounded to four decimal places.
I r tiie a-3: De-'. 'l(tpiiiu ' rE D% 1lt l ��p,ta,`I i l i-
1 Revenue Requirement $3,701,664 Table 0-11
2 Units of Service 1,233,888 EMUS Table 0-1
3 Monthly Capital Surcharge $3.00 per EMU per month [1] / [2]
4 Daily Capital Surcharge $0.0987 per EMU per day [31 / 30.42
Table 0-4 displays the complete schedule of daily fixed service charges, including the capital
surcharge, by meter size. It also includes multifamily charges per EDU, which are equal to the 3/4"
meter charges. The rightmost two columns display the current FY 2018 daily charge and the change
under the proposed rates. The proposed rates collect the full cost of service revenue requirement
from fixed charges as determined in Section 4.
Table 0-4: FY 2019 Proposed Daily Fixed Charges by Meter Size
3/4"
40,212
40,212
$0.4175
$0.0987
$0.5162
$0.3886
$0.1276
1"
6,283
10,472
$0.6957
$0.1644
$0.8601 '..
$0.7772
$0.0829
11/2"
818
2,727
$1.3914
$0.3288
$1.7202
$1.1657
$0.5545
2"
1,479
7,888
$2.2262
$0.5261
$2.7523
$1.9429
$0.8094
3"
100
1,167
$4.8698
$1.1507
$6.0205
$4.2744
$1.7461
4" Compound
50
833
$6.9568
$1.6439
$8.6007
$6.6059
$1.9948
4" FM
1
23
$9.7395
$2.3014
$12.0409
$12.8231
-$0.7822
6" Compound
11
367
$13.9136
$3.2877
$17.2013
$12.8231
$4.3782
6" FM
3
160
$22.2617
$5.2603
$27.5220
$26.0348
$1.4872
8" FM
13
1,213
$38.9579
$9.2055
$48.1634
$45.4638
$2.6996
10" FM
5
733
$61.2196
$14.4658
$75.6854
$71.1100
$4.5754
MFR by EDU
4,117
37,029
$0.4175
$0,0987
$0.5162
$0.3886
$0.1276
-.2 PROPOSED WATER USAGE CHARGES
We calculate the proposed water usage charges by taking the revenue requirement from Table
0-11 and dividing it by the total projected water sales in FY 2019, as shown in Table 0-7. Table 0-5
shows the derivation of the commodity rate. Note that we convert the AF sales shown in Table 0-7
to CCF to determine the commodity rate.
2018 Water Rate Study Report 132
HB -243- Item 16• - 67
The commodity rate is designed to recover three cost causation components: Supply (including
supply 0&M costs, source of supply capital costs, and proposed pass -through increases), Base
Delivery, and Peaking (including Max Day and Max Hour supply costs). These components are
shown in Table 0-5 for clarity. The pass -through increase is calculated in Table 0-8 and presented
along with the other components in Table 0-11. The final rate is rounded to four decimal places.
Table 0-5: Development of Water Usage Charges
1 Cost Component
2
Supply
$17,501,179
Table 0-11
3
Base
$2,226,735
Table 0-11
4
Max Day
$2,211,041
Table 0-11
5
Max Hour
$2,815,039
Table 0-11
6
Supply Cost Pass -Through
$987,831
Table 0-8
7
Total FY 2019 Revenue Requirement
$25,741,826
Sum of lines [2] - [6]
8
9
Projected Water Sales
27,499
AF
Table 0-11
10
Units of Service
11,978,514
CCF
[9] * 435.6
11
Daily Capital Surcharge
$2.1490
day EMU per
[71 / [10]
Table 0-6 shows the proposed rate schedule for FY 2019. In the future years of the study period
(FY 2020-2023), the fixed charges will increase at the rate specified in Table 0-10. The commodity
charge will increase at the estimated unit pass -through rate, to be calculated by the City in each
year based on the change in effective rates for OCWD and MWDOC.
