HomeMy WebLinkAbout25 - Water Utility Financial Plan and Water Rate IncreaseCITY OF NEWPORT BEACH
CITY COUNCIL STAFF REPORT
Agenda Item No. 25
September 8, 2009
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Utilities Department
George Murdoch, Utilities Director
949 - 718 -3401 or gmurdoch @newportbeachca.gov
SUBJECT: Water Utility Financial Plan and Water Rate Increase
ISSUE
Should the City Council approve the Water Utility Financial Plan and direct staff to begin
the Proposition 218 rate increase notification process with the rates proposed in the
financial plan?
RECOMMENDATION
1. Approve the Water Utility Financial Plan;
2. Set public hearing on water rate increase for November 10, 2009; and
3. Direct staff to send rate increase notices as required by Proposition 218 with the
rates proposed in the Financial Plan.
DISCUSSION:
Background:
The increasing cost and scarcity of water has been in the news more and more over
the past several years and the City has not been immune to the effects of this
situation. The City has not raised its water rates since 2005. Since then the City has
seen a 29% increase in the average unit cost of purchased water from the Municipal
Water District of Orange County (MWDOC) and a 37% increase in the average unit
cost of purchased water from the Orange County Water District (OCWD).
In order to provide a plan to ensure the adequate funding of the Water Enterprise
Fund, the City retained the services of Red Oak Consulting to complete a five -year
Financial Plan and a Water Rate Study (Attachment A). This staff report briefly
summarizes their findings. A representative of Red Oak will be present at the Council
Meeting to present their analysis and recommendations, as well as to answer
questions.
Water Rate Increase
September 8, 2009
Page 2
Current Financial Outlook
Based on the City's increasing operations and maintenance (O &M) expenditures,
capital financing needs, and proposed reserve requirements, current water revenues
are insufficient. Under the current rate structure, the Water Fund will be unable to
maintain a positive cash balance by fiscal year 2010 -11. By 2013 -14, the fund deficit
is projected to grow to nearly $30 million.
Financial Plan:
As the basis for the rate study, Department staff and Red Oak developed a five -year
financial plan (FY 2010 - 2014). This plan includes an estimate of the Department's
annual projected operating expenses, a funding plan for the updated Water Master
Plan (on the September 8 study session agenda) and recommended Reserve Policy
revisions for City Council consideration.
Projected Operating Expenses
The Financial Plan revealed that anticipated operating expenses will increase from
$16.7 million in 2009 to $24.1 million by 2014, an increase of approximately 45 %, as
illustrated in the following table:
Projected Operations & Maintenance Expenditures (in thousands)
Current 1 2 3 4 5
Description FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Purchased Water- MWDOC
$ 3,354
$ 4,931
$ 5,991
$ 6,440
$ 6,762
$ 7,100
Purchased Water- OCWD
$3,857
$3,922
$3,947
$4,081
$4,232
$4,351
Utilities
$1,325
$1,322
$1,440
$1,549
$1,692
$1,851
Salaries & Benefits
$4,152
$4,319
$4,491
$4,671
$4,858
$5,052
Equipment Maintenance & Replacement
$423
$444
$467
$490
$514
$540
Other O &M
$3,579
$3,856
$4,159
$4,491
$4,853
$5,250
Total $ 16,690 $18,794 $ 20,494 $ 21,722 $ 22,911 $ 24,144
Capital Improvement Plan (C1P) Funding
The City has developed a 30 -year capital improvement plan as part of the 2009 Water
Master Plan. The contemplated CIP totals approximately $168 million, which includes
a project cost escalation assumption of 4% per annum. Due to the long -term funding
demands of an improvement plan of this magnitude, the financing plan contemplates a
capital charge (assessed by meter size) as the primary source of revenue for the
capital plan. Effective July 1, 2009 the City created a subsidiary Water Capital Fund
to more fully segregate the resources dedicated to water capital improvements
separate and apart from Water Division operating activities.
Water Rate Increase
September 8, 2009
Page 3
Reserve Policy Recommendations
To insulate the Water Fund from financial volatility, City staff and Red Oak
recommend the City maintain an Operating Stabilization Reserve equivalent to 180
days of its operating budget, or 50 %. This reserve level also provides a buffer period
of 24 months at a 25% loss rate. Funds collected in excess of the operations
stabilization reserve target would be available to offset future rate adjustments while
extended reserve shortfalls would be recovered from future rate increases.
Although it is difficult to determine an appropriate level for a Capital Contingency
reserve without conducting an expensive and extensive criticality assessment of
system facilities which are particularly at risk to catastrophic failure, Red Oak has
evaluated a contingency reserve level contemplated by staff that parallels the annual
contribution requirement necessary to fund the Water Master Plan. Red Oak concurs
that this amount should provide a sufficient reserve against unanticipated
replacements or repairs. By fiscal year 2013 -14, the target contingency reserve will be
approximately $4 million.
In total, the reserve policy recommendations change reserve levels from 60% of
operations to approximately 65% of operations.
Finance Committee Review:
This information was presented to the City's Finance Committee on March 20h and
April 24th of 2009. The Committee directed staff and Red Oak to adjust the Financial
Plan and rate increase structure to accommodate three issues: 1) minimize "rate
shock" to customers with a rate increase, 2) investigate financing the CIP using cash
(pay -as- you -go) or optional debt issuance (General fund loan), and 3) fully fund
reserves by 2014.
As directed by the Finance Committee, staff and Red Oak investigated two scenarios
in an attempt to reduce rate shock and compare debt issuance or cash financing.
Scenario one was to borrow funds from the General Fund or issue debt in the amount
to equal at least two years of CIP funding. Scenario two was to use cash financing or
a pay -as- you -go method. Although adding funds to the reserves in scenario one
initially did bring the rates down for the first year, by 2014 the rates would actually be
higher due to the additional interest cost burden (example below). Additionally, due to
potential State budget actions, the General Fund loan option seems less plausible
than when originally contemplated in April of 2009. Staff recommends scenario two
be selected. The rates proposed in this report meet the Finance Committee's goals
and fully fund the reserves by 2014.
Example:
Scenario one — Commodity rate FY2010 $2.18 /HCF by FY 2014 $3.22
Scenario two — Commodity rate FY2010 $2.20 /HCF by FY 2014 $3.08
Water Rate Increase
September 8, 2009
Page 4
Rate Increase:
There are three elements to the water rates: 1) the commodity or "variable" charge, 2)
the meter or "fixed" charge, and 3) the capital charge. The rate study looked at each
of these charges and determined jointly at what level they should be set, and how they
should be structured, in order to fairly and equitably recover the cost of providing
water to our customers. As directed by the Finance Committee, the rate study also
includes means of mitigating "rate shock" to customers.
The commodity charge is geared primarily towards recovering the cost of the water
itself; this charge currently generates about 90% of the. water enterprise's revenue.
The rate study revealed that not only does this charge need to increase from the
current rate of $2.08 per hundred cubic feet (HCF or 748 gallons), but the percentage
of revenue generated by this charge needs to decrease from 90% to 70% of total
revenue. This means that the commodity charge would increase to $2.20
immediately, and then, so as to avoid "rate shock ", continue to increase each year
until it reaches $3.08 in 2014 as follows:
Current & Proposed Commodity Charges (cost per HCF)
Current 1 2 3 4 5
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Commodity Charge $2.08 $2.20 $2.46 $2.73 $2.96 $3.08
The fixed charge was designed to recapture the costs of reading, maintaining and
replacing the various sizes of meters. Presently the remaining 10% of the revenue
received doesn't cover these costs, a situation that is partially due to the basis upon
which the charges are allocated. As a result of the rate study, staff is recommending a
significant restructuring of the fixed charge structure. This new structure would shift
an additional 20% of the revenue requirements onto the fixed charge. After a slight
decrease in 2010 in order to mitigate "rate shock ", customers would see an increase in
the fixed charge. The majority of customers (those with %" meters) would see an
increase of less than $1.50 per month due to this charge. However, customers with
meters sized 2" and above would see larger increases to their fixed charges — in most
cases the charges would be tripled.
Staff is also proposing the establishment of a capital charge that would also be
assessed based upon the size of the customer's meter. The capital charge funds the
repair, replacement and/or construction of expensive facilities such as pipelines,
reservoirs and wells. Again, for the large diameter meter customer, these increases
will be substantial; however, the average customer will realize a $7.00 -$8.00 a month
increase.
Water Rate Increase
September 8, 2009
Page 5
Below is the summary table of the combined fixed rates proposed:
Combined Fixed C'
578" or 314"
1"
1 1/2"
2"
3"
4"
6"
8"
10"
12"
Current & Proposed Combined Fixed Charges
Current 1 2 3 4 5
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
$4.50 $8.27 $13.09 $15.11 $16.63 $17.27
$5.50 $13.78 $21.82 $25.19 $27.72 $28.79
$7.00 $27.55 $43.64 $50.38 $55.43 $57.58
49.50 $44.08 $69.82 $80.61 $88.69 $92.12
$18.00 $82.65 $130.91 $151.14 $166.30 $172.73
$25.50 $137.75 $218.18 $251.90 $277.16 $287.88
$38.50 $275.50 $436.37 $503.81 $554.32 $575.76
$45.00 $440.80 $698.19 $806.09 $886.91 $921.22
$45.00 $792.34 $1,254.99 $1,448.95 $1,594.22 $1,655.90
$45.00 $1,274.47 $2,018.64 $2,330.61 $2,564.27 $2,663.48
It is important to note that under this proposal, 67% of our customers will realize an
increase in their monthly bill of less than $10; however there will be significant
increases for the remaining 33 %.
Proposition 218 Requirements
Proposition 218 amended the California Constitution, Articles XIIIC and XIIID, to require
property owner notification of proposed increases in property related fees and give
property owners the right to protest. Attachment B is a draft Proposition 218 Notice that
would be sent to all property owners and non - property owning customers of the City.
The notice provides background information, advises customers of the proposed water
rates described in this report, notifies customers of the public hearing, and describes the
protest procedure.
Environmental Review:
Staff recommends the City Council finds that approving the financial plan is not subject
to the California Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2)
(the activity will not result in a direct or reasonably foreseeable indirect physical change
in the environment) and 15060(c)(3) (the activity is not a project as defined in Section
15378) of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3,
because it has no potential for resulting in physical change to the environment, directly
or indirectly.
Funding Availability:
Funding for the Proposition 218 Notice will come from the water enterprise fund.
Water Rate Increase
September 8, 2009
Page 6
Prepared and Submitted by:
neorgvNurd6ch, Utilities Director
Attachments: Attachment A — Draft Water Utility Financial Plan
Attachment B — Draft Proposition 218 Notice
City of Newport Beach, CA
949 W 16th Street • Newport Beach, CA 92663
Water Utility Financial
Plan
August 2009
Report Prepared By:
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• •' CONSULTING
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888 W 6th Street
Third Floor
5317004 Los Angeles, CA 90017
(213) 326 -1600
Contents
Executive Summary .......
Table of Contents
............. ............................... ES -1
1. Introduction ...................................................................... ............................1 -1
1.1. Scope........................... ................................................................................................. 1 -1
1.2. Background .......... ............................... ................................... ............................... .1 -1
2. Financial Plan ............................................................... ............................... 2 -1
2.1.
Funds ......................................................................................... ...............................
2 -1
2.2.
Revenue Requirement .................................................. ............................... ..............2
-1
2.2.1. Operations & Maintenance ........................ ............................... ..............2
-1
2.2.1.1. Purchased Water Costs ..................... ............................... ..............2
-2
2.2.1.2. Utilities ..................................................................... ............................2
-3
2.2.1.3. Other O &M ........................................................... ...............................
2 -3
2.2.1.4. Projected Operations & Maintenance Expenditures ...........................2
-3
2.2.2. Capital Improvement Program Financing ......................... .............................2-4
2.2.2.1. Historical Capital Improvement Program Financing ............................
2.4
2.2.2.2. Water Master Plan ................................................ ...............................
2-4
2.2.2.3. Future Capital Improvement Program Financing . ...............................
2 -5
2.2.2.4. Historical and Future Debt Service Payments ..... ...............................
2 -5
2.3.
Reserve Requirements ...................................................................... ............................2
-6
2.3.1. Operating Stabilization Reserve (Operating Fund) ........... ............................2
-6
2.3.2. Contingency Reserve (Capital Fund) ............................. ...............................
2 -7
2.4.
Five -Year Financial Plan ............................................................... ..................- ............
2 -7
2.4.1. Current Financial Outlook .................................................. ............................2
-7
2.4.2. Proposed Five -Year Financial Plan ................................ ...............................
2 -8
3. Current Water Rates ........................................................ ............................3
-1
3.1.
Monthly Service Charge ............................................ ............................... . ..............
3 -1
3.2.
Commodity Charge ......................... ..............................................................................
3 -1
4. Fixed ! Variable Revenue ................................................ ............................4
-1
4.1.
Current Fixed /Variable Rate Revenue ......................................... ...............................
4 -1
4.2.
California Urban Water Conservation Council Best Management Practice 11 .............4
-1
4.3.
Proposed Fixed / Variable Revenue .............................................. ...............................
4 -1
5. Monthly Service Charge Meter Equivalency
5.1. Current Meter Equivalency Schedule ...................
5.2. Proposed Meter Equivalency Schedule ...............
6. Proposed Water Rates
7. Bill Comparisons & Impacts.......
t REE DAK City of Newport Beach, CA
CONSULTING Water utility Financial Plan
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5 -1
......................... ............................... 5 -1
........................................................ 5 -1
`c°'
6 -1
7 -1
Table of Contents
List of Tables
Table 2 -1: Historical Operations & Maintenance Expenditures (in thousands) .......
Table 2 -2: Historical Average Unit Cost of Purchased Water per AF ......................
Table 2 -3: Projected Average Unit Cost of Purchased Water per AF ......................
Table 2-4: Projected Operations & Maintenance Expenditures (in thousands).......,
Table 2 -5: Historical Capital Improvement Program Financing (in thousands) .......
Table 2.6: 30 -Year Capital Improvement Program (in thousands ) ...........................
Table 2 -7: Capital Improvement Program Financing (in thousands ) ........................
Table 2 -8: Debt Service Payments (in thousands) .................... ...............................
Table 2 -9: Projected Debt Service Payments (in thousands) .... ...............................
Table 2 -10: Operating Fund Five -Year Financial Plan (in thousands) .....................
Table 2 -11: Capital Fund Five -Year Financial Plan (in thousands ) ..........................
Table 2 -12: Combined Water Fund Five -Year Financial Plan (in thousands)..........
Table 3 -1: Current Monthly Service Charge by Meter Size ....... ...............................
Table 4 -1: Current (FY2009) Fixed / Variable Rate Revenue ($ in thousands) .......
Table 4 -2: Proposed Fixed /Variable Revenue ($ in thousands ) .............................
Table 5 -1: Current Monthly Service Charge & Meter Equivalency Schedule...........
Table 5 -2: Current & Proposed Meter Equivalency Schedules . ...............................
Table 6 -1: Current & Proposed Commodity Charges ................ ...............................
Table 6 -2: Current & Proposed Monthly Service Charges ........ ...............................
Table 6 -3: Proposed Capital Charges ..................................._.. ...............................
Table 64: Current & Proposed Combined Fixed Charges ........ ...............................
List of Figures
............. 2 -2
............. 2 -2
......... 2 -3
............. 24
............. 2-4
............. 2 -5
............. 2 -5
............. 2-6
............. 2-6
............. 2 -9
- .......2 -10
..........2 -11
............. 3-1
............ 4 -1
............ 4 -2
............ 5 -1
............ . 5 -2
............ 6 -1
------------ 6 -1
......6 -2
. 6 -2
Figure 2 -1: Five -Year Financial Outlook with No Revenue Increases (in thousands) .................. 2-8
Figure 2 -2: Five -Year Financial Plan (in thousands) ....................................... ...........................2 -12
Figure 5 -1: Meter Equivalency Schedule Regional Comparison ( FY2009) ... ............................... 5 -2
Figure 7 -1: FY2010 Single Family Residential Customer Monthly Bill Impact ............................. 7 -1
Figure 7 -2: Monthly Regional Bill Comparison - 18 HCF ............................... ............................... 7 -2
REj3DAK City of Newport Beach, CA
CONSULTING water utility Financial Plan ii
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Acronyms
Used in the Report
AF
Acre Feet
AWWA
American Water Works Association
BMP
Best Management Practice
BPP
Basin Pumping Percentage
CUWCC
California Urban Water Conservation Council
CIP
Capital Improvement Program
ENR
Engineering News Record
FY
Fiscal Year
HCF
Hundred Cubic Feet
MET
Metropolitan Water District of Southern California
MWDOC
Municipal Water District of Orange County
OCWD
Orange County Water District
O &M
Operations & Maintenance
: RE[1DAK City of Newport Beach, CA
••' CONSULTING Water Utility Financial Plan
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Executive Summary
Executive Summary
Scope
The City of Newport Beach Utilities Division (the City) retained Red Oak Consulting to
conduct a water rate study (the Study). This study includes the development of a five-
year financial plan, cost -of- service analysis, and development of a conservation rate
structure. For purposes of expediting the adoption of new rates, the Study has been
divided into two phases:
1. The development of the financial plan, the allocation of fixed and variable
revenue, and the proportioning of the monthly service charge by meter size; and
2. The redesign of the commodity charge from a uniform rate to a conservation rate
structure.
This report documents the first phase of the Study, including the methodology used to
develop the financial plan, the policy decisions reached, the proposed water rates, and the
customer bill impacts. A separate report will be prepared for the second phase of the
study upon its completion.
Financial Plan
In order to maintain the financial viability of the City water system, Red Oak, with the
assistance of City staff, prepared a financial plan for the five -year period from fiscal year
ending (FY) 2010 through FY2014. This financial plan includes the development of the
City's annual revenue requirement, a financing plan for its capital improvement program
(CIP), and review and recommendations for the City's reserve policies.
Red Oak used its proprietary electronic financial planning model, eForecast, to determine
the appropriate amount of revenue necessary for the City to meet all of the above
requirements.
Funds
The City currently maintains a single fund for its water operations, capital improvement
financing, and reserves. Based on direction from the City's staff, Red Oak created a
separate fund for capital- related expenditures, which is referred to as the `Capital Fund.'
