Evaluating a rate structure presentation stubberfield

11
Evaluating a Rate Structure:Evaluating a Rate Structure:
How to Complete a Rate AnalysisHow to Complete a Rate Analysis
Rose StubberfieldRose Stubberfield

22
What is RCAP?What is RCAP?
RRuralural CCommunityommunity AAssistancessistance PProgramrogram
Technical assistance provided at no cost to ruralTechnical assistance provided at no cost to rural
communitiescommunities

less than 10,000 in populationless than 10,000 in population

low to moderate incomelow to moderate income
To assure safe drinking water and sanitary wasteTo assure safe drinking water and sanitary waste
disposal for the low income, rural communities anddisposal for the low income, rural communities and
individuals in Indianaindividuals in Indiana
National non-profit organization formed in 1972National non-profit organization formed in 1972
Federal and State fundedFederal and State funded

USDA Rural Development - Rural Utilities ServiceUSDA Rural Development - Rural Utilities Service

US Health and Human ServicesUS Health and Human Services

US EPAUS EPA

33
Rate AnalysisRate Analysis
Is your community charging enough forIs your community charging enough for
water or sewer?water or sewer?
Do revenues and fees cover all expensesDo revenues and fees cover all expenses
and debt?and debt?
Do you have adequate financial reserves?Do you have adequate financial reserves?
(Do you have(Do you have ANYANY financial reserves?)financial reserves?)
Are your rates fair? (Is one user groupAre your rates fair? (Is one user group
subsidizing others?)subsidizing others?)

44
Rate AnalysisRate Analysis
These are the key questions we will beThese are the key questions we will be
answering in this presentation . . .answering in this presentation . . .

55
What This Presentation CoversWhat This Presentation Covers
Introduction / Types of Rate StructuresIntroduction / Types of Rate Structures
Developing the DataDeveloping the Data
Key RatiosKey Ratios
Key DataKey Data
Running ScenariosRunning Scenarios
Conclusions / Keys to SuccessConclusions / Keys to Success

66
Why Analyze Rates?Why Analyze Rates?
Small towns face a greater challenge inSmall towns face a greater challenge in
providing services (such as water andproviding services (such as water and
sewer) because they have a smaller usersewer) because they have a smaller user
base to pay for it.base to pay for it.
It is critically important for small towns toIt is critically important for small towns to
periodically evaluate rates to ensure thatperiodically evaluate rates to ensure that
revenues cover expenses.revenues cover expenses.

77
Key QuestionsKey Questions
Are revenues covering current expenses?Are revenues covering current expenses?
Will revenues cover future expenses?Will revenues cover future expenses?
Is there money available for unexpectedIs there money available for unexpected
expenses?expenses?
Are we planning ahead for the future?Are we planning ahead for the future?
Are the rates fair?Are the rates fair?
Are we financially able to build new facilities?Are we financially able to build new facilities?
Are we going to apply for grants and/or loans?Are we going to apply for grants and/or loans?
What if the economy, inflation, or interest ratesWhat if the economy, inflation, or interest rates
change?change?
Is population increasing or declining?Is population increasing or declining?

88
Evaluating Types ofEvaluating Types of
Rate StructuresRate Structures
Types of rates to consider:Types of rates to consider:

Flat rateFlat rate
A flat rate on a per user basis, no matter what the level ofA flat rate on a per user basis, no matter what the level of
usage is by individual users.usage is by individual users.
A common wastewater rate structure in Indiana where usageA common wastewater rate structure in Indiana where usage
is not metered.is not metered.

Proportional-to-use ratesProportional-to-use rates
A rate that is based on a level of usage.A rate that is based on a level of usage.
More on these rates in the next slide.More on these rates in the next slide.
Recommended structure for two reasons: (1) The most fair;Recommended structure for two reasons: (1) The most fair;
and (2) Easy for users to understand.and (2) Easy for users to understand.

Arbitrary RatesArbitrary Rates
Just that . . . Arbitrary.Just that . . . Arbitrary.