Table 0-6: Proposed FY 2019 Rate Schedule
3/4"
$0.4175
$0.0987
$0.5162
$0.3886
$0.1276
V
$0.6957
$0.1644
$0.8601
$0.7772
$0.0829
11/2'.
$1.3914
$0.3288
$1.7202
$1.1657
$0.5545
2"
$2.2262
$0.5261
$2.7523
$1.9429
$0.8094
3"
$4.8698
$1.1507
$6.0205
$4.2744
$1.7461
33 1 City of Huntington Beach
Item 16. - 68 HB -244-
4" Compound $6.9568
4" FM
$9.7395
6" Compound
$13.9136
6" FM
$22.2617
8" FM
$38.9579
10" FM
$61.2196
MFR by EDU $0.4175
Commodity Rate ($ per CCF)
$1.6439
$2.3014
$3.2877
$5.2603
$9.2055
$14.4658
$0.0987
$8.6007
$12.0409
$17.2013
$27.5220
$48.1634
$75.6854
$0.5162
$2.1490
$6.6059
$12.8231
$12.8231
$26.0348
$45.4638
$71.1100
$1.9948
-$0.7822
$4.3782
$1.4872
$2.6996
$4.5754
$0.3886 $0.1276
$2.0839 $0.0651
5.3 CUSTOMER IMPACT ANALYSIS
Table 0-7 compares bills under the current FY 2018 rate schedule with those projected under the
proposed FY 2019 rates. We compare bills for an average residential customer with a 3/4" meter
(or single multifamily EDU) using 12 CCF of water per month. For these calculations, we multiply
the daily fixed charges by the average number of days per month (30.42)10.
Table 0-7: Average Customer Monthly Bill Impacts
Fixed Service Charges & Capital
1 Surcharges
(3/4" meter)
2 Capital Surcharges
(3/4" meter)
3 Usage Charges
(12 CCF monthly usage)
4 Total Bill ([11 + [21)
$11.82 $12.70 $0.88
$0.00
$3.00
$3.00
$25.01
$25.79
$0.78
$36.83
$41.49
$4.66
Figure 0-1 shows a breakdown of monthly customer impacts for customers with a 3/4" meters (or
single multifamily EDU) at various levels of usage, including the 12 CCF example from Table 0-7.
10 365 days / 12 months = 30.42 days per month
2018 Water Rate Study Report 134
HB -245- Item 16. - 69
Figure 0-1: Projected Residential Bill Impacts
Single Family Sample Monthly Bills, 3/4" Meter, Effective FY 2019
$73
$60
$5)
$4,)
$31)
$23
$13
$0 5 ccf 12 ccf 15 ccf 20 ccf 25 ccf
11 Current Bill $22.24 $36.83 $43.08 $53,50 $63.92
0 Prcpcsed Bill $25.44 $41.49 $47.93 $58.68 $69.42
S Impact $4.20 $4.66 $4.86 $5.18 $5.51
35 1 City of Huntington Beach
Item 16. - 70 HB -246-
City of Huntington Beach
WATER AND SEWER RATE
ADJUSTMENT
City Council Meeting
March 19, 2018
Water Rates Background
s City Council Study Session on Water Master Plan Update October 17. 2016;
adopted by City Council on November 7, 2016.
ell City Council Study Session on Water Financial Plan November 6. 2017.
Current Rate Structure
Uniform commodity rate
Fixed Meter fee based on meter size or number of dwelling units
fi Resolution 99-50 — established annual adjustment formulas for commodity and meter
fees.
m Commodity rate adjusted based on basin pumping percentage (BPP),
replenishment assessment (RA) and imported water rate
Meter fee adjusted based on percentage change in CPI
The adjustment formula worked well for over 13 years.
Water Rates Background
Beginning in 2012, increases in other water related costs outpaced the CPI and
the fund balance began to dip and currently does not meet the Council adopted
reserve policy.