The financial planning model isolates this fund from the City's Operating Fund in order
to evaluate the financial viability of each fund separately. The City, with the assistance of
RE@DAK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan [ES-1]
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Executive Summary
Red Oak, has developed target reserve levels for each fund, which will be explained in
detail below.
Revenue Requirement
The City's revenue requirement is the total amount of revenue it must collect in order to
meet its operations and maintenance (O &M) expenditures, debt service payments, and
cash - financed capital expenditures. This revenue is collected through water rates and
does not include revenue from incidental fees, charges, or other non - operating revenue.
The City's O &M expenditures are accounted for in the Operating Fund while debt
service payments and cash - financed capital are accounted for in the Capital Fund.
Operations & Maintenance
The City's operations & maintenance expenditures have steadily increased over the past
four years, since its most -recent rate increase in FY2005. Table ES -1 presents the City's
historical O &M expenditures for FY2005 through FY2008.
Table ES -1: Historical Operations & Maintenance Expenditures (in thousands)
Description
FY2005
FY2006
FY2007
FY2008
Purchased Water - MWDOC
$ 3,350
$ 3,800
$ 3,350
$ 3,400
Purchased Water- OCWD
2,929
2,880
3,280
3,280
Utilities
1,094
922
872
922
Salaries & Benefits
3,302
3,712
3,827
3,799
Equipment Maintenance & Replacement
345
341
348
417
Other O &M
3,013
3,453
3,444
3,593
Total
$14,033
$15,108
$15,121
$15,411
The City has seen a 29% increase in the average unit cost of purchased water from the
Municipal Water District of Orange County (MWDOC) and a 37% increase in the
average unit cost of purchased water from the Orange County Water District (OCWD)
since 2005. O &M expenditures apart from purchased water and utilities include salaries
and benefits, equipment maintenance and replacement, and other O &M. Other O &M
includes the general fund service charge, minor capital expenditures, chemicals, and other
supplies.
Table ES -2 presents the projected O &M expenditures for the City for the current fiscal
year and the financial plan period FY2010 through FY2014.
REBDAK. city of Newport Beach, CA
CONSULTING Water Utility Financial Plan ES -2
•. •' .o..,.,e. ,....�,,.. w, 5317004
Executive
Table: ES -2: Projected Operations & Maintenance Expenditures (in thousands)
Current 1 2 3 4 5
Description
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
Purchased Water - MWDOC
$ 3,354
$ 4,931
$ 5,991
$ 6,440
$ 6,762
$ 7,100
Purchased Water- OCWD
3,857
3,922
3,947
4,081
4,232
4,351
Utilities
1,325
1,322
1,440
1,549
1,692
1,851
Salaries & Benefits
4,152
4,319
4,491
4,671
4,858
5,052
Equipment Maintenance & Replacement
423
444
467
490
514
540
Other O&M
3,579
3,856
4,159
4,491
4,853
5,250
Total
$16,690
$ 18,794
$ 20,494
$ 21,722
$ 22,911
$ 24,144
The City's O &M expenditures are projected to increase by over $7 million, or 45 %, from
FY2009 to FY2014. Purchased water costs alone account for 57% of this increase.
Purchased water costs are projected to increase by $3.7 million from MWDOC and $0.5
million from OCWD from FY2009 through FY2014. These costs, combined with Other
O &M, which is partially determined by the total amount of water purchased, account for
nearly 80% of the total increase.
Capital Improvement Program Financing
Since FY2005, the City has cash - financed all of its capital improvement needs. The City
has developed a 30 -year capital improvement program as part of its 2009 Water Master
Plan. This CIP totals approximately $167.6 million in escalated dollars at 4% per annum.
The City will continue to finance its CIP on a pay -as- you -go basis during the financial
plan period. Table ES -3 presents the financing plan for the City's CIP for the current
fiscal year and the financial plan period FY2010 through FY2014. Future capital
financing will be accounted for in the City's Capital Fund. An additional monthly capital
charge will be assessed by meter size. This capital charge will be the primary source of
revenue for the Capital Fund and be used to pay for cash - financed capital and debt
service.
Table ES -3: Capital Improvement Program Financing (in thousands)
Current 1 2
3 4
5
Description FY2009 FY2010 FY2011
FY2012 FY2013
FY2014
Capital Projects $ 1,600 $ 3,210 $ 1,830
$ 3,542 $ 2,700
$ 1,033
Cash - Financed Capital Projects 1,600 3,210 1,830
3,542 2,700
1,033
Debt- Financed Capital Projects - - -
-
-
Total Capital Projects Funded $ 1,600 $ 3,210 $1,830
$ 3,542 $ 2,700
$1,033
Table ES -4 presents the two remaining debt service payments for the 1999 Refunding of
Water Revenue Bonds for the financial plan period FY2010
through FY2014.
. •.; REFDAK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan
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[ES-3]
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Executive Sum
Table ES-4: Projected Debt Service Payments (in thousands)
Current
5
Description FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Debt Service $ 1,618 $ 130
Reserve Requirements
The following reserves are commonly maintained by utilities, and are recommended by
Red Oak —at a minimum —to insulate the City from financial volatility.
Operating Stabilization Reserve (Operating Fund)
The City does not currently maintain an operating stabilization reserve. Red Oak
recommends that the City maintain a reserve equivalent to 180 days of its operating
budget, or 50 %. This reserve level also provides a buffer period of 24 months at a 25%
loss rate. Funds collected in excess of the operations stabilization reserve target would be
available to offset future rate adjustments while extended reserve shortfalls would be
recovered from future rate increases.
Contingency Reserve (Capital Fund)
The City currently maintains a contingency reserve equivalent to 35% of its annual
budget, which is based on a historical approximation of capital replacement needs in the
event of a catastrophe. In order to determine the appropriate level of emergency capital
replacement reserves, the City should conduct a criticality assessment of its system
facilities. This assessment involves quantifying the probability of its facilities being
impaired, the level of impairment, and the cost of replacement should a catastrophe
occur. Red Oak recommends that the City conduct such an assessment; however, if
resources are limited, the City may wish to set its contingency reserve level based on an
alternative method. Based on direction from the City's staff, Red Oak has evaluated a
contingency reserve that parallels the annual revenue anticipated to be recovered through
the proposed capital charge. Red Oak believes this amount may provide a sufficient
reserve against unanticipated replacements or repairs. By FY2014, the target
contingency reserve will be approximately $4 million.
Current Financial Outlook
Based on the City's increasing O &M expenditures, capital financing needs, and proposed
reserve requirements, current revenue are insufficient. Figure ES -1 presents the current
fiscal year and the five -year financial outlook for FY2010 through 2014 with no rate
revenue increases. Under current rate revenue, the City will be unable to maintain a
positive balance in the combined Operating Fund and Capital Fund by FY2011.
REMAK
City of Newport Beach, CA
•• • �' CONSULTING water Utility Financial Pla<.. n ES-0
• • .. • ..,..,,......,....... 5317004
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Executive Summary
Figure ES -2: Five -Year Financial Plan (in thousands)
2G09
®Cash.FundwdCaptlal
—Op.re n9EVpnndM .
–r-
i
2010 2011 2012 2013 2014
Etk$n9Dahl Svnica Purchased Watat -OCvVD Pmchasad Wat« -MW000
�F Ra•Mnuec ��� TWQA Racetvae Endngaalance
Current Fixed / Variable Rate Revenue
The City currently collects approximately 90% of its rate revenue through its commodity
charge and the remaining 10% through its monthly service charge. Table ES -5 presents
the current composition of the City's rate revenue. A high proportion of variable revenue
is potentially favorable in terms of affordability and conservation as customers that use
less water are rewarded with lower bills. A high proportion of variable revenue,
however, is less favorable in terms of revenue stability as less revenue is secure when
water use is volatile.
Table ES -5: Current (FY2009) Fixed I Rate Variable Revenue
Rate Revenue Source
FY2009 Percent Share
Commodity Charge
Monthly Service Charge
$14,938 90%
1,640 10%
Total Rate Revenue
$ 16,578
Proposed Fixed /Variable Revenue
The City is currently exceeding the requirements of California Urban Water Conservation
Council's (CUWCC) Best Management Practice (BMP) 1 l by 20 %. BMP 11 states that
RE ®AK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan ES-6
. ,...e. o....�......... 5317004
Executive Summary
in order for water rates to qualify as `conservation rates,' variable revenue must be at
least 70% of total rate revenue. Red Oak recommends that in order to reduce revenue
instability generated by the City's disproportionate share of variable revenue, the City
should gradually reduce the commodity charge's share of total rate revenue to slightly
more than 70% by FY2014.1 Table ES -6 presents the proposed blend of fixed and
variable rate revenue for the financial plan period FY2010 through FY2014. The
proposed blends of fixed and variable revenue will help the City maintain revenue
stability while still meeting the requirements of California CUWCC's BMP 11. Further,
by increasing the proportion of revenue that is collected through fixed charges, the City
can reduce its reliance on revenue collected through more aggressive conservation -based
rates that it is planning to adopt in the future.
Table ES -6: Proposed Fixed I Variable Revenue ($ in thousands)
Rate Revenue
Total Rate Revenue
Fixed Revenue Share
Variable Revenue Share
Fixed Revenue - Monthly Service Charge
Variable Revenue - Commodity Charge
Projected Water Sales (Million HCF)
Current
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
$ 16,578
$ 19,479
$ 23,723
$ 26,569
$ 28,916
10%
21 %
27%
28%
28%
90%
79%
73%
72%
72%
$ 1,640
$ 4,084
$ 6,469
$ 7,469
$ 8,218
$ 14,938
$ 15,394
$ 17,253
$ 19,100
$ 20,698
7.182
Variable Rate ($ /HCF) $ 2.08
Note: Projected Water Sates assumes 6% water loss rate.
7,002 7,002 7,002 7,002
$2.20 $2.46 $2.73 $2.96
$ 30,130
28%
72%
$ 8,536
$ 21,594
7,002
$ 3.08
Variable revenue projections rely on the City's projected sales of approximately 7 million
HCF for FY2010 through FY2014. Projected sales, however, will be revised to account
for a conservation rate structure, during the second phase of the Study. Adjustments to
these projections will vary according to how aggressive the conservation rate structure is.
Proposed Meter Equivalency Schedule
The current meter equivalency schedule for the City's monthly service charge does not
adequately reflect the relative costs of reading, maintaining, and replacing different meter
sizes. Further, the current schedule does not account for the relative flow capacities of
different meter sizes, which often serves as a basis for the relative amounts of meter -
based charges. Red Oak recommends using the American Water Works Association's
(AW WA) estimate of meter flow capacity from the M6 manual as the basis for the City's
meter equivalency schedule. These flow estimates indicate the relative amounts of water
To meet the requirements of BMP 11, the City should closely monitor its revenue to ensure that fixed charges do not
exceed 30 percent of its revenue. This is important since the effects of conservation will reduce volume - related
charges. As the City implements tiered water rates, it may consider requesting and exemption from the requirements of
KE ®AK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan ES -7
...... . 5317 004
Executive Summary
that can flow through each meter size, expressed in gallons per minute. These relative
capacities serve as an empirical basis for allocating costs among different meter sizes and
provide a more defensible rationale for the determination of relative meter charges.
California's Proposition 218 and Government Code §54999 both require proportionality
in the determination of water rates, which the proposed meter equivalency schedule helps
to address. Table ES -7 presents the current and proposed meter equivalency schedules.
Table ES -7: Current & Proposed Meter Equivalency Schedules
Meter Size
Number of
Meters
Meter Equivalency Ratio
Current Proposed
314"
17,445
1.00
1.00
1"
6,762
1.22
1.67
1112"
495
1.56
3.33
2"
1,373
2.11
5.33
3"
48
4.00
10.00
4"
80
5.67
16.67
6"
28
8.56
33.33
8"
14
10.00
53.33
10"
0
10.00
95.87
12"
0
10.00
154.20
Proposed Rates
In order to implement the proposed financial plan, the City should adjust its current
monthly service charge and commodity charge to the rates presented below for the
financial plan period FY2010 through FY2014. These rates will allow the City to meet
the revenue targets presented in the five -year financial plan, which will cover its rising
expenditures for purchased water and other O &M items, capital improvement financing
needs, and proposed reserve requirements. These rates will also meet the proposed
transition to a composition of rate revenue in which fixed charges account for slightly
less than 30% of total rate revenue, allowing for more revenue stability. Tables ES -8
through ES -11 present the proposed rates for the financial plan period FY2010 through
FY2014. Note that.these rates are anticipated to be implemented on January 1 of each
year.
Table ES-8: Current & Proposed Commodity Charges
Current 1 2 3 4 5
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Commodity Charge $ 2.08 $ 2.20 $ 2.46 $ 2.73 $ 2.96 $ 3.08
RE13DAK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan F��]
. --i.. o .............. 5317004
Executive Summary
Table ES -9: Current & Proposed Monthly Service Charges
Table ES -11: Current & Proposed Combined Fixed Charges
Current
1
2
3
4
5
Monthly Service Charge
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
3/4"
$ 4.50
$ 1.18
$ 5.76
$ 7.53
$ 8.78
$ 9.15
1"
5.50
1.97
9.60
12.55
14.63
15.24
11/2"
7.00
3.94
19.20
25.09
29.26
30.49
2"
9.50
6.31
30.72
40.14
46.81
48.78
3"
18.00
11.83
57.61
7527
87.77
91.46
4"
25.50
19.71
96.01
125.45
146.28
152.43
6"
38.50
39.42
192.02
250.91
292.57
304.85
8"
45.00
63.07
307.23
401.45
468.10
487.76
10"
45.00
113.36
552.25
721.60
841.42
876.75
12"
45.00
182.34
888.28
1,160.69
1,353.41
1,410.24
Table ES -10:
Proposed
Capital Charges
Current
1
2
3
4
5
Capital Charge
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
314"
-
$7.08
$7.33
$7.59
$7.85
$8.13
1"
-
11.80
12.22
12.65
13.09
13.55
11/2"
-
23.61
24.43
25.29
26.18
27.09
2"
-
37.77
39.10
40.46
41.88
43.35
3"
-
70.83
73.30
75.87
78.53
81.27
4"
-
118.04
122.17
126.45
130.88
135.46
6"
-
236.09
244.35
252.90
261.75
270.91
8"
-
377.74
390.96
404.64
418.80
433.46
10"
-
678.98
702.75
727.34
752.80
779.15
12"
-
1,092.13
1,130.35
1,169.92
1,210.86
1,253.24
Table ES -11: Current & Proposed Combined Fixed Charges
Current
1
2
3
4
5
Combined Fixed Charges FY2009
FY2010
FY2011
FY2012
FY2013 FY2014
314"
$ 4.50
$ 8.27
$ 13.09
$15.11
$ 16.63 $ 17.27
1"
5.50
13.78
21.82
25.19
27.72
28.79
11/2'
7.00
27.55
43.64
50.38
55.43
57.58
2"
9.50
44.08
69.82
80.61
88.69
92.12
3"
18.00
82.65
130.91
151.14
166.30
172.73
4"
25.50
137.75
218.18
251.90
277.16
287.88
6"
38.50
275.50
436.37
503.81
554.32
575.76
8"
45.00
440.80
698.19
806.09
886.91
921.22
10"
45.00
792.34
1,254.99
1,448.95
1,594.22 1,655.90
12"
45.00
1,274.47
2,018.64
2,330.61
2,564.27 2,663.48
RE®AlC
CONSULTING
City of Newport Beach. CA
Water Utility Financial Plan
[ES-9]
'.. •' . a...e... ...<o........
5317004
Executive Summary
Customer Bill Impact
Figure $S -3 presents the single— family residential monthly bill impact distribution for
FY2010 rates. This bill distribution is based on the City's calendar year 2007
consumption history. The blue columns indicate the percentage of single - family
residential monthly bills that will increase by the corresponding amount on the horizontal
axis, assuming consumption is similar to calendar year 2007. The red line indicates the
cumulative percentage of monthly bills at each amount of change in bill. For example,
the figure shows that 67% of monthly bills will increase by no more than $10. It also
shows that approximately 15% of monthly bills will increase by between $4 and $5.
Note that over 90% of monthly bills will increase by no more than $15.
Figure ES-3: FY2010 Single - Family Residential Customer Monthly Bill Impact
16% IDO-A
14%
12%
10%
m
4
N
a
e%
O
C
u
6%
6
4%
2%%.
0%
00%
60%
70%
67% of mondity bills will
inaeasaby nolnaetlian 60%
510
s0Y
40%
30%
20%
II�I�IIe■..._ -- --- -._�
0%
o%
.o ��unammnm �mm
N N VVl N T N N tlV1 N N' N N N N N N N N N N N
mange Inmomhry Bin
u
C
e
6
i
U
RE ®AK City of Newport Beach. CA
CONSULTING Water Utility Financial Plan ES -10
' • _ . • , I ... 1. 5317004
Section 1
Introduction
1. Introduction
1.1. Scope
The City of Newport Beach Utilities Division (the City) retained Red Oak Consulting to
conduct a water rate study (the Study). This study includes the development of a five-
year financial plan, cost -of- service analysis, and development of a conservation rate
structure. For purposes of expediting the adoption of new rates, the Study has been
divided into two phases:
L The development of the financial plan, the allocation of fixed and variable
revenue, and the proportioning of the monthly service charge by meter size; and
2. The redesign of the commodity charge from a uniform rate to a conservation rate
structure.
This report documents the first phase of the Study, including the methodology used to
develop the financial plan, the policy decisions reached, the proposed water rates, and the
customer bill impacts. A separate report will be prepared for the second phase of the
study upon its completion.
1.2. Background
The City of Newport Beach Utilities Division currently serves a population of over
86,000 within a service area of approximately fifty square miles. It is located on the
Pacific coast of California, in Orange County, and surrounded by Huntington Beach and
Costa Mesa to the north, Laguna Beach to the South, and Irvine to the east. The City
currently has over 26,300 active connections and delivers over 18,000 acre feet (AF) of
water per year on average. The City owns and operates three reservoirs: Big Canyon
Reservoir (600 AF), Spyglass Hill Reservoir (45 AF), and 16'h Street Reservoir (9.2 AF).