99
Evaluating Types ofEvaluating Types of
Rate StructuresRate Structures
Types of proportional-to-use rates to consider:Types of proportional-to-use rates to consider:

Decreasing block rateDecreasing block rate
Cost per “x” gallons decreases the more water or wastewaterCost per “x” gallons decreases the more water or wastewater
is usedis used
Most common water rate structure in IndianaMost common water rate structure in Indiana

Single block rateSingle block rate
Cost per “x” gallons costs the same regardless of the amountCost per “x” gallons costs the same regardless of the amount
of water or wastewater is usedof water or wastewater is used
Most common metered wastewater rate structure in IndianaMost common metered wastewater rate structure in Indiana

Increasing block rateIncreasing block rate
Cost per “x” gallons increases the more water or wastewaterCost per “x” gallons increases the more water or wastewater
is usedis used
Effective rate structure for encouraging conservationEffective rate structure for encouraging conservation

1010
Developing Needed DataDeveloping Needed Data
Hand Calculations:Hand Calculations:

Can be done. Initially faster than a databaseCan be done. Initially faster than a database
or spreadsheet. In the long run slower asor spreadsheet. In the long run slower as
EVERY calculation must be done by hand.EVERY calculation must be done by hand.
Develop a spreadsheet or databaseDevelop a spreadsheet or database

With basic information on cash in and out andWith basic information on cash in and out and
a few equations a spreadsheet can bea few equations a spreadsheet can be
developed. Negative is “reinventing thedeveloped. Negative is “reinventing the
wheel” factor. Positive is designed specific towheel” factor. Positive is designed specific to
system.system.

1111
Use an Existing SpreadsheetUse an Existing Spreadsheet

There are a number of existing spreadsheetsThere are a number of existing spreadsheets
that can be used (two examples are includedthat can be used (two examples are included
in this presentation). No reinventing thein this presentation). No reinventing the
wheel but not a precise fit for any onewheel but not a precise fit for any one
community. Very helpful for runningcommunity. Very helpful for running
comparisons and “what if” scenarios that arecomparisons and “what if” scenarios that are
much more difficult with paper calculations.much more difficult with paper calculations.

1212
Use some kind of accounting softwareUse some kind of accounting software

Simply examples include Intuit’s QuickBooksSimply examples include Intuit’s QuickBooks
or Microsoft’s Money. The positive is thator Microsoft’s Money. The positive is that
these software programs take into account allthese software programs take into account all
accounting needed and can be user friendly.accounting needed and can be user friendly.
Negative is that they are not a precise matchNegative is that they are not a precise match
for a water or wastewater utilities accountingfor a water or wastewater utilities accounting
needs.needs.

1313
Operating ratio.Operating ratio.
Coverage ratio.Coverage ratio.
Affordability index.Affordability index.

1414
Operating RatioOperating Ratio
Total System Operating Income /Total System Operating Income /
Total System Operating Expenses =Total System Operating Expenses =
Operating RatioOperating Ratio
Does not include debt, that comes later . . .Does not include debt, that comes later . . .

1515
What to include in the income forWhat to include in the income for
operating ratio:operating ratio:

User feesUser fees

Hook-up and impact feesHook-up and impact fees

InterestInterest

Cash carry-over and fund transfersCash carry-over and fund transfers

And income not dedicated to something elseAnd income not dedicated to something else

1616
What to include in the expenses forWhat to include in the expenses for
operating ratio:operating ratio:

AdministrationAdministration

Wages and benefitsWages and benefits

UtilitiesUtilities

SuppliesSupplies

Other operating expensesOther operating expenses

No debt! That comes next . . .No debt! That comes next . . .

1717
What does the operating ratio mean?What does the operating ratio mean?

= 1 and the system is breaking even.= 1 and the system is breaking even.

<1 and the system is losing money (in the red)<1 and the system is losing money (in the red)

>1 revenues are ahead of expenses (in the>1 revenues are ahead of expenses (in the
black)black)

1.15 is a normal target for systems with1.15 is a normal target for systems with
>2,000 connections>2,000 connections

1.35+ is better for smaller systems with1.35+ is better for smaller systems with
<1,000 connections<1,000 connections

1818
Coverage Ratio:Coverage Ratio:
Income Available for Debt Service /Income Available for Debt Service /
Annual Debt Service Expenses =Annual Debt Service Expenses =
Coverage RatioCoverage Ratio

1919
What does the coverage ratio mean?What does the coverage ratio mean?

It is an indicator of the system’s financialIt is an indicator of the system’s financial
ability to repay debt.ability to repay debt.

<1 and banks, bond buyers, and lending<1 and banks, bond buyers, and lending
agencies are unlikely to lend the system theagencies are unlikely to lend the system the
money.money.

1.25 is a normal target for larger systems.1.25 is a normal target for larger systems.