CPI cumulative change since 2012 = 9.7%
k Total Operating and Equipment Expenditures FY 12-13 thru FY 15-16 up 13%
Water Sales Revenue FY 12-13 thru FY 15-16 down 5%
Increases in MWD readiness -to -serve charges and capacity charges - up 56%
Increase in MWDOC connection fees — up 62%
Water Master Plan
• The Water Master Plan is a long term planning document to address Water Capital
Improvements and Infrastructure needs.
c The fee was originally adopted in 1995 at $2.50 and in(,rPasPd by $0 50 per year, lip to
$5.50.
The previous $5.50 capital surcharge sunset 10 years ago in 2007.
City Council Study Session October 17, 2016; adopted by City Council on November 7,
2016.
Currently has only minimal funding from connection fees ($340K in FY 16-17)
Council adopted Water Master Plan has identified 44 project to construct over the next 20
years at an estimated cost of $128.4 million.
• 1 \estr Icled Fund ti that can only be uJed for V VLAteY �iupitul Imps ovemeiii.Ci GLdnd infr a,.i Ll U%, L%AYe
Projects.
NO
Rate Study Recommendations
"Cost -of -service" study — determines equitable method of
recoverinq the cost of providing water.
ff Commodity rate adjusted based on actual city water costs using
current methodology effective at the beginning of each fiscal
year.
One-time fixed meter fee adjustment of $0.88/month for a three-
quarter inch meter to meet costs on 7/1 /18 and adjusted
annually thereafter by Consumer Price Index + 1.5%.
Multi -family charged per dwelling unit
Single-family and other accounts charged by meter size
Beginning Reserve Balance -- Water And Water Master Plan Enterprise Funds
40
35
30
M 25
I
I
20
i
0
n
s 15
10
5
0
18-1 9 19-20 20-21 21-22 22-23
Fiscal Year
Reserves - Current Methodology Reserves - New Rates Total Reserve Target
Value of Our Water Infrastructure?
4 Reservoirs/Tank
3Zone 1 Boosters
2 Zone 2 Boosters
$110 M
611 Miles of Large &
Distribution Mains
$900 M
k .L. . I j )
. . . . . . . . .
, m i s 10 Wells (8 Active)
i mi r, i f eh r- e% R A
1)�u ivi
rl
3 Import Connections
$5 N/1
Value of Our Water Infrastructure? (Con't)
53,091
Meter Connections
$220 M
51801
Public Hydrants
fine A A
y iVi
Over $1.4 Billion
Yard, Trucks,
Equipment, etc
$20 M
r
A 173749
Large Valves
WMP Projects & Costs
Production i Main Replacement
14 Ott 10
$59M., $39M
Corrosion
Control Security
3 T7
$
9M $2M
n;e,+riki i+inr-%
LJIJII ILJULIUII
7
$19M
44Projects/Prog rams at a value of 128.2MOver 20 Years
Water Master Plan Fund Balance ���'
r r 1 ! I 1 -
/ /1 -% I �• • /'h / v w A
t-und 'balance as of 1I "I/ZU"I b will be'I �IvlP•ti'b
Balance depleted in 3 years without re-
instating surcharge
Capital Surcharge Recommendation
New Capital surcharge per equivalent
meter isnit (FMU) set at S3_00 to address
ongoing capital needs (wells, pipelines,
etc.), adjusted by $0.50 every two years
through FY 22-23 — effective July 1, 2018.
FY 18/19
FY 19/20
FY 20/21
FY 21/22
FY 22/23
Proposed
Proposed
Proposed
Proposed
Proposed
Annual Adjustment leer
$3.00
$0
$0.50
$0
$0.50
EMU)
Effective Date
July 2018
July 2019
July 2020
July 2021
July2,022
Capital Surcharge Est.
$3,700,000
$3,700,000
$4,300,000
$4,300,000
$4,900,000
Revenue
Water Supply
Groundwater Basin
Orange County Water District (OCWD) Manages the Orange County Ground Water Basin.
Basin Pumping Percentage (BPP), established yearly. currently set at 75 percent of agency's
total water demand.