REIIDAK City of Newport Reach. CA
"•• CONSULTING Water utility Financial Plan 1 -1
..,.,.......... ... 5317004
Section 2
Financial Plan
2. Financial Plan
In order to maintain the financial viability of the City's water system, Red Oak, with the
assistance of the City's staff, has prepared a financial plan for the five -year period from
fiscal year ending (FY) 2010 through FY2014. This financial plan includes the
development of the City's annual revenue requirement, a financing plan for its capital
improvement program (CIP), and review and recommendations for the City's reserve
policies.
Red Oak used its proprietary electronic financial planning model, eForecast, to determine
the appropriate amount of revenue necessary for the City to meet all of the above
requirements.
2.1. Funds
The City currently maintains a single fund for its water operations, capital improvement
financing, and reserves. Based on direction from the City's staff, Red Oak has created a
separate fund for capital- related expenditures, which will be referred to as the `Capital
Fund.' The financial planning model isolates this fund from the City's Operating Fund in
order to evaluate the financial viability of each fund separately. The City, with the
assistance of Red Oak, has developed target reserve levels for each fund, which will be
explained in detail below.
2.2. Revenue Requirement
The City's revenue requirement is the total amount of revenue it must collect in order to
meet its operations and maintenance (O &M) expenditures, debt service payments, and
cash - financed capital expenditures. This revenue is collected through water rates and
does not include revenue from incidental fees, charges, or other non- operating revenue.
The City's O &M expenditures are accounted for in the Operating Fund while debt
service payments and cash - financed capital are accounted for in the Capital Fund.
2.2.1. Operations & Maintenance
The City's operations & maintenance expenditures have steadily increased over the past
four years, since its most - recent rate increase in FY2005. Table 2 -1 presents the City's
historical O &M expenditures for FY2005 through FY2008:
RE ®AK City of Newport Beach, CA
• CONSULTING Water Utility Financial Plan 2 -1
• .. • .., >. >........>........ 5317004
Section 2
Financial Plan
Table 2 -1: Historical Operations & Maintenance Expenditures (in thousands)
Description.
FY2005
FY2006
FY2007
FY2008
Purchased Water - MWDOC
$ 3,350
$ 3,800
$ 3,350
$ 3,400
Purchased Water -OCWD
2,929
2,880
3,280
3,280
Utilities
1,094
922
872
922
Salaries & Benefits
3,302
3,712
3,827
3,799
Equipment Maintenance & Replacement
345
341
348
417
Other O &M
3,013
3,453
3,444
3,593
Total
$14,033
$15,108
$ 15,121
$15,411
2.2.1.1. Purchased Water Costs
The largest components of the City's O &M expenditures are its purchased water costs
and associated O &M, which are encompassed by the `Other O &M' category in Table
2 -1. The City currently obtains its water from two major sources: the Municipal Water
District of Orange County ( MWDOC), which imports its water from the State Water
Project and the Colorado River Aqueduct through the Metropolitan Water District of
Southern California (MET), and the Orange County Water District (OCWD), which
manages the Orange County groundwater basin. Variations in purchased water costs
occur year -to -year based on the City's basin pumping percentage (BPP), which is the
percentage of the City's annual demand that can be pumped from the basin; weather
conditions; and to a lesser extent, the economy and growth.
Table 2 -2 presents the average unit cost of purchased water per AF by the City's two
major sources for FY2005 through FY2008. Note that the average cost per AF is the
total amount of charges paid to each agency, divided by the amount of water purchased.
The total amount of annual charges for MWDOC includes the cost of treated water, the
capacity charge, the readiness -to -serve charge, and the meter charge. The total amount of
annual charges for OCWD includes the cost of the replenishment assessment and
annexation fee.
Table 2 -2: Historical Average Unit Cost of Purchased Water per AF
Description FY2005 FY2006- FY2007 FY2008
Purchased Water - MWDOC ($ /AF) $ 492 $ 514 $ 616 $ 597
Purchased Water- OCWD ($ /AF) 233 255 344 279
The City has seen a 29% increase in the average cost of purchased water from MWDOC
and a 37% increase in the average cost of purchased water from OCWD since 2005.
Based on information obtained from MWDOC and OCWD, Red Oak projects the
following average unit costs of purchased water per AF in Table 2 -3. These projected
unit costs are based on a projected purchased water amount of 17,100 AF per year.
REBQAK City of Newport Beach, CA
CONSULTING Water Utifity Financial Plan 2 -2
......... ar ...call .�..�. 5317004
Section 2
Financial Plan
Table 2-3: Projected Average Unit Cost of Purchased Water per AF
Current
Description FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Purchased Water— MWDOC ($ /AF) $ 633 $ 759 $ 922 $ 966 $1,014 $ 1,065
Purchased Water —CCWD ($ /AF) 319 361 364 382 397 408
Note that the projected unit cost of purchased . water from MWDOC increases by over
65% and the projected unit cost of purchased water from OCWD increases by over 25%
from FY2009 through FY2014. Rising MWDOC costs can partially be attributed to the
State of California's third consecutive year of drought and diminished supplies from the
Bay Delta as part of efforts to protect endangered species. Purchased water costs from
OCWD vary year -to -year based on the City's BPP, which is a function of the Orange
County Groundwater Basin's rate of recharge. The unit costs also fluctuate due to the
proportions of total water purchased from each of the City's two sources.
2.2.1.2. Utilities
Utilities costs include electricity costs and telecommunications costs. The majority of
these costs depend on the total amount of water pumped from the Orange County
groundwater basin and have therefore been projected based on the projected amount of
water that will be pumped.
2.2.1.3. Other O &M
O &M expenditures apart from purchased water and utilities include salaries and benefits,
equipment maintenance and replacement, and other O &M. Other 0 &M includes the
general fund service charge, minor capital expenditures, chemicals, and other supplies.
Based on the historical changes in costs for these items and discussion with City staff,
Red Oak estimates the following annual escalation factors for these O &M expenditures:
• Salaries & Benefits — 4%
• Equipment Maintenance & Replacement — 5%
• Other O &M
• General Fund Service Charge — 4%
• Minor Capital Expense — 0%
• Chemicals & Supplies— 11%
2.2.1.4. Projected Operations & Maintenance Expenditures
Table 2 -4 presents the projected O &M expenditures for the City for the current fiscal
year and the financial plan period FY2010 through FY2014.
REIIDA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 2 -3
. ,...e. e...,�e,..,..,. 5317004
Section 2
Financial Plan
Table 24: Projected Operations & Maintenance Expenditures (in thousands)
Description
Current
FY2009
1
FY2010
2
FY2011
3
FY2012
4
FY2013
5
FY2014
Purchased Water - MWDOC
$ 3,354
$ 4,931
$ 5,991
$ 6,440
$ 6,762
$ 7,100
Purchased Water- OCWD
3,857
3,922
3,947
4,081
4,232
4,351
Utilities
1,325
1,322
1,440
1,549
1,692
1,851
Salaries & Benefits
4,152
4,319
4,491
4,671
4,858
5,052
Equipment Maintenance & Replacement
423
444
467
490
514
540
Other O &M
3,579
3,856
4,159
4,491
4,853
5,250
Total
$ 16,690
$18,794
$ 20,494
$ 21,722
$ 22,911
$ 24,144
The City's O &M expenditures are projected to increase by over $7 million, or 45 %, from
FY2009 to FY2014. Purchased water costs alone account for 57% of this increase.
Purchased water costs are projected to increase by $3.7 million from MWDOC and $0.5
million from OCWD from FY2009 through FY2014. These casts, combined with Other
O &M, which is partially determined by the total amount of water purchased, account for
nearly 80% of the total increase.
2.2.2. Capital Improvement Program Financing
2.2.2.1. Historical Capital Improvement Program Financing
Since FY2005, the City has cash - financed all of its capital improvement needs. Table 2 -5
presents a summary of capital improvement financing from FY2005 through FY2008.
Table 2 -5: Historical Capital Improvement Program Financing (in thousands)
Description
FY2005
FY2006
FY2007
FY2008
Capital Projects
$ 8,634
$ 7,794
$ 4,924
$ 5,363
Cash - Financed Capital Projects
8,634
7,794
4,924
5,363
Debt - Financed Capital Projects
-
-
-
-
Total Capital Projects Funded
$ 8,634
$ 7,794
$ 4,924
$ 5,363
2.2.2.2. Water Master Plan
The City has developed a 30 -year capital improvement program as part of its 2009 Water
Master Plan. Table 2 -6 presents the 30 -year CIP for the City as indicated in the 2009
Water Master Plan. The CIP is presented in annually escalated dollars to account for
rising construction costs. Red Oak believes that the escalation rate of 4 %, used by the
City to develop its CIP is reasonable and consistent with Engineering New Record (ENR)
construction cost index. Note the average annual capital expenditure for the 30 -year CIP
is approximately $5.6 million compared with $2.5 million for the five -year financial plan
period FY2010 through FY2014.
RE ®AK city of Newport Beach, CA
• CONSULTING Water Utility Financial Plan 2 4
�.............. 5317004
Section 2
Financial Plan
Table 2-6: 30 -Year Capital Improvement Program (in thousands)
Year
Capital
Expenditure
Year
Capital
Expenditure
FY2009
$ 1,600
FY2024
$ 5,279
FY2010
3,210
FY2025
7,905
FY2011
1,830
FY2026
7,090
FY2012
3,542
FY2027
10,534
FY2013
2,700
FY2028
1,643
FY2014
1,033
FY2029
12,458
FY2015
3,610
FY2030
7,694
FY2016
8,408
FY2031
5,518
FY2017
4,890
FY2032
7,255
FY2018
5,382
FY2033
-
FY2019
5,597
FY2034
4,315
FY2020
5,821
FY2035
- 7,645
FY2021
4,933
FY2036
7,950
FY2022
4,975
FY2037
8,268
FY2023
7,584
FY2038
8,599
15 -Year Total
$ 65,115
30 -Year Total
$167,268
Note: Project costs are escalated at a rate of 4% annually
2.2.2.3. Future Capital Improvement Program Financing
The City will continue to finance its CIP on a pay -as- you -go basis during the financial
plan period. Table 2 -7 presents the financing plan for the City's CIP for the current fiscal
year and the financial plan period FY2010 through FY2014. Future capital financing will
be accounted for in the City's Capital Fund. An additional monthly capital charge will be
assessed by meter.size. This capital charge will be the primary source of revenue for the
Capital Fund and be used to pay for cash - financed capital and debt service.
Table 2 -7: Capital Improvement Program Financing (in thousands)
Current 1 2 3 4 5
Description
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
Capital Projects
$ 1,600
$ 3,210
$1,830
$ 3,542
$ 2,700
$ 1,033
Cash - Financed Capital Projects
1,600
3,210
1,830
3,542
2,700
1,033
Debt - Financed Capital Projects
-
-
-
-
-
Total Capital Projects Funded
$1,600
$ 3,210
$ 1,830
$ 3,542
$ 2,700
$1,033
2.2.2.4. Historical and Future Debt Service Payments
Table 2 -8 presents the City's debt service payments from FY2005 through FY2008.
These payments are among the six final payments for the 1999 Refunding of Water
Revenue Bonds.
REQDAK City of Newport beach, CA
CONSULTING Water Utility Financial Plan 25
..,.,..... .., 5317004
Section 2
Financial Plan
Table 2-8: Debt Service Payments (in thousands)
Description FY2005 FY2006 FY2007 FY2008
Debt Service $ 1,653 $ 1,650 $ 1,649 $ 1,619
Table 2 -9 presents the two remaining debt service payments for the 1999 Refunding.
Table 2 -9: Projected Debt Service Payments (in thousands)
Current
Description FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Debt Service $1,618 $ 130 - - - -
2.3. Reserve Requirements
Reserve requirements are funds set aside for precautionary purposes such as for revenue
stabilization, rate stabilization, or emergency capital replacement. These funds are
typically required to maintain a predetermined balance or an amount based on annual
operating results. The City currently maintains two reserves and a minimum capital
contribution, referred to as the `designated reserve':
• System Reserve– 35% of annual budget
• Stabilization Reserve – 25% of annual budget
• Designated Reserve –10% of annual budget
The following reserves are commonly maintained by utilities, and are recommended by
Red Oak —at a minimum —to insulate the City from financial volatility.
2.3.1. Operating Stabilization Reserve (Operating Fund)
An operating stabilization reserve is established primarily to maintain adequate levels of
cash between the time expenses are incurred and revenue are received. It may also be
used to insulate a utility from volatility in some operating expenditures such as for
energy, and provide time for the utility to adjust rates. Utilities that bill monthly typically
maintain a reserve equivalent to 45 to 90 days of operating expenditures, while utilities
that bill bimonthly typically maintain a reserve equivalent to 90 to 180 days of operating
expenditures. Seasonality is also a factor in determining the appropriate reserve level;
utilities that have strong seasonal influences to their demand typically maintain larger
reserves.
The City does not currently maintain an operating stabilization reserve. Red Oak
recommends that the City maintain a reserve equivalent to 180 days of its operating
budget, or 50 %. This reserve level also provides a buffer period of 24 months at a 25%
loss rate. Funds collected in excess of the operations stabilization reserve target would be
available to offset future rate adjustments while extended reserve shortfalls would be
recovered from future rate increases.
RE ®AK city of Newport Beach, CA
CONSULTING Water utility Financial Plan 2 -6
... . ,,.. .... ............. 5317004
Section 2
Financial Plan
2.3.2. Contingency Reserve (Capital Fund)
A contingency reserve is established to fund the replacement or repair of system facilities
in the event that these facilities are impaired due to a catastrophe. The reserve may also
be used to insulate against early and/or unanticipated capital replacement costs.
The City currently maintains a contingency reserve equivalent to 35% of its annual
budget, which is based on a historical approximation of capital replacement needs in the
event of a catastrophe. In order to determine the appropriate level of emergency capital
replacement reserves, the City should conduct a criticality assessment of its system
facilities. This assessment involves quantifying the probability of its facilities being
impaired, the level of impairment, and the cost of replacement should a catastrophe
occur. Red Oak recommends that the City conduct such an assessment; however, if
resources are limited, the City may wish to set its contingency reserve level based on an
alternative method. Based on direction from the City's staff, Red Oak has evaluated a
contingency reserve that parallels the annual revenue anticipated to be recovered through
the proposed capital charge. Red Oak believes this amount may provide a sufficient
reserve against unanticipated replacements or repairs. By FY2014, the target
contingency reserve will be approximately $4 million.
2.4. Five -Year Financial Plan
2.4.1. Current Financial Outlook
Based on the City's increasing O &M expenditures, capital financing needs, and proposed
reserve requirements, current revenue are insufficient. Figure 2 -1 presents the current
fiscal year and the five -year financial outlook for FY2010 through FY2014 with no rate
revenue increases. Each column is broken into individual annual expenditures, indicated
by a different color (see legend). The red line represents annual revenue, the black line
represents ending balances, and the orange line represents target reserves. Under current
rate revenue, the City will be unable to maintain a positive balance in the combined
Operating Fund and Capital Fund by FY2011.
RE ®AK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 2 -7
. ,...... , ......... 5317004
Section 2
Financial Plan
Figure 2 -1: Five -Year Financial Outlook with No Revenue Increases (in thousands)
$30.000
120.000
$10.000
$0
410,000
-E20p00
- $30.000
-f40.000
2009 2010 2W11 2012 2013 2014
r�
'E
—C.5MFuiWedCapital Eckdng Debt S_wice �PerchoadWatsr -OCM eeee mhpsed VVt -MWDOO
�Operating Erpendtures y— P,r+enues — ►— Tergdaesenes —t Endm913^1ence
2.4.2. Proposed Five -Year Financial Plan
Red Oak, with the assistance of the City's staff, has developed a five -year financial plan
for the period FY2010 through FY2014. Based on the direction of the City's Finance
Committee, this financial plan has been developed such that rate shock to customers is
minimal, capital projects are financed only by cash, and reserves are tnct by FY2014.
Table 2 -10 presents the five -year financial plan for the City's Operating Fund.
RE ®AK City of Newport Beach, CA
• CONSULTING Water Utility Financial Plan F2 8
.. ,...1., ......... 5317004
Section 2
Financial Plan
Table 2 -10: Operating Fund Five -Year Financial Plan (in thousands)
Current 1 2 3 4
5
Operating Fund FY2009 FY2010 FY2011 FY2012 FY2013
FY2014
Commodity Charge Revenue $ 14,938 $ 15,394 $ 17,253 $ 19,100 $ 20,698
$ 21,594
Monthly Service Charge Revenue 1,640 584 2,847 3,720 4,337
4,519
Miscellaneous Revenue 439 439 439 439 439
439
Interest Income 291 117 120 143 239
377
Total Revenue 17,309 16,535 20,660 23,403 25,714
26,930
Operations & Maintenance 9,480 9,941 10,557 11,201 11,917
12,693
Purchased Water- MWDOC 3,354 4,931 5,991 6,440 6,762
7,100
Purchased Water -OCWD 3,857 3,922 3,947 4,081 4,232
4,351
Total O &M 16,690 18,794 20,494 21,722 22,911
24,144
Capital Contribution (3,300) - - - -
-
Annual Surplus / (Deficiency) (2,682) (2,258) 166 1,681 2,803
2,785
Beginning Balance 9,665 6,983 4,725 4,891 6,572
9,374
Ending Balance $ 6,963 $ 4,725 $ 4,891 $ 6,572 $ 9,374
$ 12,160
Target Reserves $ 8,345 $ 9,397 $ 10,247 $ 10,861 $ 11,456
$ 12,072
Note that cash - financed capital and debt service are accounted for in the Capital Fund.
The removal of these items has a corresponding decrease in the rate revenue required and
accounted for in the Operating Fund, as seen in FY2010. Total rate revenue for the
combined Operating Fund and Capital Fund, however, increases year -to -year to meet
increasing O &M expenditures, capital improvement financing needs, and the proposed
reserve requirements. The City's proposed Operating Stabilization reserve is met by
FY2014.
Table 2 -11 presents the five -year financial plan for the City's Capital Fund.
