13.A.
City Council Meeting - FINAL
- Meeting Date:
- 02/06/2024
- From:
- Erin Young, Water Resources Manager
- Department:
- Water Services
Co-Submitter:
Shannon Jones
Information
TITLE:
Water, Wastewater, and Reclaimed Water Rates and Cost-of-Service Study - Presentation 3 of 3 on Capacity Fees & Introduction to Rate Designs
DESIRED OUTCOME:
Staff and Stantec are seeking direction from City Council on these five elements of updating Capacity Fees as presented on January 23:
- Utilize the Combined Methodology for calculating capacity fees
- Proceed with Stantec, Staff's, and the Water Commission's recommendation to follow the Combined Methodology for calculating the capacity fee for both the water and wastewater systems
- Revisit the Buy-In or Incremental methodologies for water and/or wastewater systems
- Utilize system actuals as a basis for Level-of-Service calculations
- Proceed with Stantec, Staff's, and the Water Commission's recommendation to base the water and wastewater capacity fee level-of-service assumption on actual data
- Base capacity fee level-of-service assumption for water and/or wastewater on the water and wastewater design standards in City Code
- Collect capacity fees towards the cost of future water supply infrastructure projects (such as Red Gap Ranch, direct potable reuse, or indirect potable reuse projects, at Council direction)
- Proceed with a capacity fee model that collects fees toward water supply infrastructure projects (two of six on the Water Commission shared concerns with this option; the other four were supportive of this option)
- Do not collect a portion of capacity fees towards a new water supply infrastructure project
- Collect capacity fees towards the cost of a new wastewater treatment facility
- Proceed with a capacity fee model that collects fees towards a new wastewater treatment facility (one of six on the Water Commission shared a concern with this option; the other five were supportive of this option)
- Do not collect a portion of capacity fees towards a new wastewater treatment facility
- Include or do not include loadings capacity along with the flow capacity as a basis for calculating the level-of-service for the wastewater system. (Water Commission recommended including loadings capacity)
EXECUTIVE SUMMARY:
A capacity fee is a one-time charge for a new connection to the water and or sewer system. The charge is designed to recover a portion or all of the cost of constructing water and wastewater system capacity. The fees can also be assessed to existing customers requiring increased system capacity. In general, capacity fees are based on the costs of current and/or future utility infrastructure including, but not limited to, water supply facilities, treatment facilities, effluent disposal facilities, and transmission mains and sewer interceptors. Capacity fees serve as the mechanism by which growth can “pay its own way” and minimize the extent to which existing customers must bear the cost of facilities that will be used to serve new customers.
INFORMATION:
There are three primary approaches to the calculation of capacity fees, all of which are outlined within the American Water Works Association (AWWA) and Water Environment Federation (WEF) guidance documents. Each of the approaches is described below.
Buy-In Method
This approach determines the capacity fees solely on the existing utility system assets. The replacement cost in today’s dollars, less accumulated depreciation, of each system’s major functional components serves as the cost basis for the capacity fee calculation. This approach is most appropriate for a system with ample excess capacity, such that most new connections to the system will be served by that existing excess capacity and the customers are effectively “buying-in” to the existing system, or limited capital improvement program (CIP).
Incremental Method
The second approach is to use the portion of each system’s multi-year CIP associated with the provision of additional system capacity by a functional system component as the cost basis for the capacity fee calculation. This approach is most appropriate where 1) the existing system has limited or no excess capacity to accommodate growth, and 2) the CIP contains a significant number of projects that provide additional system capacity for each functional system component representative of the cost of capacity for the entire system.
Combined Method
The third approach is a combination of the two previous approaches described. This approach is most appropriate when 1) there is excess capacity in the current system that will accommodate some growth, but additional capacity is needed in the near-term as reflected in each system’s CIP, and 2) the CIP includes a significant number of projects that will provide additional system capacity.
Proposed Method
Given that the City has existing, but limited, capacity within both the water and wastewater systems to sell, as well as capital spending planned over the next 10 years, the Combined Method is proposed by Stantec and Staff for the calculation of the capacity fee for both the water and wastewater systems.
Using the Combined Method requires a Buy-In calculation and an Incremental calculation. The following outlines the process to determine the net value (cost basis) for each (water and wastewater) system under the Combined Method.
The City does not charge reclaimed water capacity fees because reclaimed water supply is limited and allocated to existing customers. Reclaimed water distribution system investments, however, benefit existing water supply and therefore are included in the water system capacity fee calculations.