1.90 can often be preferred for smaller1.90 can often be preferred for smaller
systems.systems.

2020
A useful way to look at these two ratios:A useful way to look at these two ratios:

A strongA strong operating ratiooperating ratio will take care of thewill take care of the
coverage ratiocoverage ratio..

2121
Affordability Index:Affordability Index:
Fees for a 5,000 gallon per month user /Fees for a 5,000 gallon per month user /
Median Household Income (MHI) for theMedian Household Income (MHI) for the
rate paying area =rate paying area =
Affordability IndexAffordability Index

2222
What does the affordability index mean?What does the affordability index mean?

<0.5% Rates are “very” affordable<0.5% Rates are “very” affordable

0.5% - 1.5% Rates are “fairly” affordable0.5% - 1.5% Rates are “fairly” affordable

>1.5% Rates are considered “high”>1.5% Rates are considered “high”

2323
Key Data - RevenuesKey Data - Revenues
Revenue Components to Include:Revenue Components to Include:

(Number of Users Per Class) x (Rate)(Number of Users Per Class) x (Rate)

Fees and Service ChargesFees and Service Charges

Hook-up ChargesHook-up Charges

Interest IncomeInterest Income

Other Revenue (Insurance Reimbursements,Other Revenue (Insurance Reimbursements,
Rental Charges, Bank Reconciliation, Sale ofRental Charges, Bank Reconciliation, Sale of
Assets)Assets)

2424
Key Data – RevenuesKey Data – Revenues
Example of Revenues Portion of SpreadsheetExample of Revenues Portion of Spreadsheet
from “Show Me Rate Maker”from “Show Me Rate Maker”

Operating Incomes
User Charges (Actual or Projected Receipts)
Surcharges
Working Capital Carried Over From Previous Year
(for Operating Expenses)
Working Capital Interest Earned (or Paid)
Hookup Fees Devoted to Operating Costs
Other Charges (late payments, forfeited deposits, etc.)
Transfers From Capital Improvements Reserve
Withdrawals From Debt Reserve
Debt Reserve Interest Earned (or Paid)
Withdrawals From Other Reserves
Other Reserve Interest Earned (or Paid)
Other Income fund transfer from General Revenue
Other Income
Other Adjust. (+ or -) Describe
Total Actual or Projected Operating Revenues

2525
Key Data – RevenuesKey Data – Revenues
Example of Revenues Portion from Jarocki-Example of Revenues Portion from Jarocki-
Environmental Finance Center SpreadsheetEnvironmental Finance Center Spreadsheet
Water Rates [assumes increase based on new customers]
Fees and Service Charges
Hookup Charges [Enter Average Charge]
Revenues Derived from Rental Charges hydrant rental
Interest Income
Other Revenues
TOTAL REVENUES AVAILABLE (Lines 6 through 13)
insurance reimbursement, bank reconcilliation, sale of truck

2626
Key Data - ExpensesKey Data - Expenses
Expense Components to Include:Expense Components to Include:

AdministrationAdministration

Wages and benefitsWages and benefits

UtilitiesUtilities

SuppliesSupplies

Other operating expensesOther operating expenses

2727
Key Data – ExpensesKey Data – Expenses
Example of Expense Portion of SpreadsheetExample of Expense Portion of Spreadsheet
from “Show Me Rate Maker”from “Show Me Rate Maker”
Item
Total Annual
Cost for
Each Item
Fixed
Cost
Percen-
tage for
Each Item
Costs
Adjusted for
Surcharge-
able Service
& Water
Loss
Adjusted
Fixed Cost
Salaries & Benefits for Administration Staff $6,000 100% X $4,486 = $4,486
Billing, Office Operation & Utilities, Rent &
Other Overhead $4,000 100% X $2,990 = $2,990
Insurance & Bonding $1,000 100% X $748 = $748
Accounting, Legal, Engineering & Other
Professional Services $900 100% X $673 = $673
Debt Repayment & Related Expenses $12,000 50% X $12,000 = $6,000
Debt Reserve Payments $0 50% X $0 = $0
Other Reserve Payments $200 0% X $200 = $0
Salaries & Benefits for Operations Staff $12,000 0% X $8,971 = $0
Electricity & Utilities for Operations $8,500 0% X $6,355 = $0
Operating Supplies & Equipment $4,500 0% X $3,364 = $0
Chemicals $2,000 0% X $1,495 = $0
Equipment Leases $0 0% X $0 = $0
Regular Maintenance & Repairs $8,500 0% X $6,355 = $0
Auto & Other Rolling Stock $3,000 0% X $2,243 = $0
Permits, Training $1,500 0% X $1,121 = $0
Taxes and Franchise Fees $3,000 0% X $2,243 = $0
Payment to R & R Account $12,900 0% X $9,644 = $0
Surchargeable Services (Adjustment) N.A. N.A. X $2,000 = N.A.
Water Loss (Adjustment) N.A. 100% X $15,113 = $15,113