REQDAK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 2 -9
...... ., ....... ... .,, 5317004 0 F
Section 2
Financial Plan
Table 2 -11: Capital Fund Five -Year Financial Plan (in thousands)
Current 1 2 3 4 5
Capital Fund FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Capital Charge Revenue - $ 3,500 $ 3,623 $ 3,749 $ 3,881 $ 4,016
Capital Contribution 3,300 - - -
Interest Income 1 3 29 55 89 181
Total Revenue 3,301 3,503 3,651 3,804 3,969 4,198
Cash - Funded Capital 1,600 3,210 1,830 3,542 2,700 1,033
Existing Debt Service 1,618 130 - - - -
New Debt Service - -
Total Debt Service 1,618 130 -
Annual Surplus /(Deficiency) 84 163 1,821 262 1,269 3,165
Beginning Balance - 84 247 2,069 2,331 3,601
Ending Balance $ 84 $ 247 $ 2,069 $ 2,331 $ 3,601 $ 6,765
Target Reserves $ 4,000 $ 3,500 $ 3,623 $ 3,749 $ 3,881 $ 4,016
Rate Revenue generated by the proposed Capital Charge is accounted for in the Capital
Fund. This source of revenue, which begins in FY2010, is collected to recover the costs
of cash - financed capital projects and debt service for the 1999 Refunding of Water
Revenue Bonds. The target contingency reserve, which is met by FY2014, is based on
the anticipated annual capital charge revenue, which will be approximately $4 million in
FY2014.
Table 2 -12 presents the five -year financial plan for the City's combined water fund.
REBDAK City of Newport Beach, CA -
' CONSULTING Water Utility Financial Plan 2 -10
.......o. o . ... ......... 5317004 �/
Section 2
Financial Plan
Table 2 -12: Combined Water Fund Five -Year Financial Plan (in thousands)
The City anticipates an annual deficiency of approximately $2.6 million for the current
fiscal year. The proposed financial plan eliminates this annual deficiency by FY2011.
Reserves are drawn down in FY2009 and FY2010 in order to minimize the rate shock
associated with the necessary rate revenue increases.
Figure 2 -2 presents a graphical representation of the Combined Water Fund's five -year
financial plan. Each column is separated into individual annual expenditures, indicated
by a different color (see legend). The red line represents annual revenue, the black line
represents ending balances, and the orange line represents target reserves. Note that
target reserves are not met until FY2014. Rate revenue is gradually increased throughout
the five -year financial plan such that `rate shock' to customers is reduced.
: RE ®AK City of Newport Beach, CA
• CONSULTING Water Utility Financial Plan 2 -11
. ,� .1- e ............. 5317004
Current
1
2
3
4
5
Combined Water Fund
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
Rate Revenue
$ 16,578
$ 19,479
$ 23,723
$ 26,569
$ 28,916
$ 30,130
Miscellaneous Revenue
439
439
439
439
439
439
Interest Income
293
120
149
198
328
558
Total Revenue
17,310
20,039
24,311
27,207
29,683
31,127
Operations & Maintenance
9,480
9,941
10,557
11,201
11,917
12,693
Purchased Water - MWDOC
3,354
4,931
5,991
6,440
6,762
.7,100
Purchased Water- OCWD
- 3,857
3,922
3,947
4,081
4,232
4,351
Total O&M
16,690
16,794
20,494
21,722
22,911
24,144
Cash - Funded Capital
1,600
3,210
1,830
3,542
2,700
1,033
Existing Debt Service
1,618
130
-
-
New Debt Service
-
-
-
-
-
-
Total Debt Service
1,618
130
0
0
0
0
Total Expenditures
19,908
22,133
22,324
25,264
25,611
25,177
Annual Surplus / (Deficiency)
(2,598)
(2,095)
1,987
1,943
4,072
5,950
Beginning Balance
9,665
7,067
4,973
6,960
8,903
12,975
Ending Balance
$ 7,067
$ 4,973
$ 6,960
$ 8,903
$12,975
$18,925
Target Reserves
$ 12,345
$12,897
$ 13,870
$ 14,610
$ 15,336
$ 16,088
The City anticipates an annual deficiency of approximately $2.6 million for the current
fiscal year. The proposed financial plan eliminates this annual deficiency by FY2011.
Reserves are drawn down in FY2009 and FY2010 in order to minimize the rate shock
associated with the necessary rate revenue increases.
Figure 2 -2 presents a graphical representation of the Combined Water Fund's five -year
financial plan. Each column is separated into individual annual expenditures, indicated
by a different color (see legend). The red line represents annual revenue, the black line
represents ending balances, and the orange line represents target reserves. Note that
target reserves are not met until FY2014. Rate revenue is gradually increased throughout
the five -year financial plan such that `rate shock' to customers is reduced.
: RE ®AK City of Newport Beach, CA
• CONSULTING Water Utility Financial Plan 2 -11
. ,� .1- e ............. 5317004
505.000
$30,000
525.000
520.070
S150A
S1o,0o0
$5,070
$0
Figure 2 -2: Five -Year Financial Plan (in thousands)
Section 2
Financial Plan
2009
2010 2011
2012
2013 2016
—Cash .0 edCapM
- &kMp DebtSenkc
Ptacha: Wata -0%VD
NrdlasMVkter -MW000
.0pemtn9EKp dwrce
�Rvmuaa
— +•— TafgHReurves
Endin9Bahnce
RE ®AK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan [2 -121
...... ............. 5317604
Section 3
Current Water Rates
3. Current Water Rates
As part of the first phase of the Study, Red Oak reviewed the City's current water rates.
These rates must be adjusted in order to follow Red Oak's proposed financial plan as they
are currently insufficient to meet the City's rising O &M expenditures, capital
improvement needs, and the proposed reserve requirements.
3.1. Monthly Service Charge
Table 3 -1 presents the current monthly service charge for water accounts by meter size.
Table 3 -1: Current Monthly Service Charge by Meter Size
Meter Size
Monthly
Service
Charge
314"
$ 4.50
1"
5.50
1 112"
7.00
2"
9.50
3"
18.00
4"
25.50
8"
38.50
a"
45.00
10"
45.00
12"
45.00
3.2. Commodity Charge
The current commodity charge is $2.08 per HCF. The City's commodity charge is a
uniform rate and does not vary by meter size, customer class, or season.
RE ®AK City of Newport Beach, CA
CONSULTING water Utility Financial Plan 3 -1
'...� .,..,. o...,<........ 5317004
Section 4
Fixed / Variable Revenue
4. Fixed / Variable Revenue
4.1. Current Fixed / Variable Rate Revenue
The City currently collects approximately 90% of its rate revenue through its commodity
charge and the remaining 10% through its monthly service charge. Table 4 -1 presents the
current composition of the City's rate revenue. A high proportion of variable revenue is
potentially favorable in terms of affordability and conservation as customers that use less
water are rewarded with lower bills. A high proportion of variable revenue, however, is
less favorable in terms of revenue stability as less revenue is secure when water use is
volatile.
Table 4 -1: Current (FY2009) Fixed f Variable Rate Revenue ($ in thousands)
Rate Revenue Source FY2009 Percent Shan:
Commodity Charge
$14,938 90%
Monthly Service Charge
1,640 10%
Total Rate Revenue
$16,578
4.2. California Urban Water Conservation Council Best
Management Practice 11
The California Urban Water Conservation Council (CUWCC) has developed fourteen
best management practices (BMPs) to reduce long -term urban water demand in
California. Implementation of these BMPs can aid water agencies in receiving regional
and/or state grants, in addition to reducing long -term demand.
CUWCC's BMP 11 concerns retail water service rates. It states that in order for water
rates to qualify as `conservation rates,' variable rate revenue must be at least 70% of total
rate revenue. BMP 11 clarifies that uniform rates, seasonal rates, tiered rates, and
allocation -based rates are all types of rates that can be used to meet its requirements.
4.3. Proposed Fixed / Variable Revenue
The City is currently exceeding the requirements of CUWCC's BMP I 1 by 20 %. Red
Oak recommends that in order to reduce revenue instability generated by the City's
disproportionate share of variable revenue, the City should gradually reduce the
commodity charge's share of total rate revenue to slightly more than 70% by FY2014. t
To meet the requirements of BMP 11, the City should closely monitor its revenue to ensure that fixed charges do not
exceed 30 percent of its revenue. This is important since the effects of conservation will reduce volume - related
: REQDAK City of Newport Beach, CA
' CONSULTING Water Utility Financial Plan 4 -1
' • .. ...................�..�. 5317004
Section 4
Fixed / Variable Revenue
Table 4 -2 presents the proposed blend of fixed and variable rate revenue for the financial
plan period FY2010 through FY2014. The proposed blends of fixed and variable revenue
will help the city maintain revenue stability while still meeting the requirements of BMP
11. Further, by increasing the proportion of revenue that is collected through fixed
charges, the City can reduce its reliance on revenue collected through more aggressive
conservation -based rates that it is planning to adopt in the future.
Table 4 -2: Proposed Fixed f Variable Revenue ($ in thousands)
Rats Revenue
Current
FY2009
1
FY2010
2
FY2011
3
FY2012
4
FY2013
5
FY2014
Total Rate Revenue
$ 16,578
$ 19,479
$ 23,723
$ 26,569
$ 28,916
$ 30,130
Fixed Revenue Share
10 °/U
21%
2r /a
28%
28%
28%
Variable Revenue Share
90%
79%
73%
72%
72%
72%
Fixed Revenue - Monthly Service Charge
$1,640
$ 4,084
$ 6,469
$ 7,469
$ 8,218
$ 8,536
Variable Revenue - Commodity Charge
$ 14,938
$15,394
$ 17,253
$ 19,100
$ 20,698
$ 21,594
Projected Water Sales (Million HCF)
7,182
7,002
7,002
7,002
7,002
7,002
Variable Rate ($1HCF)
$ 2.08
$ 2.20
$ 2.46
$ 2.73
$ 2.96
$ 3.08
Note: Projected Water Safes assumes 61Y. waterless rate
Note that the total rate revenue in the. above table matches the rate revenue presented in
Table 2 -12. Variable revenue projections rely on the City's projected sales of
approximately 7 million HCF for FY2010 through FY2014. Projected sales, however,
will be revised to account for a conservation rate structure, during the second phase of the
Study. Adjustments to these projections will vary according to how aggressive the
conservation rate structure is.
charges. As the City implements tiered water rates, it may consider requesting and exemption from the requirements of
BMP 11.
•�,� ; RH DAK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 4 -2
,...,.e...,.... 5317004
Section 5
Monthly Service Charge Meter Equivalency
5. Monthly Service Charge Meter Equivalency
5.1. Current Meter Equivalency Schedule
Table 5 -1 presents the current monthly service charge and the corresponding meter
equivalency ratio for each meter size.
Table 5 -1: Current Monthly Service Charge & Meter Equivalency Schedule
Meter Size
Monthly
Service
Charge
Meter
Equivalency
Ratio
314"
$ 4.50
1.00
V
5.50
1.22
1 112"
7.00
1.56
2"
9.50
2.11
3"
18.00
4.00
4"
25.50
5.67
61,
38.50
8.56
8"
45.00
10.00
W..
45.00
10.00
12"
45.00
10.00
5.2. Proposed Meter Equivalency Schedule
The current meter equivalency schedule for the City's monthly service charge does not
adequately reflect the relative costs of reading, maintaining, and replacing different meter
sizes. Further, the current schedule does not account for the relative flow capacities of
different meter sizes, which often serves as a basis for the relative amounts of meter -
based charges. Red Oak recommends using the American Water Works Association's
(AWWA) estimate of meter flow capacity from the M6 manual as the basis for the City's
meter equivalency schedule. These flow estimates indicate the relative amounts of water
that can flow through: each meter size, expressed in gallons per minute. These relative
capacities serve as an empirical basis for allocating costs among different meter sizes and
provide a more defensible rationale for the determination of relative meter charges.
California's Proposition 218 and Government Code §54999 both require proportionality
in the determination of water rates, which the proposed meter equivalency schedule helps
to address. Table 5 -2 presents. the current and proposed meter equivalency schedules.
�• • ; RE@DA K City of Newport Beach, CA
• CONSULTING Water Utility Financial Plan 5 -1
5317004 •..
Section 5
Monthly Service Charge Meter Equivalency
Table 5 -2: Current & Proposed Meter Equivalency Schedules
Meter Size
Number of
Meters
Meter Equivalency Ratio
Current Proposed
314"
17,445
1.00
1.00
1"
6,762
1.22
1.67
11/2"
495
1.56
3.33
2"
1,373
2.11
5.33
3"
48
4.00
10.00
4"
80
5.67
16.67
6"
28
8.56
33.33
8"
14
10.00
53.33
10"
0
10.00
95.87
12"
0
10.00
154.20
Figure 5 -1 presents the current and proposed meter equivalency schedules in comparison
to other utilities within the region. Note that the current meter equivalency schedule for
the City is conservative in its escalation compared to other water agencies in the region,
with the exception of the City of Anaheim.
140
120
100
80
60
Figure 5 -1: Meter Equivalency Schedule Regional Comparison (FY2009)
40
2D
B
—A
NewpW Beach Newpcd Beach
A.4em Irvine Ranch Laguna Beach
(Qmem) (Proposed)
.3J4' .1' .111T .Y •3' •4' .T .6
RE ®A K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan
53171H14
Huntinglm M"a
Beach cm cidaw
Carden Grove
�
Section 6
Proposed Water Rates
6. Proposed Water Rates
In order to implement the proposed financial plan, the City should adjust its current
monthly service charge and commodity charge to the rates presented below for the
financial plan period FY2010 through FY2014. These rates will allow the City to meet
the revenue targets presented in the five -year financial plan, which will cover its rising
expenditures for purchased water and other O &M items, capital improvement financing
needs, and proposed reserve requirements. These rates will also meet the proposed
transition to a composition of rate revenue in which fixed charges account for slightly
less than 30% of total rate revenue, allowing for more revenue stability. Tables 6 -1
through 6 -4 present the proposed rates for the financial plan period FY2010 through
FY2014. Note that these rates are anticipated to be implemented on January 1 of each
year.
Table 6 -1: Current & Proposed Commodity Charges
Current
FY2009
1 2 3 4
FY2010 FY2011 FY2012
FY2013
5
FY2014
Commodity Charge 2.08 2.20 2.46 2.73 2.96 3.08
Table 6 -2: Current ,& Proposed Monthly Service Charges
Current 1 2 3 4 5
Monthly Service Charge
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
314"
$ 4.50
$ 1.18
$ 5.76
$ 7.53
$ 8.78
$ 9.15
V
5.50
1.97
9.60
12.55
14.63
15.24
1112"
7.00
3.94
19.20
25.09
29.26
30.49
2"
9.50
6.31
30.72
40.14
46.81
48.78
3"
18.00
11.83
57.61
75.27
87.77
91.46
4"
25.50
19.71
96.01
125.45
146.28
152.43
6"
38.50
39.42
192.02
250.91
292.57
304.85
8"
45.00
63.07
307.23
401.45
468.10
487.76
10"
45.00
113.36
55225
721.60
841.42
876.75
12" 45.00 182.34 888.28 1,160.69 1,353.41 1,410.24
REIIDAK City of Newport Beach, CA
CONSULTING Water Mlity Financial Plan 641
. >,.,• >. o ............. 5317004 -
Section 6
Proposed Water Rates
Table 6 -3: Proposed Capital Charges
RERDAK City of Newport Beach, CA
CONSULTING Water Ulilily Financial Plan 6 -2
.....,.., 5317004
Current
1
2
3
4
5
Capital Charge
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
314"
-
$7.08
$7.33
$7.59
$7.85
$8.13
1•'
-
11.80
12.22
12.65
13.09
13.55
11/2"
-
23.61
24.43
2529
26.18
27.09
2"
-
37.77
39.10
40.46
41.88
43.35
3"
-
70.83
73.30
75.87
78.53
81.27
4"
-
118.04
122.17
126.45
130.88
135.46
6"
-
236.09
244.35
252.90
261.75
270.91
8"
-
377.74
390.96
404.64
418.80
433.46
10•1
-
678.98
702.75
727.34
752.80
779.15
12"
1,09213
1,130.35
1,169.92
1,210.86
1,253.24
Table 6-4: Current &
Proposed
Combined Fixed Charges
Current
1
2
3
4
5
Combined Fixed
Charges FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
314"
$4 .50
$ 8.27
$ 13.09
$ 15.11
$ 16.63
$ 17.27
1"
5.50
13.78
21.82
25.19
27.72
28.79
11/2'
7.00
27.55
43.64
50.38
55.43
57.58
2••
9.50
44.08
69.82
80.61
88.69
92.12
3"
18.00
82.65
130.91
151.14
166.30
172.73
4"
25.50
137.75
218.18
251.90
277.16
287.88
6"
38.50
275.50
436.37
503.81
554.32
575.76
8"
45.00
440.80
698.19
806.09
886.91
92122
101,
45.00
792.34
1,254.99
1,448.95
1,594.22
1,655.90
12"
45.00
1,274.47
2,018.64
2,330.61
2,564.27
2,663.48
RERDAK City of Newport Beach, CA
CONSULTING Water Ulilily Financial Plan 6 -2
.....,.., 5317004
Section 7
Bill Comparisons & Impacts
7. Bill Comparisons & Impacts
Figure 7 -1 presents the single family residential monthly bill impact distribution for
FY2010 rates. This bill distribution is based on the City's calendar year 2007
consumption history. The blue columns indicate the percentage of single family
residential monthly bills that will increase by the corresponding amount on the horizontal
axis, assuming consumption is similar to calendar year 2007. The red line indicates the
cumulative percentage of monthly bills at each amount of change in bill. For example, the
figure shows that 67% of monthly bills will increase by no more than $10. It also shows
that approximately I S% of monthly bills will increase by between $4 and $5. Note that
over 90% of monthly bills will increase by no more than $15.
Figure 7 -1: FY2010 Single Family Residential Customer Monthly Bill Impact
1646 1 - 100%
14%
`12%
1G°b
W
m
3
15- ax
O
L
V
4 °m
2 °.b
0%
67% of monthly bills will
increase by no more em
$10
w0.-Nq NY NO FO,WOe- '!1 "O'wW0 Nt"Y���VVVVOtiNWOrN mAN��6W0V
N N g q q N N q w w q q w w N N q K w M N N w q p w q L4 N N N w w w w N M H N
Change In monitdy 6111
90%
80%
70%
m
60% `o
a
Z
s0% Y
6
40% F�
3
u
3W,
20%
10%
Figure 7 -2 presents the current monthly bill for %" meters that consume 18 HCF per
month, compared with the bill under the proposed rates for FY2010, and the bills at other
agencies within the region. Note that it is anticipated that several, if not all of the regional
agencies presented below, will likely increase their rates in FY2010 to address rising
purchased water costs.
