Public Hearing, Consideration and Possible Adoption of Ordinance No. 2017-28:  An ordinance of the City of Flagstaff amending Title 7, Health and Sanitation, of the Flagstaff City Code, by amending Chapter 7-03-001-0018 "Reclaim Water Rate Schedule" thereof. (Ordinance increasing certain utility rates)

This action adopts an ordinance increasing reclaimed water rates. Reclaimed water rates are increased over three years in order to adequately fund operations, maintenance, debt repayment and projects contained in five year capital improvement program. Adoption of this ordinance will accelerate two key projects in the Reclaimed Water Fund which will increase capacity in the reclaimed water system.

The City desires rates that fully fund operations, maintenance and future capital costs for the reclaimed water distribution system and infrastructure. The proposed rate increases will allow Water Services to complete capital projects that improve the capacity of the reclaimed water system.  Reclaimed Water consumption rates will be phased in over a three-year period. The new rates would take effect on January 1 of each year beginning in the year 2018. Estimated revenues increases based on Council direction will be $24,260 in FY 2018, $76,860 in FY 2019, $133,124 in FY 2020 and $159,114 in FY 2021.

None.

COUNCIL GOALS:

• Ensure Flagstaff has a long-term water supply for current and future needs.
• Provide sustainable and equitable public facilities, services, and infrastructure systems in an efficient and effective manner to serve all population areas and demographics.

  REGIONAL PLAN:

• Goal WR.2.2  Maintain and develop facilities to provide reliable, safe and cost effective reclaimed water services.

Yes. The most recent meeting was held at a City Council Work Session on October 14, 2017.  A detailed list of Council meetings can be found under the Community Outreach section of this staff summary.

Adopt Ordinance No. 2017-28
Not adopt Ordinance No. 2017-28.

An alternative would be to choose not to implement any rate modifications. The ramification of such action would be to reduce capital improvement projects contained within the ten year capital improvement program. This action would delay the project to install a second reclaimed water storage tank at Buffalo Park.

As a part of the previous rate study, the financial consultant facilitated dialog with the City's Water Commission and City staff at several Commission meetings over a period of seven months. During these meetings, the Commission made recommendations to be incorporated into the final Reclaimed Water Rate Analysis.

The results of the rate analysis were then posted on the City website and presented by staff to numerous civic, neighborhood, business and manufacturing groups involving a variety of customers during numerous meetings and public presentations.

The Water Commission made their final rate recommendations on June 15, 2017.  The recommendation included phasing in reclaimed water rates, excluding off-peak rates, to be 35% of equivalent potable water rates over the next three years, increasing off-peak tier 1 annually by 6.2% and phase out off-peak tier 2 over three years.  

At the June 27, 2017 Council Work Session, staff presented the Water Commission recommendation. Council directed staff to complete a financial plan which outlines the capital and operational needs of the Reclaimed Water Fund and demonstrate the revenue requirements for the financial plan.  At the September 5, 2017 Council Meeting, Council adopted the Notice of Intent to increase Reclaimed Water Rates.  

The Water Services and Management Services Divisions worked to develop the operational and capital improvement plan needs for the Reclaimed Water Fund.  Water Services identified six key capital expenditures addressed as part of the plan: Bushmaster Pump Station, Advanced Treatment Study, Reclaimed Water Master Plan, Reclaimed Water Rate Study, Replacement of 8" Pipeline Bottleneck, and One Million Gallon Storage Tank.  The last two projects will use debt financing to complete those projects as quickly as possible and will create much needed capacity in the reclaimed water system.  Management Services used this information to develop the revenue requirements for the fund.  The analysis showed that the Water Commission recommendation would be sufficient to meet the needs of the fund over the next five years.  The two Divisions developed the Financial Plan and Rate Analysis Report and published it on October 6, 2017 to meet state requirements.  The report is on file with the City Clerk's office and is available for review 30 days prior to the ordinance consideration.