Replenishment Assessment (RA) for pumping. currently set at $445 per acre foot- expected
to increase to $472 per acre foot on July 1.
11 Imported Water
Purchased from the Municipal Water District of Orange County (MWDOC) who is a
Member Agency of the Metropolitan Water District.
Supplies remaining 25% of the City's demand.
Current rate is $1,015 per acre foot-, expected to increase to $1,053 on January 1, 2019.
Projected commodity rate is $2.15 per billing unit (748 gallons)
Water Meter Rate
Adjusted by the Percentage Increase of the Consumer Price Index -
Urban Los Anqeles-Orange-Riverside counties established by the
U.S. Bureau of Labor Statistics and available after July 1 of each
year.
Increase of $0.88 per EMU beginning July 1, 2018 to catch up to
increased costs.
Beginning July 1, 2019, will be adjusted by the Percentage Increase
of the Consumer Price Index -Urban Los Angeles -Orange -Riverside
counties established by the U.S. Bureau of Labor Statistics for
nor%%i-%&—.-%k-%r -%f 4-11e-% r%re-%iii-%i %i-,.-.%r r+Ii ir. ') C0/
IVUVCI I IIJCI UI LI IC PI CVIUUJ YCGII PIUJ I .J /0.
Comparison of Monthly Water Bills
60.00
50.00
40.00
30.00
20.00
10.00
0.00
0�.\o` GJ<<e�� O`aaoie oQoyea G�o�a �eaor are.F �a��eA \ay�a� acE \\e�0' �eac
e� �� J
cG�ati Qa .G�Ao��
e Gt� 81
\C� FOR TYPICAL SINGLE FAMILY RESIDENCE
0
Sewer Rates bra
Sewer rates determined by customer categories and adjusted annually by change
in CPI.
a No Change to Current Rate Adjustment by CPI as included in Municipal Code.
Deletes customer classification of "high use commercial" due to difficulty of
managing the small category.
Moves CPI adjustment period from July to November due to change in City's
fiscal year.
RatPS to hP r_.ha�ngPd by (1ity (ni Mr.11 Resnlutinn to matrh the Iegiglati\/p vPhiriP of
water rate adjustments.
Proposition 218 Procedures
All residents and property owners are mailed a protest hearing
notice 45 days before the public hearing.
City Council holds public hearing on the proposed adjustment(s).
r If 50% + 1 of property owners/residents mail in protests,
adjustment(s) cannot be adopted.
Staff recommends City Council vote to affirm the formulas for rate
adjustments.
Recommended Actions
1 Adopt Resolution 2018-17, reintroducing a water capital surcharge.
Adopt Resolution 2018-19, modifying the City Sewer Rate Schedule.
Adopt Resolution 2018-20, restating the City's water commodity "pass
through."
Introduce for adoption Ordinance 4157, pertaining to the City's Water
Meter and Capital Surcharge Rates.
Introduce for adoption Ordinance 4158, amending sections of the
Municipal Code pertaining to Sewer rate adjustments.
Next Steps
o Second Reading of Ordinances at next
City council Meeting, April 2, 2018
o Ordinances effective 30 days after
second reading, May 1
KNcvv Iai�� q c�iivc �iui" I , �v� �2v
y
City of Huntington Beach
WATER AND SEWER RATE
ADJUSTMENT
City Council Meeting
April 2, 2018
Water and Sewer RatesIs
On March 19t" the City Council Held a Public Hearing
which was continued to tonight, April 2.
The City Council requested to forward the report to the
Finance Commission for Review.
On March, 28t" the Finance Commission Reviewed the
report and provided recommendations.
60 00
5000
40.00
30.00
2000
1000
000
Comparison of Monthly Water Bills
S°� ace cAa yaa owe ao� eca Jai �e� a� 61
Oy G�� pia oQ° G� 6a ar Ja cy a ��at` 0aa �a �� Qa
aa� Qa o�ac �ay�F @oac FJ a- or eya Vow
c,
FOR TYPICAL SINGLE FAMILY RESIDENCE
3
Recommended Actions
Adopt Resolution 2018-17, reintroducing a water capital surcharge, meter
charge adjustment, and meter equivalent unit standard.