KE ®AK City of Newport Beach, CA
CONSULTING water Utility Financial Plan 7 1
.— ..... o..... °....w,. 5317004
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City of Newport Beach
f P.O. Box 1768
r Newport Beach, CA 92658 -8915
°glnMi`e
City of Newport Beach
Information and Notice of Public Hearing
And Protest Procedure
Proposed Water Rate Charges
TO: Doe, John & Jane
12345 Main Street
Newport Beach, CA
94590
Attachment B
- --------- - - - - -- - - - - -- - -- --- - - - - -- - -- - - - -- - ----- - - - - -- -------------- - - - - -- ----------- - - - - -- - -- - -- - -- - - - -- - -- - -- --- - - - - -- - -- - -- - - - - -- ------ - - - - --
EXTRA SPACE
Notice of Public Hearing and Protest Procedure
NOTICE IS HEREBY GIVEN that on Tuesday, November 10, 2009, at 7:0013M, a public hearing will be
conducted in the City Council Chambers (Building A) at 3300 Newport Boulevard, Newport Beach.
This will be a Public Hearing before the City Council to allow public testimony and discussion of the proposed
water rate increases described below. The City Council will take written and oral comments, and will consider
all written protests against the proposed charges, determine if a majority protest exists, and consider
resolutions to adopt the water rate charges.
Written protests must be filed with the City of Newport Beach City Clerk. Written protests may be hand
delivered or mailed to the City Clerk at 3300 Newport Boulevard, Newport Beach, California 92663. To be
valid, written protests must state opposition to the proposed water rate increase, identify the Parcel (by
assessor's parcel number or street address), and include the original signature of the record water service
customer or parcel owner. A written protest may be submitted up to the conclusion of the public testimony at
the public hearing.
About Proposition 218
In November 1996, California voters approved Proposition 218. As a result, California agencies must comply
with its requirements in setting utility rates. One provision requires that a noticed public hearing on utility rates
be held and that rates not be increased if a majority of affected utility customers protest the increased rates in
writing.
Frequently Asked Questions
Q. What does my water bill pay for?
A. Your water bill covers the following categories costs and services:
Annual operation and maintenance of the water system. Including well and pump station
operations, water treatment and testing, and water system employee salaries.
City water purchase costs. The City purchases water from the Municipal Water District of Orange
County and from the Orange County Water District.
Capital improvement projects to repair and replace facilities and equipment to improve the water
system safety, efficiency and reliability. No additional debt for this purpose is proposed and all
improvements will be paid for with rate revenue.
Q. Why do the rates need to be raised?
A. Newport Beach is not immune to the increasing cost and scarcity of water over the past several years.
Operating expenses, including chemical and electrical costs, have increased by an average of 6% over
the last four years. In the last year alone, the cost of imported water increased by 20% on September
1st and will increase by another 22% on January 1, 2011. In addition, capital expenditures are required
to maintain the water delivery system. The City has not raised its Water Rates since 2005. The existing
rates do not provide enough revenue to meet the expenses necessary to operate the water system to
provide a safe and reliable water supply to City customers for the next 5 years.
Q. How is my water bill calculated?
A. A customer's water bill (which is a component of the municipal services statement sent to City water
customer's periodically) is calculated by the sum of a fixed service charge, which is based on the
customer's meter size, and the water usage fee, which is calculated based on the amount of water
used by the customer. See rate tables below.
The rate structure in the table below is designed to spread the costs of providing water system among
the system's users fairly and equitably. The costs associated with City's water system are made up of
expenses associated with operating and maintaining the system, capital costs associated with
rehabilitating and expanding the system, and commodity charges associated with acquiring water
supplies. The City's rate structure is designed to encourage conservation by including a portion of
operations and maintenance costs in the commodity charge, even though many of these expenses may
not be directly dependent on water usage. Thereby, a greater proportion of a customer's bill reflects
water usage, which encourages conservation because a customer can reduce his or her bill by using
less water. This proposed blend of the costs between variable and fixed revenues (70% fixed / 30%
variable) ensures revenue stability while also encouraging conservation. The following is a breakdown
of each component:
1. Water Usage Fee (Variable): Shown on the bill as "Water Usage HCF ", this charge is geared
primarily towards recovering the costs associated with City water purchases, treatment, and
distribution costs. In the proposed rate, 70% of the total revenue will come from this charge. This
charge is based on the amount of water used and is calculated by multiplying the number of
hundred cubic feet units (HCF) of water used by the unit rate per HCF.
2. Water Service Charge (Fixed): This charge is designed to recover (a) the costs of reading,
maintaining, and replacing the meters and (b) the costs of capital improvements. The revenues
derived from the capital component are to be used for repairs and improvements to the water
system identified in the water master plan. In the proposed rate, 30% of the total revenue will come
from this charge. The charge is based on the customer's water meter size. Most single - family
residential properties have a 5/8 -inch or 3/4 -inch meter.
Proposed Water Rates
Current & Proposed Water Usage Fee (cost per HCF)
Current 1 2 3 4 5
FY2DD9 FY2010 FY2011 FY2012 FY2013 FY2014
Commodity Charge $2.08 $2.20 $2.46 $2.73 $2.96 $3.08
Combined Fixed C
5/8" or 3/4"
1"
1 1/2"
2"
3"
4"
6"
8"
10"
12"
Current & Proposed Water Service Charge
Current
1
2
3
4
5
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
$4.50
$8.27
$13.09
$15.11
$16.63
$17.27
$5.50
$13.78
$21.82
$25.19
$27.72
$28.79
$7.00
$27.55
$43.64
$50.38
$55.43
$57.58
49.50
$44.08
$69.82
$80.61
$88.69
$92.12
$18.00
$82.65
$130.91
$151.14
$166.30
$172.73
$25.50
$137.75
$218.18
$251.90
$277.16
$287.88
$38.50
$275.50
$436.37
$503.81
$554.32
$575.76
$45.00
$440.80
$698.19
$806.09
$886.91
$921.22
$45.00
$792.34
$1,254.99
$1,448.95
$1,594.22
$1,655.90
$45.00
$1,274.47
$2,018.64
$2,330.61
$2,564.27
$2,663.48
Need More Information? If you have questions, please call George Murdoch, Utilities Director at the following number:
(949)644- 30111287778.1
City of Newport Beach
Water Utility Financial Plan
September 8, 2009
Pathways to Lasting Solutions
Why do we need to increase rates?
":. Last rate increase was in 2005
Operating expenses have increased on
average by ~6% annually for the last 4
years
■ Chemicals and electricity are a major driver
s 2009 through 2014 CIP totals $13.9
million
2 Pathways to tasting Solutions
Why do we need to increase rates?
== : Purchased water costs are rising rapidly
■ Imported Water (MWDOC)
• Average unit cost of imported water has
risen 29% since last rate increase
• 20% MET rate increase 9/09, 22% 1/11
■ Groundwater (OCWD)
• Average unit cost of groundwater has risen
38% since last rate increase
■ Basin Pumping Percentage to be
reduced
• City will have to rely on more expensive
imported water
3 Pathways to Lasting Solutions
Projected Purchased Water Average Unit
Costs
MWDOC ($ /AF)
$ 633
$ 759
$ 922" .
$ 965
$ 1,014:1
$ 1;065
OCWD ($ /AF)
319
361
364
382
397
408
Weighted Average 59%
AF = Acre Feet; 325,850 gallons
El
Pathways to Lasting Solutions
Projected Operating Expenditures
Purchased Water
- MWDOC
Purchased Water
- OCWD
Utilities
Salaries &
Benefits
Equipment
Maintenance &
Replacement
Other O &M
Total
Percent Change
$ in thousands
5
FY2009
FY2010
FY2011
FY2012
FY2613
IFY2014
$ 3,354
$ 4,931
$ 5,991
$ 6,440
$ 6,762
$ 7,100
3,857
3,922
3,947
4,081
4;232
4,351.
1,325
1,322
1,440
1,549
1,692
1,851
4,152
4,319
4;491.
4,671
4,858
5,052
423
444
467
490
514
540
3,579
3;856
41159
4,491
4,853
5,250
$ 16,690
$ 18,794
$ 20,494
$ 21,722
$ 22,911
$ 24,144
6%
-5%
Pathways to Lasting Solutions
Current Financial Outlook
$30,.000
$20.000
$10.000
$0
2009
- $10,000
- $20.000
- $30,000
- $40.000
s Cash - Funded Capital
M_ Operating Expenditures
$ in thousands
2010 "Ali 2012 2013 2014
.y
`may
Existing Debt Service
t Revenues
($27.9 million)
asp Purchased Water. OCWD Purchased Water -MWDOC
.. — Target Reserves —! Ending Balance
6 Pathways to Lasting Solutions
Current. Financial Outlook
*r $2.6 million loss anticipated for
FY2009
Reserves will be exhausted by end
of FY2011
a CIP not adequately funded
7 Pathways to Lasting Solutions
Financial Planning Objectives
Directed by Finance Committee to:
■Draw down reserves to minimize
"rate shock"
■ Meet reserves by FY2014
■Increase fixed charge revenue to
improve revenue stability
Ensure CIP is adequately funded
■Establish dedicated capital charge
8 Pathways to Lasting Solutions
Proposed Financial Plan
$35.000
$30,000
$25.000
$20,000
$5,000
$0
$ in thousands
1s on; pj,,g�
2009 2010 2011
maswee Cash-Funded Capital Exisfing Debt Service
� Operating Expenditures
18.9 million
2012 2013 2014
Purchased Water- OCVVD Purchased Water. MVVDOC
Target Reserves —A— EndingBalance
9 Pathways to Lasting Solutions
Proposed Financial Plan
* Loss is eliminated by FY2011
Target reserves are met by FY2014
on CIP adequately funded beyond 5-
year financial plan
10 Pathways to Lasting Solutions
Proposed Rates
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
Commodity Charge $ 2.08
$ 2.20
$ 2.46
$ 2.73
$ 2.96
$ 3.08
$ 16.63
$ 17.27
V.
5.50
13.78
21.82
Monthly Meter Charge
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
3/4"
$ 4.50
$ 8.27
$ 13.09
$ 15.11
$ 16.63
$ 17.27
V.
5.50
13.78
21.82
25.19
27.72
28.79
1 1/2"
7.00
27.55
43.64
50.38
55.43
57.58
2"
9.50
44.08
69.82
80.61
88.69
92.12
3"
18.00
82.65
130.91
151.14
166.30
172.73
4"
25.50
137.75
218.18
251.90
277.16
287.88
6"
38.50
275.50
436.37
503.81
554.32
575.76
8"
45.00
440.80
698.19
806.09
886.91
921.22
10"
45.00
792.34
1,254.99
1,448.95
1,594.22
1,655.90
12"
45.00
1,274.47
2,018.64
2,330.61
2,564.27
2,663.48
Effective January 1 of each year
11 Pathways to Lasting Solutions
Single Family Bill Impact
16%
14%
12%
10%
m
4
N
N
H 8%
0
`C
U
d 6%
4%
2%
o%
100%
12 Pathways to Lasting Solutions
T
m
0
a
m
m
d
V
90%
80%
70%
67% of monthly bills will
increase by no more than
60%
$10
50%
40%
30%
20%
%
0%
--------- h W W O N M N N N N N m O N O O N M O N O� O O
N N N N N N N N lh M (") f'1 Cl C'! Cl ['1 CJ �'1 C O
!A M (A f9 q M fA f9 fA lA N.M W Vf W N A f9 fA fA (9 W f9 fR f9 IR fR W W tlf f9 $"'
Change in Monthly Bill
12 Pathways to Lasting Solutions
T
m
0
a
m
m
d
V
Regional Water Bill Comparison
$70
$65.97
$01.07
$60
13 Pathways to Lasting Solutions
Questions &Answers
September 8, 2009
Pathways to Lasting Solutions
•
•
•
Attachment A
City of Newport Beach, CA
949 W 16th Street • Newport Beach, CA 92663
Water Utility Financial
Plan
August 2009
Report Prepared By:
' RE ®A K
CONSULTING
• A OIVILION 01 MALLOL. IIIINIL
888 W 6th Street
Third Floor
Los Angeles, CA 90017
5317004 (213) 326 -1600
Table of Contents
Contents •
ExecutiveSummary ...................................................... ............................... ES -1
1. Introduction ...................................................................... ............................1 -1
1.1. Scope ............................................................................................. ............................... 1 -1
1.2. Background ....................................................................................... ............................1 -1
2. Financial Plan .................................................................. ............................2
-1
2.1.
Funds ............................................................................................. ...............................
2 -1
2.2.
Revenue Requirement ...................................................................... ............................2
-1
2.2.1. Operations & Maintenance ................................................ ............................2
-1
2.2.1.1. Purchased Water Costs .......................................... ............................2
-2
2.2.1.2. Utilities ..................................................................... ............................2
-3
2.2.1.3. Other O &M ........................................................... ...............................
2 -3
2.2.1.4. Projected Operations & Maintenance Expenditures ...........................2
-3
2.2.2. Capital Improvement Program Financing .......................... ............................2
-4
2.2.2.1. Historical Capital Improvement Program Financing ...........................2
-4
2.2.2.2. Water Master Plan .................................................. ............................2
-4
2.2.2.3. Future Capital Improvement Program Financing .... ............................2
-5
2.2.2.4. Historical and Future Debt Service Payments ........ ............................2
-5
2.3.
Reserve Requirements .................................................................. ...............................
2.3.1. Operating Stabilization Reserve (Operating Fund) ........... ............................2
2 -6
-6
2.3.2. Contingency Reserve (Capital Fund) ................................ ............................2
-7
2.4.
Five -Year Financial Plan ................................................................... ............................2
-7
2.4.1. Current Financial Outlook .................................................. ............................2
-7
2.4.2. Proposed Five -Year Financial Plan ................................... ............................2
-8
3. Current Water Rates ........................................................ ............................3
-1
3.1.
Monthly Service Charge ................................................................. ...............................
3 -1
3.2.
Commodity Charge.. .....................................................................................................
3 -1
4. Fixed
/ Variable Revenue ................................................ ............................4
-1
4.1.
Current Fixed/ Variable Rate Revenue ............................................ ............................4
-1
4.2.
California Urban Water Conservation Council Best Management Practice 11 .............4
-1
4.3.
Proposed Fixed / Variable Revenue .............................................. ...............................
4 -1
5. Monthly Service Charge Meter Equivalency ................. ............................5 -1
5.1. Current Meter Equivalency Schedule ............................................... ............................5 -1
5.2. Proposed Meter Equivalency Schedule ............................................ ............................5 -1
6. Proposed Water Rates .................................................... ............................6-1
7. Bill Comparisons & Impacts ........................................... ............................7 -1
. ; REBDA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan O
•..• ..�.,,�............,.... 5317004
Table of Contents
• List of Tables
Table 2 -1: Historical Operations & Maintenance Expenditures (in thousands)
............................2 -2
Table 2 -2: Historical Average Unit Cost of Purchased Water per AF ............ ...............................
2 -2
Table 2 -3: Projected Average Unit Cost of Purchased Water per AF ........... ...............................
2 -3
Table 2 -4: Projected Operations & Maintenance Expenditures (in thousands)
............................2 -4
Table 2 -5: Historical Capital Improvement Program Financing (in thousands)
............................2 -4
Table 2 -6: 30 -Year Capital Improvement Program (in thousands) ...................
............................2 -5
Table 2.7: Capital Improvement Program Financing (in thousands) ................
............................2 -5
Table 2 -8: Debt Service Payments (in thousands) ...........................................
............................2 -6
Table 2 -9: Projected Debt Service Payments (in thousands) ........................... ............................2
-6
Table 2 -10: Operating Fund Five -Year Financial Plan (in thousands) ............. ............................2
-9
Table 2.11: Capital Fund Five -Year Financial Plan (in thousands) ................. ...........................2
-10
Table 2.12: Combined Water Fund Five -Year Financial Plan (in thousands) . ...........................2
-11
Table 3 -1: Current Monthly Service Charge by Meter Size ........................... ...............................
3-1
Table 4.1: Current (FY2009) Fixed / Variable Rate Revenue ($ in thousands)
........................... 4 -1
Table 4.2: Proposed Fixed / Variable Revenue ($ in thousands) .................. ...............................
4 -2
Table 5.1: Current Monthly Service Charge & Meter Equivalency Schedule ...............................
5 -1
Table 5.2: Current & Proposed Meter Equivalency Schedules ........................ ............................5
-2
Table 6 -1: Current & Proposed Commodity Charges .................................... ...............................
6 -1
Table 6 -2: Current & Proposed Monthly Service Charges ............................ ...............................
6 -1
Table 63: Proposed Capital Charges ........................................................... ...............................
6 -2
Table 6 -4: Current & Proposed Combined Fixed Charges ............................ ...............................
6 -2
List of Figures
• Figure 2 -1: Five -Year Financial Outlook with No Revenue Increases (in thousands) .................. 2 -8
Figure 2 -2: Five -Year Financial Plan (in thousands) ................................................ .................. 2 -12
Figure 5 -1: Meter Equivalency Schedule Regional Comparison ( FY2009) ...... ............................5 -2
Figure 7 -1: FY2010 Single Family Residential Customer Monthly Bill Impact . ............................7 -1
Figure 7 -2: Monthly Regional Bill Comparison - 18 HCF .................................. ............................7 -2
•
R ®AK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan Ij
... 5317004
Acronyms
Acronyms Used in the
AF
Acre Feet
AWWA
American Water Works Association
BMP
Best Management Practice
BPP
Basin Pumping Percentage
CUWCC
California Urban Water Conservation Council
CIP
Capital Improvement Program
ENR
Engineering News Record
FY
Fiscal Year
HCF
Hundred Cubic Feet
MET
Metropolitan Water District of Southern California
MWDOC
Municipal Water District of Orange County
OCWD
Orange County Water District
O &M
Operations & Maintenance
REIDA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan Eiii
• .. • . ,.. ................... 5317004
•
•
•
Executive Summary
Executive Summary
Scope
The City of Newport Beach Utilities Division (the City) retained Red Oak Consulting to
conduct a water rate study (the Study). This study includes the development of a five -
year financial plan, cost -of- service analysis, and development of a conservation rate
structure. For purposes of expediting the adoption of new rates, the Study has been
divided into two phases:
1. The development of the financial plan, the allocation of fixed and variable
revenue, and the proportioning of the monthly service charge by meter size; and
2. The redesign of the commodity charge from a uniform rate to a conservation rate
structure.
