Discussion on reclaimed water rates following Council's request from the April 2, 2024 Council Meeting. 

 

• Option 1: Explore water conservation and/or demand-smoothing actions now and direct staff to include a cost-of-service-based analysis in the next rate study
• Option 2: Do not take any action on reclaimed water rates at this time and monitor customer response to rate increases
• Option 3: Ask the Water Commission and/or Staff to take different action

At the April 2, 2024 Council meeting, Council requested that staff continue discussing reclaimed water rate policy as a topic separate from the formal rate study process. On October 17, 2024 the Water Commission recommended the establishment of a working group to further the discussion. The working group consisting of representatives from Water Services, the Water Commission (including the City Council Representative Sweet), selected Flagstaff City Departments, and reclaimed water customers developed the following recommendations:
 

1. Goals for an updated reclaimed water (RW) pricing system:
   1. Provide simple, transparent logic.
   2. Provide ongoing funding to sustain RW operations at a level consistent with the needs and expectations of customers.
   3. Provide a method to address past questions concerning RW pricing fairness.
   4. Provide mechanisms to incentivize conservation and demand smoothing to minimize potential future competition over RW supplies if the City of Flagstaff (COF) implements Indirect or Direct Potable Reuse (IPR/DPR).

 

2. To fulfill these goals, the working group recommends implementing cost-based RW pricing to replace the present 35%-of-potable pricing approach:
   1. Will create rate structure unique from potable water and wastewater pricing. 
   2. Should be implemented at the time of the next rate study, i.e., the working group does NOT recommend changing the 5-year RW price trajectory agreed during the most recent rate study.
   3. The change in pricing methodology will be informed by a RW cost-of-service study presently planned by FWS for Q2 2026.

 

3. Key characteristics of the proposed cost-based plan and management approach:
   1. Flagstaff City Council will have an opportunity to review cost allocations between RW and wastewater.
   2. Will include RW customers as partners in determining what capital improvement projects to include in any given rate period, balancing costs against system performance and maintenance requirements.
   3. May include tiers or seasonal pricing to incentivize conservation and demand smoothing, developed internally or with the help of rate consultants.
   4. Requires changing the City of Flagstaff Council-adopted 2014 Water Policies, Policy C1.1 for Reclaimed Water Enterprise Fund Cost Recovery, primarily by eliminating the contingency for funding RW from Potable Water.

 

4. Key additional recommendations:
   1. Expand the scope of Flagstaff Water Services (FWS) water conservation activities to include RW uses.  RW customers and FWS should be informed by and target achieving RW usage rates as good as or better than the standards defined by the Arizona Department of Water Resources (ADWR) and the 5^th Management Plan Work Group (aka “5MP”).
   2.  If the COF decides to implement an IPR/DPR program, the Flagstaff City Council should evaluate the advantages and disadvantages of converting to a value-based RW pricing system in place of a cost-based system.

Since the 1960s, treated effluent has been purchased from the Wildcat Hill Wastewater Treatment Plant (now the Wildcat Hill Water Reclamation Plant) for irrigation of turf and golf courses to the area south of the treatment plant (the Continental area), but the expansion of a city-wide "reclaimed water" system did not occur until the mid-1990s. Coming into the 1990s, potable water use per capita was at an all-time high, and water managers and the City Council were seeking actions to reduce water demand while also increasing the City's water resources. With the State of Arizona advancing rules for reclaimed water in the 1980's, through aquifer recharge and recovery or direct use ("purple pipe") of reclaimed water, Flagstaff saw a significant opportunity to lower potable demand in the summer months by replacing outdoor irrigation with reclaimed water. It made financial sense to invest in a delivery system that targeted areas of highest consumption, namely, outdoor water use at institutions, parks, and golf courses. A reclaimed water delivery system was constructed in the middle of town at the current location of the Rio de Flag Water Reclamation Facility for the sole reason of providing reclaimed water to the new system. Most, if not all, new customers were encouraged to transition to reclaimed water through a lower water rate and up-front funding for the delivery system. Customers paid the City back for the infrastructure over some time, commonly 10 years, and today all customers have paid back the City for their portion of the infrastructure investment. Then and now, reclaimed water has consistently offset potable water demand by about 20% per year. Utilizing reclaimed water has reduced peak summer potable water demand by up to 35% by moving large tracts of irrigated turf at parks, golf courses, and athletic fields over to reclaimed water. This offset has deferred the drilling of water wells and delayed the need for projects such as the regional water project from the City's Red Gap Ranch.

Coming into the 2020s, water resources are and will continue to be a topic at the forefront for many communities in Arizona. Flagstaff has positioned itself exceptionally well through aggressive water policy and water rights work at the State level and with regional partners, actions of our City Council targeting water conservation and forward-thinking water planning work (i.e., the City's Designation of Adequate Water Supply), appropriate investment in water resources through water rates, and water efficiency and conservation actions by the community. Appropriate planning includes planning for water resource shortages and sustainable natural water systems. Viewing water for long-term security and sustainability causes utilities and water users in Arizona to face increased pressure to do more with less water. In contrast to using less water is an increased price per unit of water. Costs of running the utility, replacing aging infrastructure, and building new projects increase the cost to the utility and, therefore, consumer rates.

In 1993, reclaimed water rates were set to 75% of potable water rates, and in 2002 a City Council ordinance adjusted reclaimed water rates to 35% of potable water for most uses. In 2010, rates were reviewed to reflect revenue requirements determined through a cost-of-service study, but the cost-of-service model was not adopted. The primary goal of reclaimed water rate setting has been cost recovery, with revenue targets set to recover operational and some capital improvement costs. Current rates for reclaimed water are approved by City Council and are set to collect revenues sufficient to cover operational costs and approved capital improvement expenses. In 2014, the City adopted a policy to guide reclaimed water allocations, which states that the distribution of reclaimed water will prioritize renewing existing agreements, then will allocate to new agreements in which reclaimed water will offset potable demand, and finally, will be allocated to uses that provide community benefits.

Demand for reclaimed water in Flagstaff has increased, and for the past several years the City has not been able to execute new reclaimed water purchase agreements due to distribution limitations. During peak demand the reclaimed water system is fully committed, meaning existing water delivery commitments use the full system capacity. However, reclaimed water demand varies seasonally, with the lowest demand in March and November, and the highest demand in June and July for turf irrigation purposes.