4 Adopt Resolution 2018-19, modifying the City Sewer Rate Schedule.
Adopt Resolution 2018-20, restating the City's water commodity "pass
through" methodology.
Introduce for adoption Ordinance 4157, pertaining to the City's Water Meter
and Capital Surcharge Rates.
Introduce for adoption Ordinance 4158, amending sections of the Municipal
rude riartaininri to ge%Ahzr rates nr ii ictment(z
Items for Action
• Adopt $3.00 per month Water Capital Surcharge for infrastructure projects in the Water Master
Plan (Resolution 2018-17)
Adopt American Water Works Association (AWWA) Equivalent Meter Unit (EMU) Schedule
(Resolution 2018-17)
• Adopt $0.88 per EMU monthly meter charge in 2018; Consumer Price Index plus 1.5% beginning
July 1. 2019 (Resolution 2018-17)
• Re -affirm water consumption rate adjustment pass through formula (Ordinance 4157, Resolution
2018-20)
• Delete Sewer Customer Category 'High Use Commercial` (Resolution 2018-19)
• Change sewer rate adjustment From Ordinance to Resolution (Ordinance 4158), aligning the
process with the water rate process
• Reaffirm sewer rate adjustment pass through formula (Ordinance 4158)
Align both the Water and Sewer Service adjustments to the new, .July ls', fisral year rhanninn thin
month of CPI to November from July (Resolution 2018-17, Resolution 20"
Finance Commission Recommendations
Approved the Staff recommended actions with the following additions and exceptions. -
Add language to the Capital Surcharge to provide a sunset of the charge in 10 years.
Adjust the meter fee annually by CPI only. Replacing the CPI plus 1.5%.
The Finance Commission was unable to make a recommendation without further
information on the current basis of calculating the water meter charges compared to
moving to the AWWA industry standard.
Recommended that staff study a method to suspend rate adjustments or provide a
discount for low income/Seniors.
Base Meter Rate
Water rates use the 3/4 inch meter as the base and uses customers
meter's equivalent capacity as it compares to the 3/4" meter.
• Staff is recommending to adopt the industry standard developed by the
American Water Works Association (AWWA).
• The Finance Commission was unable to make a recommendation withouI.
further information on the current basis of calculating the water meter
charges compared to moving to the AWWA industry standard.
The AWWA standard uses the capacity of flow through each size of meter.
This scientific standard is proposed as the basis to distribute the costs
equitably to all customers.
Production
14
$59M
Corrosion
Control
3
WM P Projects & Costs
Main Replacement
10 A&
$39M
Security
7
'L Ail
$2M
Distribution
7
$19M , •.
Studies
3
$0.5M
4L. Projects/Programs at a value of $128.2MOver 20 Years
Water Master Plan Fund Balance
► Fund Balance as of 7/1/2018 will be $17M
► Balance depleted in 3 years without re-
instating charge
Staff Recommended Actions
Staff recommends the following actions incorporating the Finance Committee Recommendations.
• Adopt Resolution 2018-17, reintroducing a water capital surcharge with the following Finance Commission
Recommendations:
• Add a sunset of the capital surcharge fee in 10 years.
• Modify the annual meter charge adjustment to Consumer Price Index only. Removing the Consumer Price Index
Plus an additional 1-112 percent.
• Adopt Resolution 2018-19, modifying the City Sewer Rate Schedule.
• Adopt Resolution 2018-20, restating the City's water commodity "pass through.
• Introduce for adoption Ordinance 4157, pertaining to the City's Water Meter and Capital Surcharge Rates.
Introduce for adoption Ordinance 4158, amending sections of the Municipal Code pertaining to Sewer
rate adjustments.
• Add the following Finance Commission recommendation:
• Study methods to provide discount to off set the rate adjustment for low income senior citizens.
46