Public Works conducts a cost of service rate study every two years to review and recommend appropriate water and wastewater rates and fees for the upcoming two fiscal years.  The methodology used in the rate studies follows industry standard approaches and recommends rates for each class of customer.  The rates allow the Public Works Department to adequately recover costs in proportion to the cost of providing service to each customer class.  The rate study prepared by AE2S Nexus was completed in April 2017, resulting in recommended rate changes for FY 2018 and FY 2019.  Increases for water and wastewater system development fees, as well as wholesale customer rate decreases that were required by contract were implemented in FY 2018.  However, Council voted not to increase rates per the rate study for all other customer classes or increase any other fees.  Current rates are not at an adequate level to sustain operations and fund required infrastructure.  Public Works staff presented two options for rate adjustments for FY 2019 at the February 20, 2018 Council work session.  The first option increases the rates in FY 2019 to the rates recommended in the rate study for FY 2018.  The second option increases the rates in FY 2019 to the rates recommended in the rate study for FY 2019.   Average water rates would increase approximately 3% and wastewater rates would increase by 2.7% under Option I.   Under Option II, both average water and wastewater rates increase by approximately 5%.   While Option I would implement a lesser rate increase in FY 2019 than Option II, future increases will need to be higher to meet infrastructure needs under Option I.  The following are additional proposed changes for FY 19 in both options:

1. Private fire protection charges increases of approximately 4.4%.
2. Various water and wastewater fee and permit increases to cover the current cost of services.
3. The implementation of a Non-Sufficient Fund (NSF) fee of $25.
4. A slight increase in the extra strength surcharge for TSS is recommended to reflect the appropriate cost of service.
5. Establish rates for the Exxon Mobile Billings Refinery.

The attached resolutions specify the proposed rates and fees in Option I and Option II.  A comparison of current versus proposed rates is also attached. A public hearing is required per MCA 69-7-111 and if the proposed resolution is approved, rates will be effective July 1, 2018.

The City Council must hold a public hearing and then may

• approve resolution Option I
• approve resolution Option II; or
• not approve a resolution.  If Council does not approve a resolution specifying rates and fees for FY 19, the rates and fees will continue at current levels, leaving insufficient revenues in the water and wastewater funds to sustain the adopted capital improvement program.

The proposed Option 1 rate and fee adjustments will generate approximately $700,000 more water revenues than last year and $450,000 more wastewater revenues during FY 2019.  Under Option II, the proposed rate and fee adjustments will generate approximately $1,100,000 higher water revenues and $875,000 more in wastewater revenues during FY 2019.

Staff recommends that the City Council conduct a public hearing and approve the proposed Option II resolution adopting the water and wastewater rate and fee schedule effective July 1, 2018.