The value of the wastewater treatment portion of reclaimed water treatment provided at the City’s wastewater treatment plants is included in the wastewater system capacity fee calculations.
Major Project Alternatives
The City is currently reviewing the need for major projects such as future water supply projects and a wastewater treatment plant expansion. While specific details are still being developed, it is understood that growth is driving a large portion of these costs. Including these future costs as capacity fee options for consideration by the Water Commission and City Council was recommended in previous Water Commission Rate Study meetings and the joint City Council-Water Commission meeting on October 23, 2023.
The following sections outline other assumptions used to calculate the water and wastewater capacity fees.
System Capacity
The City’s water and wastewater systems comprise numerous functional components such as water production, wastewater treatment, and transmission/conveyance. Each of the functional components has a physical or regulatory permitted capacity. While treatment, supply, and disposal capacities are readily available and generally accepted to be the physical or regulatory permitted capacity of such facilities, transmission system capacities are more difficult to quantify. Stantec obtained the system capacities through reviews and discussions with City staff and references to the City’s system master plans.
Added System Capacity
The expansion-related capital improvement projects identified in the City’s CIP will all add capacity to the City’s water and wastewater systems. Incremental increases in capacity for the water and wastewater system projects were obtained from discussions with City Staff and the City’s Engineering Consultants.
Level of Service Assumptions
Capacity fees are typically assessed based on a “Service Unit” which represents a unit of measure of system capacity, typically defined as an equivalent residential unit (ERU). Expressing the system capacities in terms of ERUs allows for the development of the unit pricing of capacity which is essential for the determination of capacity fees. The basis for the determination of the ERU needs to be related to a specific level of service (LOS) used by the local government for system engineering and planning purposes.
The City’s current levels of service or (design standards) in City Code have not been updated since the 1980s. According to the AWWA Manual M1:
For water service, the level-of-service standard that is commonly used in the utility industry is the amount of capacity (service) allocable to an ERU expressed as the amount of usage (e.g., gallons, cubic feet) on an average-day or peak basis. This allocation of capacity represents the amount of capacity allowable to an ERU for system engineering and planning purposes, whether or not such capacity is actually used by the customer.
A review of historical customer and per capita flows and peak-to-average-daily-flow water production relationships and trends can indicate whether an existing level-of-service standard is still appropriate or whether it should be updated.
The City’s design standards, from the 1980's, for a water ERU include the following assumptions:
In the January 23, 2024 Council Work Session, Stantec presented an alternative to the wastewater capacity calculation that is based on a portion of the fee being attributed to the current and future loadings capacity of the wastewater treatment plants. This alternative was developed to acknowledge that not all growth projects increase flow capacity. The Water Commission recommended including loadings capacity in determining the level of service for wastewater capacity fee calculations.
Buy-In Method
This approach determines the capacity fees solely on the existing utility system assets. The replacement cost in today’s dollars, less accumulated depreciation, of each system’s major functional components serves as the cost basis for the capacity fee calculation. This approach is most appropriate for a system with ample excess capacity, such that most new connections to the system will be served by that existing excess capacity and the customers are effectively “buying-in” to the existing system, or limited capital improvement program (CIP).
Incremental Method
The second approach is to use the portion of each system’s multi-year CIP associated with the provision of additional system capacity by a functional system component as the cost basis for the capacity fee calculation. This approach is most appropriate where 1) the existing system has limited or no excess capacity to accommodate growth, and 2) the CIP contains a significant number of projects that provide additional system capacity for each functional system component representative of the cost of capacity for the entire system.
Combined Method
The third approach is a combination of the two previous approaches described. This approach is most appropriate when 1) there is excess capacity in the current system that will accommodate some growth, but additional capacity is needed in the near-term as reflected in each system’s CIP, and 2) the CIP includes a significant number of projects that will provide additional system capacity.
Proposed Method
Given that the City has existing, but limited, capacity within both the water and wastewater systems to sell, as well as capital spending planned over the next 10 years, the Combined Method is proposed by Stantec and Staff for the calculation of the capacity fee for both the water and wastewater systems.
Using the Combined Method requires a Buy-In calculation and an Incremental calculation. The following outlines the process to determine the net value (cost basis) for each (water and wastewater) system under the Combined Method.