This report documents the first phase of the Study, including the methodology used to
develop the financial plan, the policy decisions reached, the proposed water rates, and the
• customer bill impacts. A separate report will be prepared for the second phase of the
study upon its completion.
•
Financial Plan
In order to maintain the financial viability of the City water system, Red Oak, with the
assistance of City staff, prepared a financial plan for the five -year period from fiscal year
ending (FY) 2010 through FY2014. This financial plan includes the development of the
City's annual revenue requirement, a financing plan for its capital improvement program
(CEP), and review and recommendations for the City's reserve policies.
Red Oak used its proprietary electronic financial planning model, eForecast, to determine
the appropriate amount of revenue necessary for the City to meet all of the above
requirements.
Funds
The City currently maintains a single fund for its water operations, capital improvement
financing, and reserves. Based on direction from the City's staff, Red Oak created a
separate fund for capital- related expenditures, which is referred to as the 'Capital Fund.'
The financial planning model isolates this fund from the City's Operating Fund in order
to evaluate the financial viability of each fund separately. The City, with the assistance of
. ; REMA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan E :l
........................ 5317004
Executive Summary
Red Oak, has developed target reserve levels for each fund, which will be explained in •
detail below.
Revenue Requirement
The City's revenue requirement is the total amount of revenue it must collect in order to
meet its operations and maintenance (O &M) expenditures, debt service payments, and
cash - financed capital expenditures. This revenue is collected through water rates and
does not include revenue from incidental fees, charges, or other non - operating revenue.
The City's O &M expenditures are accounted for in the Operating Fund while debt
service payments and cash-financed capital are accounted for in the Capital Fund.
Operations & Maintenance
The City's operations & maintenance expenditures have steadily increased over the past
four years, since its most - recent rate increase in FY2005. Table ES -1 presents the City's
historical O &M expenditures for FY2005 through FY2008.
Table ES-1: Historical Operations & Maintenance Expenditures (in thousands)
Description
FY2005
FY2006
FY2007
FY2008
Purchased Water - MW DOC
$ 3,350
$ 3,800
$ 3,350
$ 3,400
Purchased Water -OCWD
2,929
2,880
3,280
3,280
Utilities
1,094
922
872
922
Salaries & Benefits
3,302
3,712
3,827
3,799
Equipment Maintenance & Replacement
345
341
348
417
Other O &M
3,013
3,453
3,444
3,593
Total
$14,033
$15,108
$15,121
$15,411
The City has seen a 29% increase in the average unit cost of purchased water from the
Municipal Water District of Orange County (MWDOC) and a 37% increase in the
average unit cost of purchased water from the Orange County Water District (OCWD)
since 2005. O &M expenditures apart from purchased water and utilities include salaries
and benefits, equipment maintenance and replacement, and other O &M. Other O&M
includes the general fund service charge, minor capital expenditures, chemicals, and other
supplies.
Table ES -2 presents the projected O &M expenditures for the City for the current fiscal
year and the financial plan period FY2010 through FY2014.
•; RE13DA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan ES-2
....,.....1.. a ... ...... 5317004
u
•
The City's O &M expenditures are projected to increase by over $7 million, or 45%, from
FY2009 to FY2014. Purchased water costs alone account for 57% of this increase.
Purchased water costs are projected to increase by $3.7 million from MWDOC and $0.5
million from OCWD from FY2009 through FY2014. These costs, combined with Other
O &M, which is partially determined by the total amount of water purchased, account for
nearly 80% of the total increase.
Capital Improvement Program Financing
Since FY2005, the City has cash - financed all of its capital improvement needs. The City
• has developed a 30 -year capital improvement program as part of its 2009 Water Master
Plan. This CIP totals approximately $167.6 million in escalated dollars at 4% per annum.
•
The City will continue to finance its CIP on a pay -as- you -go basis during the financial
plan period. Table ES -3 presents the financing plan for the City's CIP for the current
fiscal year and the financial plan period FY2010 through FY2014. Future capital
financing will be accounted for in the City's Capital Fund. An additional monthly capital
charge will he assessed by meter size. This capital charge will be the primary source of
revenue for the Capital Fund and be used to pay for cash - financed capital and debt
service.
Table ES-3: Capital Improvement Program Financing (in thousands)
Current 1 2 3 4 5
Description FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Capital Projects $1,600 $ 3,210 $ 1,830 $ 3,542 $ 2,700 $ 1,033
Cash - Financed Capital Projects 1,600 3,210 11830 3,542 2,700 1,033
Debt - Financed Capital Projects - - - - - -
Total Capital Projects Funded $1,600 $ 3,210 $1,830 $ 3,542 $ 2,700 $1,033
Table ES-4 presents the two remaining debt service payments for the 1999 Refunding of
Water Revenue Bonds for the financial plan period FY2010 through FY2014.
• .' REIDA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan [ES-3]
• ..• ..,.,.�.......<. <..,. 5317004 -.....
Executive Summary
• Table: ES-2: Projected Operations & Maintenance Expenditures (in thousands)
Current
1
2
3
4
5
Description
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
Purchased Water- MWDOC
$ 3,354
$ 4,931
$ 5,991
$ 6,440
$ 6,762
$ 7,100
Purchased Water - OCW D
3,857
3,922
3,947
4,081
4,232
4,351
Utilities
1,325
1,322
1,440
1,549
1,692
1,851
Salaries & Benefits
4,152
4,319
4,491
4,671
4,858
5,052
Equipment Maintenance & Replacement
423
444
467
490
514
540
Other O &M
3,579
3,856
4,159
4,491
4,653
5,250
Total
$ 16,690
$18,794
$ 20,494
$ 21,722
$ 22,911
$ 24,144
The City's O &M expenditures are projected to increase by over $7 million, or 45%, from
FY2009 to FY2014. Purchased water costs alone account for 57% of this increase.
Purchased water costs are projected to increase by $3.7 million from MWDOC and $0.5
million from OCWD from FY2009 through FY2014. These costs, combined with Other
O &M, which is partially determined by the total amount of water purchased, account for
nearly 80% of the total increase.
Capital Improvement Program Financing
Since FY2005, the City has cash - financed all of its capital improvement needs. The City
• has developed a 30 -year capital improvement program as part of its 2009 Water Master
Plan. This CIP totals approximately $167.6 million in escalated dollars at 4% per annum.
•
The City will continue to finance its CIP on a pay -as- you -go basis during the financial
plan period. Table ES -3 presents the financing plan for the City's CIP for the current
fiscal year and the financial plan period FY2010 through FY2014. Future capital
financing will be accounted for in the City's Capital Fund. An additional monthly capital
charge will he assessed by meter size. This capital charge will be the primary source of
revenue for the Capital Fund and be used to pay for cash - financed capital and debt
service.
Table ES-3: Capital Improvement Program Financing (in thousands)
Current 1 2 3 4 5
Description FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Capital Projects $1,600 $ 3,210 $ 1,830 $ 3,542 $ 2,700 $ 1,033
Cash - Financed Capital Projects 1,600 3,210 11830 3,542 2,700 1,033
Debt - Financed Capital Projects - - - - - -
Total Capital Projects Funded $1,600 $ 3,210 $1,830 $ 3,542 $ 2,700 $1,033
Table ES-4 presents the two remaining debt service payments for the 1999 Refunding of
Water Revenue Bonds for the financial plan period FY2010 through FY2014.
• .' REIDA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan [ES-3]
• ..• ..,.,.�.......<. <..,. 5317004 -.....
Executive Su
Table ES -4: Projected Debt Service Payments (in thousands) •
Current 1 2 3 4 5
Description FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Debt Service $ 1,618 $ 130
Reserve Requirements
The following reserves are commonly maintained by utilities, and are recommended by
Red Oak —at a minimum —to insulate the City from financial volatility.
Operating Stabilization Reserve (Operating Fund)
The City does not currently maintain an operating stabilization reserve. Red Oak
recommends that the City maintain a reserve equivalent to 180 days of its operating
budget, or 50 %. This reserve level also provides a buffer period of 24 months at a 25%
loss rate. Funds collected in excess of the operations stabilization reserve target would be
available to offset future rate adjustments while extended reserve shortfalls would be
recovered from future rate increases.
Contingency Reserve (Capital Fund)
The City currently maintains a contingency reserve equivalent to 35% of its annual
budget, which is based on a historical approximation of capital replacement needs in the
event of a catastrophe. In order to determine the appropriate level of emergency capital •
replacement reserves, the City should conduct a criticality assessment of its system
facilities. This assessment involves quantifying the probability of its facilities being
impaired, the level of impairment, and the cost of replacement should a catastrophe
occur. Red Oak recommends that the City conduct such an assessment; however, if
resources are limited, the City may wish to set its contingency reserve level based on an
alternative method. Based on direction from the City's staff, Red Oak has evaluated a
contingency reserve that parallels the annual revenue anticipated to be recovered through
the proposed capital charge. Red Oak believes this amount may provide a sufficient
reserve against unanticipated replacements or repairs. By FY2014, the target
contingency reserve will be approximately $4 million.
Current Financial Outlook
Based on the City's increasing O &M expenditures, capital financing needs, and proposed
reserve requirements, current revenue are insufficient. Figure ES -1 presents the current
fiscal year and the five -year financial outlook for FY2010 through 2014 with no rate
revenue increases. Under current rate revenue, the City will be unable to maintain a
positive balance in the combined Operating Fund and Capital Fund by FY2011.
•
• �.; R ®AK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan ES-4
'..•' 5317004
1]
•
Ll
Executive Su
Figure ES -1: Five -Year Financial Outlook with No Revenue Increases (in thousands)
sa0.)-C
s2oaw
s10a00
$o
- st0.000
-s2o.oc0
530.000
- 540 .)CT.
2049 '',? _ 2012 2013 2014
A.
� IL
� y
..�G.e CundeEC.Ift E.13• ,NWZ5 1.e PwchooedWma OCWD .....•Purcha • W -MWDOC
O.,.tng E:pena ,a, Ending9•I•nw
Proposed Five -Year Financial Plan
Red Oak, with the assistance of the City's staff, has developed a five -year financial plan
for the period FY2010 through FY2014. Based on the direction of the City's Finance
Committee, this financial plan has been developed such that rate shock to customers is
minimal, capital projects are financed only through cash, and reserves are met by
FY2014. Figure ES -2 presents the Combined Water Fund's five -year financial plan.
The City is anticipating an annual deficiency of approximately $2.6 million for the
current fiscal year. The proposed financial plan eliminates this annual deficiency by
FY2011. Reserves are drawn down in FY2009 and FY2010 in order to minimize the rate
shock associated with the necessary rate revenue increases.
• •' R DAK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan
5317004
�Pii ®I
Executive Su
Figure ES -2: Five -Year Financial Plan (in thousands)
$35.000
*Y Aoo
$25000
$20.000
$15.000
$1,000
?'. 000
50
2009 201) 2a1/
�Caah =unded Capual EeIRnq Debt Sanka
aaaaa� pp.wng Ex PendN- �Pe+enuec
2012
i
lj –
2013 2014
—PUrelneadWrtr -OCWD —Purchawd Wear -MWOOC
— • —T.,qw R"awas —� En0119B619n.
Current Fixed / Variable Rate Revenue
The City currently collects approximately 90% of its rate revenue through its commodity
charge and the remaining 10% through its monthly service charge. Table ES -5 presents
the current composition of the City's rate revenue. A high proportion of variable revenue
is potentially favorable in terms of affordability and conservation as customers that use
less water are rewarded with lower bills. A high proportion of variable revenue,
however, is less favorable in terms of revenue stability as less revenue is secure when
water use is volatile.
Table ES -5: Current (FY2009) Fixed / Rate Variable Revenue
Rate Revenue Source
FY2009 Percent Share
Commodity Charge
Monthly Service Charge
$ 14,938 90%
1,640 10%
Total Rate Revenue
$ 16,578
•
0
Proposed Fixed /Variable Revenue
The City is currently exceeding the requirements of California Urban Water Conservation
Council's (CUWCC) Best Management Practice (BMP) 11 by 20 %. BMP 11 states that •
RE ®A K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan ES66
. _•• ..••.. 5317004
Executive Summary
. in order for water rates to qualify as `conservation rates,' variable revenue must be at
least 70% of total rate revenue. Red Oak recommends that in order to reduce revenue
instability generated by the City's disproportionate share of variable revenue, the City
should gradually reduce the commodity charge's share of total rate revenue to slightly
more than 70% by FY2014.1 Table ES -6 presents the proposed blend of fixed and
variable rate revenue for the financial plan period FY2010 through FY2014. The
proposed blends of fixed and variable revenue will help the City maintain revenue
stability while still meeting the requirements of California CUWCC's BMP 11. Further,
by increasing the proportion of revenue that is collected through fixed charges, the City
can reduce its reliance on revenue collected through more aggressive conservation -based
rates that it is planning to adopt in the future.
Table ES-6: Proposed Fixed / Variable Revenue ($ in thousands)
Current 1 2 3 4 5
Rate Revenue FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
E
Total Rate Revenue
Fixed Revenue Share
Variable Revenue Share
Fixed Revenue - Monthly Service Charge
Variable Revenue - Commodity Charge
Projected Water Sales (Million HCF)
$ 16,578
10%
90%
$ 19,479 $ 23,723 $ 26,569 $ 28,916 $ 30,130
21%
79%
$ 1,640 $ 4,084
$ 14,938 $ 15,394
27%
28%
73%
72%
$ 6,469
$ 7,469
26%
28%
72%
72%
$ 8,218
$ 8,536
$ 17,253 $19,100 $ 20,698 $ 21,594
7,182 7,002 7,002 7,002 7,002 7,002
Variable Rate ($/HCF) $ 2.08 $ 2.20 $ 2.46 $ 2.73 $ 2.96 $ 3.08
Note: Projected Water Sales assumes 6% water loss rate.
Variable revenue projections rely on the City's projected sales of approximately 7 million
HCF for FY2010 through FY2014. Projected sales, however, will be revised to account
for a conservation rate structure, during the second phase of the Study. Adjustments to
these projections will vary according to how aggressive the conservation rate structure is.
Proposed Meter Equivalency Schedule
The current meter equivalency schedule for the City's monthly service charge does not
adequately reflect the relative costs of reading, maintaining, and replacing different meter
sizes. Further, the current schedule does not account for the relative flow capacities of
different meter sizes, which often serves as a basis for the relative amounts of meter -
based charges. Red Oak recommends using the American Water Works Association's
(AWWA) estimate of meter flow capacity from the M6 manual as the basis for the City's
meter equivalency schedule. These flow estimates indicate the relative amounts of water
To meet the requirements of BMP 11, the City should closely monitor its revenue to ensure that fixed charges do not
exceed 30 percent of its revenue. This is important since the effects of conservation will reduce volume - related
• charges. As the City implements tiered water rates, it may consider requesting and exemption from the requirements of
BMP 11.
R ®A K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan ES-7
,...... 5317004
Executive Summary
that can flow through each meter size, expressed in gallons per minute. These relative
•
capacities serve as an empirical basis for allocating costs among different meter sizes and
provide a more defensible rationale for the determination of relative meter charges.
California's Proposition 218 and Government Code §54999 both require proportionality
in the determination of water rates, which the proposed meter equivalency schedule helps
to address. Table ES -7 presents the current and proposed meter equivalency schedules.
Table ES -7: Current & Proposed Meter Equivalency Schedules
Meter Equivalency Ratio
Meter Size Number of Current Proposed
Meters
3/4" 17,445 1.00 1.00
1" 6,762 1.22 1.67
11/2" 495 1.56 3.33
2" 1,373 2.11 5.33
3" 48 4.00 10.00
4" 80 5.67 16.67
6" 28 8.56 33.33
8" 14 10.00 53.33
10" 0 10.00 95.87
12" 0 10.00 154.20
•
Proposed Rates
In order to implement the proposed financial plan, the City should adjust its current
monthly service charge and commodity charge to the rates presented below for the
financial plan period FY2010 through FY2014. These rates will allow the City to meet
the revenue targets presented in the five -year financial plan, which will cover its rising
expenditures for purchased water and other O &M items, capital improvement financing
needs, and proposed reserve requirements. These rates will also meet the proposed
transition to a composition of rate revenue in which fixed charges account for slightly
less than 30% of total rate revenue, allowing for more revenue stability. Tables ES -8
through ES -11 present the proposed rates for the financial plan period FY2010 through
FY2014. Note that these rates are anticipated to be implemented on January 1 of each
year.
Table ES-8: Current & Proposed Commodity Charges
Current 1 2 3 4 5
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Commodity Charge $ 2.08 $ 2.20 $ 2.46 $ 2.73 $ 2.96 $ 3.08
•
REMA K City of Newport Beach, CA
CONSULTING water Utility Financial Plan ES -8
5317004
Executive Summary
•
Table ES -9: Current & Proposed Monthly Service Charges
Current
1
2
3
4
5
Monthly Service Charge
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
3/4"
$ 4.50
$ 1.18
$ 5.76
$ 7.53
$ 8.78
$ 9.15
11.
5.50
1.97
9.60
12.55
14.63
15.24
11/2"
7.00
3.94
19.20
25.09
29.26
30.49
2"
9.50
6.31
30.72
40.14
46.81
48.78
3"
18.00
11.83
57.61
75.27
87.77
91.46
4"
25.50
19.71
96.01
125.45
146.28
152.43
V.