2828
Key Data – ExpensesKey Data – Expenses
Example of Revenues Portion from Jarocki-Example of Revenues Portion from Jarocki-
Environmental Finance Center SpreadsheetEnvironmental Finance Center Spreadsheet
EXPENSES
Operating and Maintenance
Salaries and Benefits 18679
Purchased power* 141
Chemicals and Testing* 6576
Contracted work-non grant related work 1819
Materials, Supplies, and Parts 7542
Wellhead protection plan 2000
Miscellaneous* 0
   Total Operating and Maintenance (Lines 17 through 23) 36757
General and Administrative
Rent 920
Postage* 1201
Insurance 3299
Membership dues 132
SBA audit 2035
0
Miscellaneous* 0
   Total General and Administrative (Lines 26 through 32) 7587
Other Expenses
Other Deductions, Fees and Expenses
Income Taxes
Public Utilities Excise Tax [enter to override excise tax rate]
Sales Tax, Gross Tax 2764
   Total Other Expenses (Lines 35 through 38) 2764
Subtotal Expenses (Lines 24, 33 and 39) 47108
Emergency Reserve *According to NETC, Emergency Reserve is 1/8 of non-debt expenditures (Jarocki calls this Operating reserve/OMGA reserve)
Operating Reserve should be sufficient to OMGA Reserve Target 5889
meet 1/8 of annual O&M expenses, plus Current Year OMGA Reserve Balance 0
general and administrative expenses (OMGA) Required OMGA Reserve Amount 5889
Budgeted OMGA Reserve Amount 0
TOTAL EXPENSES (Lines 40 + 45) 47108

2929
Running a ScenarioRunning a Scenario
FIRST: Key data has been obtainedFIRST: Key data has been obtained
SECOND: Software has been selectedSECOND: Software has been selected
THIRD: Data entryTHIRD: Data entry
FOURTH: Analysis and scenariosFOURTH: Analysis and scenarios

3030
2 Keys to Successful Rate Setting2 Keys to Successful Rate Setting
Key to Success #1: Set the rates higherKey to Success #1: Set the rates higher
that you think you will need them to be.that you think you will need them to be.
This extra money will help weatherThis extra money will help weather
unexpected “bumps”—an upturn in costs,unexpected “bumps”—an upturn in costs,
a downturn in revenue, an unexpecteda downturn in revenue, an unexpected
equipment failure.equipment failure.

3131
Key to Success #2: Analyze rates oftenKey to Success #2: Analyze rates often
and adjust them as needed without delay.and adjust them as needed without delay.
Somewhere between annually and everySomewhere between annually and every
two years is best. This ensures realitytwo years is best. This ensures reality
meets projections and detects neededmeets projections and detects needed
changes before a crisis arrives.changes before a crisis arrives.

3232
And when the local officials say:And when the local officials say: “You“You
want me to set the rates HIGHwant me to set the rates HIGH andand
recheck them often!!!”recheck them often!!!”
You say:You say: “Planning ahead will keep a“Planning ahead will keep a
crisis away. The negatives of ONEcrisis away. The negatives of ONE
financial crisis will overshadow ANY shortfinancial crisis will overshadow ANY short
term savings from setting rates low.”term savings from setting rates low.”

3333
*** Projected rate increases if*** Projected rate increases if
current rate structure continuescurrent rate structure continues
Current
Year Year 2 Year 3 Year 4 Year 5 Year 6
END OF YEAR BALANCE $14,809 $11,722 $7,913 $2,461 ($3,787) ($11,751)
Revenues - Expenses
[Result should be equal to or greater than 0]
FORECASTED NET REVENUES AVAILABLE $121,702 $64,367 $61,807 $57,614 $52,689 $46,057
ADDITIONAL REVENUES NEEDED $0 $0 $0 $0 $3,787 $11,751
REVENUES NEEDED TO MEET BUDGETED
EXPENSES $106,893 $52,645 $53,894 $55,153 $56,476 $57,808
Revenues needed to meet Operations,
Capital, Reserve and other Expenses
PROJECTED MONTHLY BILL (Estimated
average) $11.91 $11.98 $11.91 $11.91 $12.90 $15.00