- The City’s existing major water and wastewater system components assets are analyzed to determine the replacement cost new less depreciation (RCNLD).
- Any non-core system assets with an original cost less than $5,000 are excluded from the existing system value including items such as office and computer equipment and other non-core system assets.
- Growth-related capital projects over the next 10 years as identified in the City’s CIP are added. This includes projects designated to add new capacity to the system, whether partially or entirely.
- Any donated assets and/or assets not funded by the City (funded by grants or contributed by developers), including bond-funded projects being repaid with property tax revenues, are removed from the net system value (both existing assets and future within the capital improvement plan).
- The net value of the water and wastewater systems is further reduced by the outstanding principal on existing debt and the net present value of future debt over the planning period for each system.
- The resulting net system value is used in the determination of the capacity fee using capacity and level of service standards.
The City does not charge reclaimed water capacity fees because reclaimed water supply is limited and allocated to existing customers. Reclaimed water distribution system investments, however, benefit existing water supply and therefore are included in the water system capacity fee calculations.
The value of the wastewater treatment portion of reclaimed water treatment provided at the City’s wastewater treatment plants is included in the wastewater system capacity fee calculations.
Major Project Alternatives
The City is currently reviewing the need for major projects such as future water supply projects and a wastewater treatment plant expansion. While specific details are still being developed, it is understood that growth is driving a large portion of these costs. Including these future costs as capacity fee options for consideration by the Water Commission and City Council was recommended in previous Water Commission Rate Study meetings and the joint City Council-Water Commission meeting on October 23, 2023.
The following sections outline other assumptions used to calculate the water and wastewater capacity fees.
System Capacity
The City’s water and wastewater systems comprise numerous functional components such as water production, wastewater treatment, and transmission/conveyance. Each of the functional components has a physical or regulatory permitted capacity. While treatment, supply, and disposal capacities are readily available and generally accepted to be the physical or regulatory permitted capacity of such facilities, transmission system capacities are more difficult to quantify. Stantec obtained the system capacities through reviews and discussions with City staff and references to the City’s system master plans.
Added System Capacity
The expansion-related capital improvement projects identified in the City’s CIP will all add capacity to the City’s water and wastewater systems. Incremental increases in capacity for the water and wastewater system projects were obtained from discussions with City Staff and the City’s Engineering Consultants.
Level of Service Assumptions
Capacity fees are typically assessed based on a “Service Unit” which represents a unit of measure of system capacity, typically defined as an equivalent residential unit (ERU). Expressing the system capacities in terms of ERUs allows for the development of the unit pricing of capacity which is essential for the determination of capacity fees. The basis for the determination of the ERU needs to be related to a specific level of service (LOS) used by the local government for system engineering and planning purposes.
The City’s current levels of service or (design standards) in City Code have not been updated since the 1980s. According to the AWWA Manual M1:
For water service, the level-of-service standard that is commonly used in the utility industry is the amount of capacity (service) allocable to an ERU expressed as the amount of usage (e.g., gallons, cubic feet) on an average-day or peak basis. This allocation of capacity represents the amount of capacity allowable to an ERU for system engineering and planning purposes, whether or not such capacity is actually used by the customer.
A review of historical customer and per capita flows and peak-to-average-daily-flow water production relationships and trends can indicate whether an existing level-of-service standard is still appropriate or whether it should be updated.
The City’s design standards, from the 1980's, for a water ERU include the following assumptions:
- 3.5 people per household (pph)
- 100 gallons of water use per capita per day (gpcd)
- 2.5 maximum day peaking factor
- 2.4 people per household (pph) from the last census
- 93 gallons of total water use (residential + non-residential + non-revenue water) per capita per day (gpcd) average for time period 2020-2022
- 1.5 3-year average maximum day peaking factor
- 3.5 people per household (pph)
- 75 gallons of water use per capita per day (gpcd)
- 1.6 maximum day peaking factor
- 2.4 people per household (pph) from the latest census
- 67 gallons of wastewater inflow per capita per day (gpcd) average from time period 2020-2022
- 1.6 maximum day peaking factor
In the January 23, 2024 Council Work Session, Stantec presented an alternative to the wastewater capacity calculation that is based on a portion of the fee being attributed to the current and future loadings capacity of the wastewater treatment plants. This alternative was developed to acknowledge that not all growth projects increase flow capacity. The Water Commission recommended including loadings capacity in determining the level of service for wastewater capacity fee calculations.