11.
City Council Work Session
- Meeting Date:
- 12/12/2023
- From:
- Erin Young, Water Resources Manager
- Department:
- Water Services
Co-Submitter:
Shannon Jones
TITLE:
Water, Wastewater, Reclaimed Water Rate Study Presentation 1 of 2 on Capacity Fees and Misc. Fees Presentation from Stantec
DESIRED OUTCOME:
The desired outcome is to prepare City Council for upcoming decision points on customer rates and fees, Stantec will be presenting the approach to calculating capacity fees, calculations of miscellaneous fees, and how operational costs are allocated to utility services. This is an opportunity for City Council to ask questions about how rates and fees are determined and presented for Council decisions. This is also an opportunity for City Council to request what other information would help them with upcoming decisions.
EXECUTIVE SUMMARY:
Stantec will be presenting the approach to calculating capacity fees, calculations of miscellaneous fees, and how operational costs are allocated to utility services. The capacity fee component consists of the revenues required to provide additional water resources, production, storage, distribution, treatment, and collections systems to support growth and development that is projected to occur in the City over the next ten years. Miscellaneous fees will be reviewed to allow the City to recover costs incurred by Water Services for activities such as plan reviews, account services, and surcharges to reduce rates from user fees. Stantec will also review how operating cost allocations drive rate design and the revenues to cover the cost of those services. Stantec will return in January to present the technical analysis of capacity fees calculations, preliminary findings on miscellaneous fees, cost allocation implications for rate design, and water usage by class. Stantec will request Council direction on January 30th on capacity fee options.
INFORMATION:
Capacity fees are one-time fees levied upon new development. The City of Flagstaff currently charges buy-in capacity fees for water and wastewater facilities that are calculated following Arizona Revised Statue (ARS) 9-511.01. As such they are not considered as impact fees under ARS 9-463.05.
The calculation of capacity fees mirrors the cost-of-service analyses in that asset and capital improvement categorization by system function is consistent between rates and capacity fees. Growth-related costs are the basis of capacity fees and used in three alternative methods recommended by the American Water Works Association and the Water Environment Federation for capacity fees. Stantec will present each method and the range of capacity fees that result from the analysis for water and wastewater capacity fees.
Miscellaneous fees are additional fees for services such as for scavenger waste and for river can waste collection and cleaning services. Such fees help offset Water Services’ revenue requirements when calculating user rates and are typically based on a cost-of-service approach. Some fees can be adjusted based on local benchmarking of typical service fees for activities such as late fees, returned check fees, and tampering penalties.
Allocation of costs of service by customer classes is a critical task in evaluating cost-based rate designs. Two primary steps are followed in allocating the costs of service to customer classes. First, costs are allocated to water and wastewater system functions that are provided by the various components of the utility (i.e., various costs required to handle flow, remove biochemical oxygen demand (BOD), and bill customers). Second, the functionalized costs are distributed to the various customer classes in proportion to the requirements they impose on each component (i.e., a particular class may discharge a large amount of suspended solids into the system and therefore would be distributed a corresponding proportion of the cost related to suspended solids removal). Customers are classified into groups that exhibit similar service requirements, such as average daily water demand. Costs of the water and wastewater systems are driven by customer service characteristics and the operating and capital costs incurred to provide the level of service required.
The functional components for which the costs of operating the system are broken down are volume, capacity, and customer-related costs in the water system; and volume, suspended solids, biochemical oxygen demand, and customer-related costs for the wastewater system. An example of capacity-related costs includes the capital and operating cost of pumping stations and collection lines. The size and functions of these parts of the system are driven by peak capacity use, which therefore influences the costs incurred to operate and maintain the infrastructure. Customers with higher peak capacity usage characteristics are assigned a relative proportion of such capacity costs.
Another example is biochemical oxygen demand costs, which are incurred by aeration equipment and other system assets associated with BOD removal. Normal domestic (residential) strength wastewater requires normal treatment and costs are derived from this base level of treatment. Higher-strength waste from significant industrial users causes additional BOD removal costs, which are therefore identified through the cost allocation process and recovered from extra-strength surcharges. Separating costs into functional components provides a means of distributing costs to the various customer classifications based on their respective requirements.
The purpose of the cost-of-service analysis is to identify which system functions are driving the costs of the systems, which components should recover the costs, and how much each customer class should share. The final component of the rate study is to evaluate the City’s existing rates and rate structures and provide recommended alternatives based on the cost-of-service analysis.
Stantec will go into more detail during this informational presentation.
The calculation of capacity fees mirrors the cost-of-service analyses in that asset and capital improvement categorization by system function is consistent between rates and capacity fees. Growth-related costs are the basis of capacity fees and used in three alternative methods recommended by the American Water Works Association and the Water Environment Federation for capacity fees. Stantec will present each method and the range of capacity fees that result from the analysis for water and wastewater capacity fees.
Miscellaneous fees are additional fees for services such as for scavenger waste and for river can waste collection and cleaning services. Such fees help offset Water Services’ revenue requirements when calculating user rates and are typically based on a cost-of-service approach. Some fees can be adjusted based on local benchmarking of typical service fees for activities such as late fees, returned check fees, and tampering penalties.
Allocation of costs of service by customer classes is a critical task in evaluating cost-based rate designs. Two primary steps are followed in allocating the costs of service to customer classes. First, costs are allocated to water and wastewater system functions that are provided by the various components of the utility (i.e., various costs required to handle flow, remove biochemical oxygen demand (BOD), and bill customers). Second, the functionalized costs are distributed to the various customer classes in proportion to the requirements they impose on each component (i.e., a particular class may discharge a large amount of suspended solids into the system and therefore would be distributed a corresponding proportion of the cost related to suspended solids removal). Customers are classified into groups that exhibit similar service requirements, such as average daily water demand. Costs of the water and wastewater systems are driven by customer service characteristics and the operating and capital costs incurred to provide the level of service required.
The functional components for which the costs of operating the system are broken down are volume, capacity, and customer-related costs in the water system; and volume, suspended solids, biochemical oxygen demand, and customer-related costs for the wastewater system. An example of capacity-related costs includes the capital and operating cost of pumping stations and collection lines. The size and functions of these parts of the system are driven by peak capacity use, which therefore influences the costs incurred to operate and maintain the infrastructure. Customers with higher peak capacity usage characteristics are assigned a relative proportion of such capacity costs.
Another example is biochemical oxygen demand costs, which are incurred by aeration equipment and other system assets associated with BOD removal. Normal domestic (residential) strength wastewater requires normal treatment and costs are derived from this base level of treatment. Higher-strength waste from significant industrial users causes additional BOD removal costs, which are therefore identified through the cost allocation process and recovered from extra-strength surcharges. Separating costs into functional components provides a means of distributing costs to the various customer classifications based on their respective requirements.
The purpose of the cost-of-service analysis is to identify which system functions are driving the costs of the systems, which components should recover the costs, and how much each customer class should share. The final component of the rate study is to evaluate the City’s existing rates and rate structures and provide recommended alternatives based on the cost-of-service analysis.
Stantec will go into more detail during this informational presentation.