Discussion and Direction on Reclaimed Water Rates and the Use of Reclaimed Water for Non-recreational Purposes. 

The reclaimed water rate discussion was separated from the water, wastewater & stormwater rate approval process last year in order to better focus on this topic.  Staff brought reclaimed water rates back for City Council's consideration on October 11, 2016.  At that meeting, Council gave general direction that they would like to raise reclaimed water rates and at a different rate than the 3% annual increase recommended by the Water Commission.  Staff would like to discuss options on how Council may raise reclaimed water rates (e.g., either via policy or cost of service study) and obtain direction on a path forward. 

City Council would like to discuss non-recreational uses of reclaimed water.  Utilities has not added any new summer-time reclaimed water customers since 2012 in order to focus on providing existing customers with a more reliable service.  Once specific reclaimed water system capital projects are completed in 2018, Utilities is anticipating that there will be some additional reclaimed water available to allocate to new customers during the peak summer months.  Staff will present the "waiting list" of new customers that have contacted the City for future service and obtain direction and feedback on how Council would like to proceed.   

In the recent past, the City's reclaimed water rates have been set by policy rather than a cost of service study (e.g., a percentage of potable rates).  In 2002,  the reclaimed water rates were set to be 35% of the highest potable water rate customer  in an effort to promote the use of reclaimed water with the exception of Off-Peak/High Volume Users which were set at a specific declining block rate.  The policy of setting reclaimed water rates as a percentage of potable rates has been carried forward through today with the exception of Off-Peak/High Volume Users where the declining block rate was phased out from a 4-tiered rate structure to a 2-tiered rate structure between 2010 and 2015.

Council also requested more information on potential future reclaimed water capital improvement projects. Attached is a copy of the Reclaimed Water Enterprise Fund's existing 10-year capital improvement program (CIP) and proposed new CIP projects.

Below are several policies for Council to consider;

1. Council may decide to increase the cost of reclaimed water by adopting a new policy for rates based on a higher percentage  of potable water rates.

2. Council may decide to increase reclaimed water revenues by raising rates to include an  additional portion of wastewater treatment expenses.  This action will increase the cost to the reclaimed water enterprise fund by shifting costs normally borne by the wastewater customers to the existing reclaimed water customers. This action will require a cost of service study to be performed by an outside financial consultant.

3. If rates are increased, additional revenues may be used to complete additional CIP or implement other new reclaimed water programs, such as:

• Extension of Reclaim Water pipelines to serve new customers.
• Conduct an Advanced Water Treatment Feasibility Study for reclaimed water to determine the feasibility and costs associated with indirect (groundwater augmentation) or direct potable reuse. This would include developing water quality goals for reclaimed water beyond existing regulatory requirements, identifying treatment processes to achieve those water quality goals, developing a conceptual design and associated construction costs.
• Looping the reclaimed water distribution system for improved system pressures and increased customer service reliability.
• Provide financial incentives to potential expand to new customers.

Below are the Council goals that this item supports;
COUNCIL GOALS:
1) Ensure Flagstaff has a long-term water supply for current and future needs
3) Provide sustainable and equitable public facilities, services, and infrastructure systems in an efficient and effective manner to serve all population areas and demographics
8) Improve effectiveness of notification, communication, and engagement with residents, neighborhoods and businesses and about City services, programs, policies, projects and developments

The Flagstaff Regional Plan 2030 supports the update and adjustment to City utility rates with the following goals: Policies are only included where needed to clarify a goal.
Goal WR.2 Manage a coordinated system of water, wastewater and reclaimed water utility service facilities and resources at the City level and identify funding to pay for new resources.
Goal WR.4 logically enhance and extend the City's public water, wastewater and reclaimed water utility services including their treatment, distribution and collection systems in both urbanized and newly developed areas of the City to provide an efficient delivery of services.
Goal U.7 Provide for public services and infrastructure.
Goal LU.8 balance future growth with available water resources.
Goal CD.1 Improve the City and County financial systems to provide for needed infrastructure development and rehabilitation, including maintenance and enhancement of existing infrastructure.
Goal PF.2 Provide sustainable and equitable public facilities services, and infrastructure systems in an efficient and effective manner to serve all population areas and demographics.