Staff presented the recommendation for reclaimed water rate increases to Council at a Work Session on October 17, 2017.  Staff was seeking direction from Council to be incorporated in the adoption of reclaimed water rates.  Council provided direction to staff to bring back an ordinance that proposed Off-Peak Tier 1 rates will keep the same differential as compared to Commercial customer rates over the next three years.  The differential of Off-Peak rates is currently 13% of Commercial customer rates.  The table below shows the increase in revenues based on Council direction as compared to the Water Commission recommendation.

Comparison of Total Revenue Increases	01/01/2018	01/01/2019	01/01/2020	01/01/2021
Council Direction - Off Peak Tier 1 at 87% of Commercial Reclaimed Rate	$24,260	$  6,860	$133,124	$159,114
Water Commission Recommendation Tier 1 at 6.2% annual increase	$21,522	$69,844	$121,218	$144,918
Difference	$  2,738	$  7,016	$  11,906	$  14,196

Please refer to Ordinance 2017-28  for more details regarding the 2017 Amendments to City Code increasing Reclaimed Water rates. The ordinance provided includes Council direction and Water Commission recommendation to help assist in the final adoption.

Several objectives were identified during the rate analysis to guide decisions regarding the proposed financial plan. The major objectives of the reclaimed water financial plan were;

• Utility rates should generate sufficient revenue to meet operating and maintenance costs, capital program requirements, debt service obligations and maintain reserves consistent with sound financial management practices.
• A financial plan that follows the water policies and goals established by City Council on April 1, 2014

In reviewing the above objectives it should be noted that the City has limited control over external forces such as growth, consumer behavior and system usage. Recognizing these factors, we believe the recommendations in this financial plan and rate analysis provide a fair, reasonable and balanced set of proposed rates for the City that meets these key objectives.

Please refer to Ordinance 2017-28 for more details regarding the Financial Implications to the Reclaimed Water Utility.

Regular rate reviews and modifications are necessary to maintain a stable financial position for the reclaimed water utility and avoid transfers from the Water Utility Fund.

Involve: During the Water Commission review and discussion on the rate study, local members of the community were very involved in the rate making process.  The public and members of the commission  asked questions, requested information, requested modification to rate structures, and discussed impacts of Commission decisions. 

Inform: City staff has met with the numerous customer groups across all customer classes to discuss and inform the public on proposed rate adjustments to reclaimed water. Below is a summary of our public outreach efforts to inform the public.

• The Water Commission held meetings to discuss the reclaimed rates on 1/15/15, 2/19/15, 4/16/15, 5/21/15, 6/18/15, 7/16/15.
• The Water Commission considered numerous options prior to making their first recommendations to Council in July 16,2015.
• The Water Commission held an informational Public Hearing meeting on 7/16/2015 This meeting is videotaped and is available on the City website.
• Letters were sent to the city's top 10 reclaimed water users notifying them of the proposed rate modifications on 7/21/2015
• Staff met with Northern Arizona University and the largest 10 reclaimed water customers on 7/30/2015 to discuss the increased reclaimed water rates and the projected impacts to their businesses.
• Staff met with the Chamber of Commerce on 9/16/2015 to discuss the increased reclaimed water rates and the impacts to local business community.
• Staff met with various Civic groups (Lions Club, Liberty), ASCE, Sierra Club and various neighborhood associations in the South Side and Sunnyside areas to discuss the need for financial sustainability of the reclaimed water system and the results of the Rate study.
• Staff presented Reclaimed Water Revenue requirements and Rate Options for consideration  to Water Commission and members of the public on June 15, 2017 for their input and recommendations.
• Staff presented Reclaimed Water Rate Options for Consideration  to City Council and members of the public on June 27, 2017
• The Notice of Intent to increase Reclaimed Water Rates was adopted by the City Council at September 5, 2017 Council Meeting,
• A financial report on the Reclaimed Water Rate Adjustments was filed with the City Clerk's office and posted to the City of Flagstaff Website on October 6, 2017.
• The November 7, 2017 public hearing for discussing Reclaimed Water Rate adjustments was advertised in the Arizona Daily Sun on 10/13/2017 and 10/15/2017.
• Staff presented a summary of the Reclaimed Water Rate Public Report prepared by the City's Management Services Division to City Council and members of the public on October 17, 2017,
• The public hearing is being held at the 11/7/2017 Council Meeting.