38.50
39.42
192.02
250.91
292.57
304.85
8"
45.00
63.07
307.23
401.45
468.10
487.76
10"
45.00
113.36
552.25
721.60
841.42
876.75
12"
45.00
182.34
888.28
1,160.69
1,353.41
1,410.24
Table ES -10: Proposed Capital Charges
Current
1
2
3
4
5
Capital Charge
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
3/4"
$ 7.08
$ 7.33
$ 7.59
$ 7.85
$ 8.13
1 "
11.80
12.22
12.65
13.09
13.55
11/2"
23.61
24.43
25.29
26.18
27.09
•
2"
37.77
39.10
40.46
41.88
43.35
3"
i
70.83
73.30
75.87
78.53
81.27
4"
118.04
122.17
126.45
130.88
135.46
6"
236.09
244.35
252.90
261.75
270.91
8"
-
377.74
390.96
404.64
418.80
433.46
10"
-
678.98
702.75
727.34
752.80
779.15
12"
1,092.13
1,130.35
1,169.92
1,210.86
1,253.24
Table ES -11: Current
& Proposed Combined Fixed Charges
Current
1
2
3
4
5
Combined Fixed Charges FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
314"
$ 4.50
$ 8.27
$ 13.09
$ 15.11
$ 16.63
$ 17.27
1 "
5.50
13.78
21.82
25.19
27.72
28.79
1112"
7.00
27.55
43.64
50.38
55.43
57.58
2"
9.50
44.08
69.82
80.61
88.69
92.12
3"
18.00
82.65
130.91
151.14
166.30
172.73
4"
25.50
137.75
218.18
251.90
277.16
287.88
6"
38.50
275.50
436.37
503.81
554.32
575.76
8"
45.00
440.80
698.19
806.09
886.91
921.22
10"
45.00
792.34
1,254.99
1,448.95
1,594.22
1,655.90
12"
45.00
1,274.47
2,018.64
2,330.61
2,564.27
2,663.48
•
R MA K
CONSULTING
City of Newport Beach, CA
Water Utility Financial Plan
�
ES-9
' .. . ,,.,,,,. "....<,...,..,.
5317004
Executive
Customer Bill Impact
Figure ES -3 presents the single — family residential monthly bill impact distribution for
FY2010 rates. This bill distribution is based on the City's calendar year 2007
consumption history. The blue columns indicate the percentage of single- family
residential monthly bills that will increase by the corresponding amount on the horizontal
axis, assuming consumption is similar to calendar year 2007. The red line indicates the
cumulative percentage of monthly bills at each amount of change in bill. For example,
the figure shows that 67% of monthly bills will increase by no more than $10. It also
shows that approximately 15% of monthly bills will increase by between $4 and $5.
Note that over 90% of monthly bills will increase by no more than $15.
Figure ES -3: FY2010 Single - Family Residential Customer Monthly Bill Impact
16% _ - - - _ _ _ - = 100%
14%
12%
10%
c
a
E A -%
b
4
i 6%
4%
2%
0%
O fV P Y
N O h N<
N N N N N
N N N N 1
?0%
80%
70%
67% of nwntllly bills will
increase by w more Dian 60%
S10
'0%
40 -A
30%
20%
1 0 Ml 1 N O A 9 P O M O N A m (qy O N {y.1 N ro 0 O V
1 N P N N N P N N 'Jl N N N N A N P Nr N
NV N N 51 2 VI N N 4 (^'1 N N
2
change in Mordity Bill
m
e
q
m
6
u
�.; RERDA K City of Newport Beach, CA
CONSULTING water Utility Financial Plan O ES-10
.. �. �. �...1.... ... ...... 5317004
E
1]
•
Section 1
Introduction
•
1. Introduction
1.1. Scope
The City of Newport Beach Utilities Division (the City) retained Red Oak Consulting to
conduct a water rate study (the Study). This study includes the development of a five -
year financial plan, cost -of- service analysis, and development of a conservation rate
structure. For purposes of expediting the adoption of new rates, the Study has been
divided into two phases:
1. The development of the financial plan, the allocation of fixed and variable
revenue, and the proportioning of the monthly service charge by meter size; and
2. The redesign of the commodity charge from a uniform rate to a conservation rate
structure.
This report documents the first phase of the Study, including the methodology used to
develop the financial plan, the policy decisions reached, the proposed water rates, and the
• customer bill impacts. A separate report will be prepared for the second phase of the
study upon its completion.
•
1.2. Background
The City of Newport Beach Utilities Division currently serves a population of over
86,000 within a service area of approximately fifty square miles. It is located on the
Pacific coast of California, in Orange County, and surrounded by Huntington Beach and
Costa Mesa to the north, Laguna Beach to the South, and Irvine to the east. The City
currently has over 26,300 active connections and delivers over 18,000 acre feet (AF) of
water per year on average. The City owns and operates three reservoirs: Big Canyon
Reservoir (600 AF), Spyglass Hill Reservoir (4.5 AF), and 16'h Street Reservoir (9.2 AF).
•,• RE®AK City of Newport Beach, CA
% CONSULTING Water Utility Financial Plan 1 -1
..,.,.•. ,..... ... ...... 5317D04
Section 2
Financial Plan
•
2. Financial Plan
In order to maintain the financial viability of the City's water system, Red Oak, with the
assistance of the City's staff, has prepared a financial plan for the five -year period from
fiscal year ending (FY) 2010 through FY2014. This financial plan includes the
development of the City's annual revenue requirement, a financing plan for its capital
improvement program (CIP), and review and recommendations for the City's reserve
policies.
Red Oak used its proprietary electronic financial planning model, eForecast, to determine
the appropriate amount of revenue necessary for the City to meet all of the above
requirements.
2.1. Funds
The City currently maintains a single fund for its water operations, capital improvement
financing, and reserves. Based on direction from the City's staff, Red Oak has created a
separate fund for capital- related expenditures, which will be referred to as the 'Capital
Fund.' The financial planning model isolates this fund from the City's Operating Fund in
order to evaluate the financial viability of each fund separately. The City, with the
assistance of Red Oak, has developed target reserve levels for each fund, which will be
explained in detail below.
2.2. Revenue Requirement
The City's revenue requirement is the total amount of revenue it must collect in order to
meet its operations and maintenance (O &M) expenditures, debt service payments, and
cash - financed capital expenditures. This revenue is collected through water rates and
does not include revenue from incidental fees, charges, or other non - operating revenue.
The City's O &M expenditures are accounted for in the Operating Fund while debt
service payments and cash - financed capital are accounted for in the Capital Fund.
2.2.1. Operations & Maintenance
The City's operations & maintenance expenditures have steadily increased over the past
four years, since its most- recent rate increase in FY2005. Table 2 -1 presents the City's
historical O &M expenditures for FY2005 through FY2008.
•
• RE ®A K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 2 -1
• . ..,.,...... ..,.....,... 5317004
2.2.1.1. Purchased Water Costs
The largest components of the City's O &M expenditures are its purchased water costs
and associated O &M, which are encompassed by the `Other O &M' category in Table
2 -1. The City currently obtains its water from two major sources: the Municipal Water
District of Orange County ( MWDOC), which imports its water from the State Water
Project and the Colorado River Aqueduct through the Metropolitan Water District of
Southern California (MET), and the Orange County Water District (OCWD), which
manages the Orange County groundwater basin. Variations in purchased water costs
occur year -to -year based on the City's basin pumping percentage (BPP), which is the
percentage of the City's annual demand that can be pumped from the basin; weather
• conditions; and to a lesser extent, the economy and growth.
Table 2 -2 presents the average unit cost of purchased water per AF by the City's two
major sources for FY2005 through FY2008. Note that the average cost per AF is the
total amount of charges paid to each agency, divided by the amount of water purchased.
The total amount of annual charges for MWDOC includes the cost of treated water, the
capacity charge, the readiness -to -serve charge, and the meter charge. The total amount of
annual charges for OCWD includes the cost of the replenishment assessment and
annexation fee.
Table 2 -2: Historical Average Unit Cost of Purchased Water per AF
Description FY2005 FY2006 FY2007 FY2008
Purchased Water — MWDOC ($/AF) $ 492 $ 514 $ 616 $ 597
Purchased Water — OCWD ($ /AF) 233 255 344 279
•
The City has seen a 29% increase in the average cost of purchased water from MWDOC
and a 37% increase in the average cost of purchased water from OCWD since 2005.
Based on information obtained from MWDOC and OCWD, Red Oak projects the
following average unit costs of purchased water per AF in Table 2 -3. These projected
unit costs are based on a projected purchased water amount of 17,100 AF per year.
REBDA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan F2--2]
•.••.. 5317004
Section 2
Financial Plan
• Table 2 -1: Historical Operations & Maintenance
Expenditures (in thousands)
Description
FY2005
FY2006
FY2007
FY2008
Purchased Water - MWDOC
$ 3,350
$ 3,800
$ 3,350
$ 3,400
Purchased Water -OCWD
2,929
2,880
3,280
3,280
Utilities
1,094
922
872
922
Salaries & Benefits
3,302
3,712
3,827
3,799
Equipment Maintenance & Replacement
345
341
348
417
Other O &M
3,013
3,453
3,444
3,593
Total
$ 14,033
$ 15,108
$ 15,121
$ 15,411
2.2.1.1. Purchased Water Costs
The largest components of the City's O &M expenditures are its purchased water costs
and associated O &M, which are encompassed by the `Other O &M' category in Table
2 -1. The City currently obtains its water from two major sources: the Municipal Water
District of Orange County ( MWDOC), which imports its water from the State Water
Project and the Colorado River Aqueduct through the Metropolitan Water District of
Southern California (MET), and the Orange County Water District (OCWD), which
manages the Orange County groundwater basin. Variations in purchased water costs
occur year -to -year based on the City's basin pumping percentage (BPP), which is the
percentage of the City's annual demand that can be pumped from the basin; weather
• conditions; and to a lesser extent, the economy and growth.
Table 2 -2 presents the average unit cost of purchased water per AF by the City's two
major sources for FY2005 through FY2008. Note that the average cost per AF is the
total amount of charges paid to each agency, divided by the amount of water purchased.
The total amount of annual charges for MWDOC includes the cost of treated water, the
capacity charge, the readiness -to -serve charge, and the meter charge. The total amount of
annual charges for OCWD includes the cost of the replenishment assessment and
annexation fee.
Table 2 -2: Historical Average Unit Cost of Purchased Water per AF
Description FY2005 FY2006 FY2007 FY2008
Purchased Water — MWDOC ($/AF) $ 492 $ 514 $ 616 $ 597
Purchased Water — OCWD ($ /AF) 233 255 344 279
•
The City has seen a 29% increase in the average cost of purchased water from MWDOC
and a 37% increase in the average cost of purchased water from OCWD since 2005.
Based on information obtained from MWDOC and OCWD, Red Oak projects the
following average unit costs of purchased water per AF in Table 2 -3. These projected
unit costs are based on a projected purchased water amount of 17,100 AF per year.
REBDA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan F2--2]
•.••.. 5317004
Section 2
Financial Plan
Table 2 -3: Projected Average Unit Cost of Purchased Water per AF
Note that the projected unit cost of purchased water from MWDOC increases by over
65% and the projected unit cost of purchased water from OCWD increases by over 25%
from FY2009 through FY2014. Rising MWDOC costs can partially be attributed to the
State of California's third consecutive year of drought and diminished supplies from the
Bay Delta as part of efforts to protect endangered species. Purchased water costs from
OCWD vary year -to -year based on the City's BPP, which is a function of the Orange
County Groundwater Basin's rate of recharge. The unit costs also fluctuate due to the
proportions of total water purchased from each of the City's two sources.
2.2.1.2. Utilities
Utilities costs include electricity costs and telecommunications costs. The majority of
these costs depend on the total amount of water pumped from the Orange County
groundwater basin and have therefore been projected based on the projected amount of
water that will be pumped.
2.2.1.3. Other O &M
O &M expenditures apart from purchased water and utilities include salaries and benefits,
equipment maintenance and replacement, and other O &M. Other O &M includes the
general fund service charge, mirror capital expenditures, chemicals, and other supplies.
Based on the historical changes in costs for these items and discussion with City staff,
Red Oak estimates the following annual escalation factors for these O&M expenditures:
• Salaries & Benefits — 4%
• Equipment Maintenance & Replacement — 5%
• Other O &M
• General Fund Service Charge — 4%
• Minor Capital Expense — 0%
• Chemicals & Supplies — 11%
2.2.1.4. Projected Operations & Maintenance Expenditures
Table 2-4 presents the projected O &M expenditures for the City for the current fiscal
year and the financial plan period FY2010 through FY2014.
::• RE®A K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 2 -3
.................,..,, 5317004
•
r1
LJ
\J
Current 1 2 3 4 5
Description
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Purchased Water - MWDOC ($ /AF)
$ 633 $ 759 $ 922 $ 966 $ 1,014 $ 1,065
Purchased Water- OCWD($ /AF)
319 361 364 382 397 408
Note that the projected unit cost of purchased water from MWDOC increases by over
65% and the projected unit cost of purchased water from OCWD increases by over 25%
from FY2009 through FY2014. Rising MWDOC costs can partially be attributed to the
State of California's third consecutive year of drought and diminished supplies from the
Bay Delta as part of efforts to protect endangered species. Purchased water costs from
OCWD vary year -to -year based on the City's BPP, which is a function of the Orange
County Groundwater Basin's rate of recharge. The unit costs also fluctuate due to the
proportions of total water purchased from each of the City's two sources.
2.2.1.2. Utilities
Utilities costs include electricity costs and telecommunications costs. The majority of
these costs depend on the total amount of water pumped from the Orange County
groundwater basin and have therefore been projected based on the projected amount of
water that will be pumped.
2.2.1.3. Other O &M
O &M expenditures apart from purchased water and utilities include salaries and benefits,
equipment maintenance and replacement, and other O &M. Other O &M includes the
general fund service charge, mirror capital expenditures, chemicals, and other supplies.
Based on the historical changes in costs for these items and discussion with City staff,
Red Oak estimates the following annual escalation factors for these O&M expenditures:
• Salaries & Benefits — 4%
• Equipment Maintenance & Replacement — 5%
• Other O &M
• General Fund Service Charge — 4%
• Minor Capital Expense — 0%
• Chemicals & Supplies — 11%
2.2.1.4. Projected Operations & Maintenance Expenditures
Table 2-4 presents the projected O &M expenditures for the City for the current fiscal
year and the financial plan period FY2010 through FY2014.
::• RE®A K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 2 -3
.................,..,, 5317004
•
r1
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The City's O &M expenditures are projected to increase by over $7 million, or 45 %, from
FY2009 to FY2014. Purchased water costs alone account for 57% of this increase.
Purchased water costs are projected to increase by $3.7 million from MWDOC and $0.5
million from OCWD from FY2009 through FY2014. These costs, combined with Other
O &M, which is partially determined by the total amount of water purchased, account for
nearly 80% of the total increase.
2.2.2. Capital Improvement Program Financing
2.2.2.1. Historical Capital Improvement Program Financing
• Since FY2005, the City has cash - financed all of its capital improvement needs. Table 2 -5
presents a summary of capital improvement financing from FY2005 through FY2008.
Table 2 -5: Historical Capital Improvement Program Financing (in thousands)
Description FY2005 FY2006 FY2007 FY2008
Capital Projects $ 8,634 $ 7,794 $ 4,924 $ 5,363
Cash - Financed Capital Projects 8,634 7,794 4,924 5,363
Debt - Financed Capital Projects - - - -
Total Capital Projects Funded $ 8,634 $ 7,794 $ 4,924 $ 5,363
E
2.2.2.2. Water Master Plan
The City has developed a 30 -year capital improvement program as part of its 2009 Water
Master Plan. Table 2 -6 presents the 30 -year CIP for the City as indicated in the 2009
Water Master Plan. The CIP is presented in annually escalated dollars to account for
rising construction costs. Red Oak believes that the escalation rate of 4% used by the
City to develop its CIP is reasonable and consistent with Engineering New Record (ENR)
construction cost index. Note the average annual capital expenditure for the 30 -year CIP
is approximately $5.6 million compared with $2.5 million for the five -year financial plan
period FY2010 through FY2014.
,•� R)r ®ill'` City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 72-4]
..,. ..... ..... ...... 5317004
Section 2
Financial Plan
• Table 2-4: Projected Operations &
Maintenance Expenditures (in thousands)
Current
1
2
3
4
5
Description
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
Purchased Water - MW DOC
$ 3,354
$ 4,931
$ 5,991
$ 6,440
$ 6,762
$ 7,100
Purchased Water -OCWD
3,857
3,922
3,947
4,081
4,232
4,351
Utilities
1,325
1,322
1,440
1,549
1,692
1,851
Salaries & Benefits
4,152
4,319
4,491
4,671
4,858
5,052
Equipment Maintenance & Replacement
423
444
467
490
514
540
Other O&M
3,579
3,856
4,159
4,491
4,853
5,250
Total
$16,690
$18,794
$ 20,494
$ 21,722
$ 22,911
$ 24,144
The City's O &M expenditures are projected to increase by over $7 million, or 45 %, from
FY2009 to FY2014. Purchased water costs alone account for 57% of this increase.
Purchased water costs are projected to increase by $3.7 million from MWDOC and $0.5
million from OCWD from FY2009 through FY2014. These costs, combined with Other
O &M, which is partially determined by the total amount of water purchased, account for
nearly 80% of the total increase.
2.2.2. Capital Improvement Program Financing
2.2.2.1. Historical Capital Improvement Program Financing
• Since FY2005, the City has cash - financed all of its capital improvement needs. Table 2 -5
presents a summary of capital improvement financing from FY2005 through FY2008.
Table 2 -5: Historical Capital Improvement Program Financing (in thousands)
Description FY2005 FY2006 FY2007 FY2008
Capital Projects $ 8,634 $ 7,794 $ 4,924 $ 5,363
Cash - Financed Capital Projects 8,634 7,794 4,924 5,363
Debt - Financed Capital Projects - - - -
Total Capital Projects Funded $ 8,634 $ 7,794 $ 4,924 $ 5,363
E
2.2.2.2. Water Master Plan
The City has developed a 30 -year capital improvement program as part of its 2009 Water
Master Plan. Table 2 -6 presents the 30 -year CIP for the City as indicated in the 2009
Water Master Plan. The CIP is presented in annually escalated dollars to account for
rising construction costs. Red Oak believes that the escalation rate of 4% used by the
City to develop its CIP is reasonable and consistent with Engineering New Record (ENR)
construction cost index. Note the average annual capital expenditure for the 30 -year CIP
is approximately $5.6 million compared with $2.5 million for the five -year financial plan
period FY2010 through FY2014.