3434
*** Projected end-of-year balances*** Projected end-of-year balances
with current rate structurewith current rate structure
1 2 3 4 5 6
$14,809
$11,722
-$11,751
-$3,787
$2,461
$7,913
-$15,000
-$10,000
-$5,000
$0
$5,000
$10,000
$15,000
Year
End of Year Balance

3535
*** In addition, the lowest volume users are paying*** In addition, the lowest volume users are paying
a high proportion of revenues….a high proportion of revenues….
Equitability of current user rates
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Low Middle High
User Class (by volume)
% of usage
% revenue (current)

3636
*** What does this mean for Bay*** What does this mean for Bay
Area residents?Area residents?
Current water bills are not high enough toCurrent water bills are not high enough to
sustain a healthy utilitysustain a healthy utility
If rate increases are postponed, rates increasesIf rate increases are postponed, rates increases
will become unavoidable just for the utility towill become unavoidable just for the utility to
break evenbreak even
With no reserves, the town cannot plan aheadWith no reserves, the town cannot plan ahead
for emergencies and changes in regulationsfor emergencies and changes in regulations
The lowest volume users (usually elderly users)The lowest volume users (usually elderly users)
are paying more than they should beare paying more than they should be
The solution: to evaluate the rate structureThe solution: to evaluate the rate structure

3737
*** The selected alternative*** The selected alternative
Increasing block structureIncreasing block structure
Reduced minimum gallons per monthReduced minimum gallons per month

Will decrease from 2,500 to 1,500Will decrease from 2,500 to 1,500

Minimum bill will also decline from $6.85 to $4.50Minimum bill will also decline from $6.85 to $4.50
The new rate structureThe new rate structure

First 1,500 gallons: $3.00/1,000 gallonsFirst 1,500 gallons: $3.00/1,000 gallons

Next 8,500 gallons: $3.15/1,000 gallonsNext 8,500 gallons: $3.15/1,000 gallons

All use over 10,000 gallons: $3.31/1,000 gallonsAll use over 10,000 gallons: $3.31/1,000 gallons

3838
*** What are the benefits of the new*** What are the benefits of the new
rate structure?rate structure?
Will generate revenue to cover allWill generate revenue to cover all
operating expenses and reserves foroperating expenses and reserves for
emergenciesemergencies
Encourages water conservationEncourages water conservation

Reduces the burden on water and sewerReduces the burden on water and sewer
systemssystems
Reduces the burden on lowest volumeReduces the burden on lowest volume
usersusers

3939
Equitability of proposed user rates
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
Low Middle High
User class
% of usage
% of revenue
(low ered min)

4040
Equitability of current user rates
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Low Middle High
User Class
% of usage
% revenue (current)

4141
*** Estimated end-of-year balance under*** Estimated end-of-year balance under
new rate structure with 6% reservesnew rate structure with 6% reserves
1 2 3 4 5 6
$14,809
$16,822
$13,121
$16,250
$17,583
$18,062
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
Year
End of Year Balance

4242
*** How will it impact my rates?*** How will it impact my rates?
Households that use <1,500Households that use <1,500
gallons/month will pay the new minimumgallons/month will pay the new minimum
bill of $4.50bill of $4.50
The average household (about 4,000The average household (about 4,000
gallons/month) will now pay $12.37/monthgallons/month) will now pay $12.37/month
(up from $9.37/month)(up from $9.37/month)
Higher volume users will see a largerHigher volume users will see a larger
increaseincrease

12,500 gallons: from $23.13 to $39.5412,500 gallons: from $23.13 to $39.54

26,000 gallons: from $41.77 to $84.2026,000 gallons: from $41.77 to $84.20

4343
*** Important things to know:*** Important things to know:
The price of clean water for the highestThe price of clean water for the highest
volume users will increase from $0.001volume users will increase from $0.001
per gallon to $0.0033 per gallonper gallon to $0.0033 per gallon
Users can reduce their bills by practicingUsers can reduce their bills by practicing
water conservationwater conservation
The new rates will take effect on JanuaryThe new rates will take effect on January
11
The new rate structure may require futureThe new rate structure may require future
adjustmentadjustment

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