,•� R)r ®ill'` City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 72-4]
..,. ..... ..... ...... 5317004
Section 2
Current
FY2009
Financial Plan
2
FY2011
Table 2 -6: 30 -Year Capital Improvement Program (in thousands)
•
Year Capital Year Capital
Capital Projects
Expenditure Expenditure
$ 3,210
FY2009 $ 1,600 FY2024 $ 5,279
$ 3,542
FY2010 3,210 FY2025 7,905
$ 1,033
FY2011 1,830 FY2026 7,090
1,600
FY2012 3,542 FY2027 10,534
1,830
FY2013 2,700 FY2028 1,643
2,700
FY2014 1,033 FY2029 12,458
Debt - Financed Capital Projects
FY2015 3,610 FY2030 7,694
-
FY2016 8,408 FY2031 5,518
-
FY2017 4,890 FY2032 7,255
-
FY2018 5,382 FY2033
$1,600
FY2019 5,597 FY2034 4,315
$1,830
FY2020 5,821 FY2035 7,645
$ 2,700
FY2021 4,933 FY2036 7,950
FY2022 4,975 FY2037 8,268
FY2023 7,584 FY2038 8,599
15 -Year Total $ 65,115 30 -Year Total $167,268
Note: Project costs are escalated at a rate of 4% annually
2.2.2.3. Future Capital Improvement Program Financing
•
The City will continue to finance its CIP on a pay -as- you -go basis during the financial
plan period. Table 2 -7 presents the financing plan for the City's CIP for the current fiscal
year and the financial plan period FY2010 through FY2014. Future capital financing will
be accounted for in the City's Capital Fund. An additional monthly capital charge will be
assessed by meter size. This capital charge will be the primary source of revenue for the
Capital Fund and be used to pay for cash - financed capital and debt service.
Table 2 -7: Capital Improvement Program Financing (in thousands)
Description
Current
FY2009
1
FY2010
2
FY2011
3
FY2012
4
FY2013
5
FY2014
Capital Projects
$ 1,600
$ 3,210
$ 1,830
$ 3,542
$ 2,700
$ 1,033
Cash - Financed Capital Projects
1,600
3,210
1,830
3,542
2,700
1,033
Debt - Financed Capital Projects
-
-
-
-
-
-
Total Capital Projects Funded
$1,600
S3,210
$1,830
$ 3,542
$ 2,700
$1,033
2.2.2.4. Historical and Future Debt Service Payments
Table 2 -8 presents the City's debt service payments from FY2005 through FY2008.
These payments are among the six final payments for the 1999 Refunding of Water
Revenue Bonds.
E
• •.' RE®AIC City of Newport Beach, CA
CONSULTING water Utility Financial Plan 2-5
..• 5317004 O
Section 2
Financial Plan
• Table 2 -8: Debt Service Payments (in thousands)
Description FY2005 FY2006 FY2007 FY2008
Debt Service $ 1,653 $ 1,650 $ 1,649 $ 1,619
Table 2 -9 presents the two remaining debt service payments for the 1999 Refunding.
Table 2 -9: Projected Debt Service Payments (in thousands)
Current
Description FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Debt Service $ 1,618 $ 130 - - -
2.3. Reserve Requirements
Reserve requirements are funds set aside for precautionary purposes such as for revenue
stabilization, rate stabilization, or emergency capital replacement. These funds are
typically required to maintain a predetermined balance or an amount based on annual
operating results. The City currently maintains two reserves and a minimum capital
contribution, referred to as the `designated reserve':
• System Reserve – 35% of annual budget
• Stabilization Reserve – 25% of annual budget
• • Designated Reserve– 10% of annual budget
The following reserves are commonly maintained by utilities, and are recommended by
Red Oak —at a minimum —to insulate the City from financial volatility.
2.3.1. Operating Stabilization Reserve (Operating Fund)
An operating stabilization reserve is established primarily to maintain adequate levels of
cash between the time expenses are incurred and revenue are received. It may also be
used to insulate a utility from volatility in some operating expenditures such as for
energy, and provide time for the utility to adjust rates. Utilities that bill monthly typically
maintain a reserve equivalent to 45 to 90 days of operating expenditures, while utilities
that bill bimonthly typically maintain a reserve equivalent to 90 to 180 days of operating
expenditures. Seasonality is also a factor in determining the appropriate reserve level;
utilities that have strong seasonal influences to their demand typically maintain larger
reserves.
The City does not currently maintain an operating stabilization reserve. Red Oak
recommends that the City maintain a reserve equivalent to 180 days of its operating
budget, or 50 %. This reserve level also provides a buffer period of 24 months at a 25%
loss rate. Funds collected in excess of the operations stabilization reserve target would be
available to offset future rate adjustments while extended reserve shortfalls would be
• recovered from future rate increases.
• .' RMA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan F27-6
• . ........................ 53170114
Section 2
Financial Plan
2.3.2. Contingency Reserve (Capital Fund) •
A contingency reserve is established to fund the replacement or repair of system facilities
in the event that these facilities are impaired due to a catastrophe. The reserve may also
be used to insulate against early and/or unanticipated capital replacement costs.
The City currently maintains a contingency reserve equivalent to 35% of its annual
budget, which is based on a historical approximation of capital replacement needs in the
event of a catastrophe. In order to determine the appropriate level of emergency capital
replacement reserves, the City should conduct a criticality assessment of its system
facilities. This assessment involves quantifying the probability of its facilities being
impaired, the level of impairment, and the cost of replacement should a catastrophe
occur. Red Oak recommends that the City conduct such an assessment; however, if
resources are limited, the City may wish to set its contingency reserve level based on an
alternative method. Based on direction from the City's staff, Red Oak has evaluated a
contingency reserve that parallels the annual revenue anticipated to be recovered through
the proposed capital charge. Red Oak believes this amount may provide a sufficient
reserve against unanticipated replacements or repairs. By FY2014, the target
contingency reserve will be approximately $4 million.
2.4. Five -Year Financial Plan
2.4.1. Current Financial Outlook
Based on the City's increasing O &M expenditures, capital financing needs, and proposed
reserve requirements, current revenue are insufficient. Figure 2 -1 presents the current
fiscal year and the five -year financial outlook for FY2010 through FY2014 with no rate
revenue increases. Each column is broken into individual annual expenditures, indicated
by a different color (see legend). The red line represents annual revenue, the black line
represents ending balances, and the orange line represents target reserves. Under current
rate revenue, the City will be unable to maintain a positive balance in the combined
Operating Fund and Capital Fund by FY2011.
• .' RE ®A K City of Newport Beach, CA ,-
CONSULTING Water Utility Financial Plan 2 -7
• .. .... ..... .I ............1 5317004
•
•
•
•
•
Section 2
Financial Plan
Figure 2 -1: Five -Year Financial Outlook with No Revenue Increases (in thousands)
530.000
S20,000
510.0.0
$0
- 510,000
- S20A00
- 530,000
540.000
2i {5 2010 gym" _gin_ 2019 2014
` IL
. cllh- FUn]a: Pur- hII3tlVplal OCAM PurehaWMt*,_WVDoc
�Jpmetng L:�sneYN =a— Fevenuea -•-`ayetFnervee —t EOtliny Beinee
2.4.2. Proposed Five -Year Financial Plan
Red Oak, with the assistance of the City's staff, has developed a five -year financial plan
for the period FY2010 through FY2014. Based on the direction of the City's Finance
Committee, this financial plan has been developed such that rate shock to customers is
minimal, capital projects are financed only by cash, and reserves are met by FY2014.
Table 2 -10 presents the five -year financial plan for the City's Operating Fund.
�.' RE®AK City of Newport Beach, CA
CONSULTING water Utility Financial Plan
....... ........,.., 5317004
Section 2
Financial Plan
Table 2 -10: Operating Fund Five -Year Financial Plan (in thousands)
Operations & Maintenance
Current
1
2
3
4
5
Operating Fund
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
Commodity Charge Revenue
$ 14,938
$ 15,394
$ 17,253
$ 19,100
$ 20,698
$ 21,594
Monthly Service Charge Revenue
1,640
584
2,847
3,720
4,337
4,519
Miscellaneous Revenue
439
439
439
439
439
439
Interest Income
291
117
120
143
239
377
Total Revenue
17,309
16,535
20,660
23,403
25,714
26,930
Operations & Maintenance
9,480
9,941
10,557
11,201
11,917
12,693
Purchased Water -MWDOG
3,354
4,931
5,991
6,440
6,762
7,100
Purchased Water - OCWD
3,857
3,922
3,947
4,081
4,232
4,351
Total O&M
16,690
18,794
20,494
21,722
22,911
24,144
Capital Contribution
(3,300)
Annual Surplus / (Deficiency)
(2,682)
(2,258)
166
1,681
2,803
2,785
Beginning Balance
9,665
6,983
4,725
4,891
6,572
9,374
Ending Balance
$ 6,983
$ 4,725
S4,891
$ 6,572
$ 9,374
$12,160
Target Reserves
$ 8,345
$ 9,397
$ 10,247
$ 10,861
$ 11,456
$ 12,072
Note that cash- financed capital and debt service are accounted for in the Capital Fund.
The removal of these items has a corresponding decrease in the rate revenue required and
accounted for in the Operating Fund, as seen in FY2010. Total rate revenue for the
combined Operating Fund and Capital Fund, however, increases year -to -year to meet
increasing O &M expenditures, capital improvement financing needs, and the proposed
reserve requirements. The City's proposed Operating Stabilization reserve is met by
FY2014.
Table 2 -11 presents the five -year financial plan for the City's Capital Fund.
•'� .' R EDDA K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 2 -9
,..,.,..., ............. 5317004
•
u
•
•
Annual Surplus / (Deficiency)
84 163
1,821
262
1,269
Section 2
Beginning Balance
- 84
247
2.069
2,331
Financial Plan
• Table 2 -11:
Capital Fund Five -Year Financial Plan (in thousands)
$ 2,069
Current
1
2
3
4 5
Capital Fund
FY2009
FY2010
FY2011
FY2012
FY2013 FY2014
Capital Charge Revenue
$ 3,500
$ 3,623
$ 3,749
$ 3,881 $ 4,016
Capital Contribution
3,300
-
-
-
Interest Income
1
3
29
55
89 181
Total Revenue
3,301
3,503
3,651
3,804
3,969 4,198
Cash - Funded Capital
1,600
3,210
1,830
3,542
2,700 1,033
Existing Debt Service
1,618
130
-
-
- -
New Debt Service
-
-
-
-
- -
Total Debt Service
1,618
130
•
Annual Surplus / (Deficiency)
84 163
1,821
262
1,269
3,165
Beginning Balance
- 84
247
2.069
2,331
3,601
Ending Balance
$ 84 $ 247
$ 2,069
$ 2,331
S3,601
$ 6,765
Target Reserves
$ 4,000 $ 3,500
$ 3,623
$ 3,749
$ 3,881
$ 4,016
Rate Revenue generated by the proposed Capital Charge is accounted for in the Capital
Fund. This source of revenue, which begins in FY2010, is collected to recover the costs
of cash - financed capital projects and debt service for the 1999 Refunding of Water
Revenue Bonds. The target contingency reserve, which is met by FY2014, is based on
the anticipated annual capital charge revenue, which will be approximately $4 million in
FY2014.
Table 2 -12 presents the five -year financial plan for the City's combined water fund.
,•.; R QAK City of Newport Beach, CA
CONSULTING 'Hater Utility Financial Plan
• 5317004
2 -10
Section 2
Financial Plan
Table 2 -12: Combined Water Fund Five -Year Financial Plan (in thousands)
Current 1 2 3 4
Combined Water Fund
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Rate Revenue
$ 16,578
$ 19,479
$ 23,723
$ 26,569
$ 28,916
$ 30,130
Miscellaneous Revenue
439
439
439
439
439
439
Interest Income
293
120
149
198
328
558
Total Revenue
17,310
20,039
24,311
27,207
29,683
31,127
Operations & Maintenance
9,480
9,941
10,557
11,201
11,917
12,693
Purchased Water - MWDOC
3,354
4,931
5,991
6,440
6,762
7,100
Purchased Water - OCWD
3,857
3,922
3,947
4,081
4,232
4,351
Total O&M
16,690
18,794
20,494
21,722
22,911
24,144
Cash - Funded Capital 1,600 3,210 1,830 3,542 2,700
1,033
Existing Debt Service 1,618 130 - - -
-
New Debt Service - - - - -
Total Debt Service 1,618 130 0 0 0
0
Total Expenditures 19,908 22,133 22,324 25,264 25,611
25,177
Annual Surplus / (Deficiency) (2,598) (2,095) 1,987 1,943 4,072
5,950 •
Beginning Balance 9,665 7,067 4,973 6,960 8,903
12,975
Ending Balance $ 7,067 $ 4,973 $ 6,960 $ 8,903 $12,975
$18,925
Target Reserves $ 12,345 $ 12,897 $ 13,870 $ 14,610 $ 15,336
$ 16,088
The City anticipates an annual deficiency of approximately $2.6 million for the current
fiscal year. The proposed financial plan eliminates this annual deficiency by FY2011.
Reserves are drawn down in FY2009 and FY2010 in order to minimize the rate shock
associated with the necessary rate revenue increases.
Figure 2 -2 presents a graphical representation of the Combined Water Fund's five -year
financial plan. Each column is separated into individual annual expenditures, indicated
by a different color (see legend). The red line represents annual revenue, the black line
represents ending balances, and the orange line represents target reserves. Note that
target reserves are not met until FY2014. Rate revenue is gradually increased throughout
the five -year financial plan such that 'rate shock' to customers is reduced.
•
RMAK City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 2 -11
5317004
•
•
Figure 2 -2: Five -Year Financial Plan (in thousands)
$35.000
$30.000
325.000
$20000
-�
315.000
$10000
$5.000
so
2009
]aa FundWophol
agar• JP*,.09 E.Pendbrm
Section 2
Financial Plan
201) 2_11
ExlAn9 )ept:er: ke
Rvsnuea
REIIDAK City of Newport Beach, CA
• CONSULTING water Utility Financial Plan
5317004
2012 2013 2014
Purahaaa9V*tx -OCAL �Purdmsei Waler -Mw00C
— —Targe Raoarvaa —a- Enamp BPbrPs
2 -12
Section 3
Current Water Rates
3. Current Water Rates
As part of the first phase of the Study, Red Oak reviewed the City's current water rates.
These rates must be adjusted in order to follow Red Oak's proposed financial plan as they
are currently insufficient to meet the City's rising O &M expenditures, capital
improvement needs, and the proposed reserve requirements.
3.1. Monthly Service Charge
Table 3 -1 presents the current monthly service charge for water accounts by meter size.
Table 3-1: Current Monthly Service Charge by Meter Size
Meter Size
Monthly
Service
Charge
3/4"
$ 4.50
1"
5.50
1 1/2"
7.00
2"
9.50
3"
18.00
4"
25.50
6"
38.50
8"
45.00
10"
45.00
12"
45.00
3.2. Commodity Charge
The current commodity charge is $2.08 per HCF. The City's commodity charge is a
uniform rate and does not vary by meter size, customer class, or season.
' •: R ®Ali City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 3-1
..................... 5317004 ._
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E
Section 4
Fixed / Variable Revenue
•
4. Fixed / Variable Revenue
4.1. Current Fixed / Variable Rate Revenue
The City currently collects approximately 90% of its rate revenue through its commodity
charge and the remaining 10% through its monthly service charge. Table 4 -1 presents the
current composition of the City's rate revenue. A high proportion of variable revenue is
potentially favorable in terms of affordability and conservation as customers that use less
water are rewarded with lower bills. A high proportion of variable revenue, however, is
less favorable in terms of revenue stability as less revenue is secure when water use is
volatile.
Table 4 -1: Current (FY2009) Fixed / Variable Rate Revenue ($ in thousands)
Rate Revenue Source FY2009 Percent Share
Commodity Charge $ 14,938 90%
Monthly Service Charge 1,640 10%
Total Rate Revenue $ 16,578
4.2. California Urban Water Conservation Council Best
Management Practice 11
The California Urban Water Conservation Council (CUWCC) has developed fourteen
best management practices (BMPs) to reduce long -term urban water demand in
California. Implementation of these BMPs can aid water agencies in receiving regional
and/or state grants, in addition to reducing long -term demand.
CUWCC's BMP 11 concerns retail water service rates. It states that in order for water
rates to qualify as 'conservation rates,' variable rate revenue must be at least 70% of total
rate revenue. BMP 11 clarifies that uniform rates, seasonal rates, tiered rates, and
allocation -based rates are all types of rates that can be used to meet its requirements.
4.3. Proposed Fixed / Variable Revenue
The City is currently exceeding the requirements of CUWCC's BMP 11 by 20 %. Red
Oak recommends that in order to reduce revenue instability generated by the City's
disproportionate share of variable revenue, the City should gradually reduce the
commodity charge's share of total rate revenue to slightly more than 70% by FY2014.1
. I To meet the requirements of BMP 11, the City should closely monitor its revenue to ensure that fixed charges do not
exceed 30 percent of its revenue. This is important since the effects of conservation will reduce volume - related
,'� P- REIIDA K City of Newport Beach, CA
CONSULTING Water utility Financial Plan 4 -1
> ... ............. 5317004
Section 4
Fixed / Variable Revenue
Table 4 -2 presents the proposed blend of fixed and variable rate revenue for the financial
plan period FY2010 through FY2014. The proposed blends of fixed and variable revenue
will help the city maintain revenue stability while still meeting the requirements of BMP
11. Further, by increasing the proportion of revenue that is collected through fixed
charges, the City can reduce its reliance on revenue collected through more aggressive
conservation -based rates that it is planning to adopt in the future.
Table 4 -2: Proposed Fixed / Variable Revenue ($ in thousands)
Current 1 2 3 4 5
Rate Revenue FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Total Rate Revenue
$ 16,578
$ 19,479
$ 23,723
$ 26,569
$ 28,916
$ 30,130
Fixed Revenue Share
10%
21%
27%
28%
28%
28%
Variable Revenue Share
90%
79%
73%
72%
72%
72%
Fixed Revenue - Monthly Service Charge
$ 1,640
$ 4,084
$ 6,469
$ 7,469
$ 8,218
$ 8,536
Variable Revenue - Commodity Charge
$ 14,938
$ 15,394
$ 17,253
$ 19,100
$ 20,698
$ 21,594
Projected Water Sales (Million HCF)
7,182
7,002
7,002
7,002
7,002
7,002
Variable Rate ($ /HCF)
$ 2.08
$ 2.20
$ 2.46
$ 2.73
$ 2.96
$ 3.08
Note: Projected Water Sales assumes 6% water loss rate.
Note that the total rate revenue in the above table matches the rate revenue presented in
Table 2 -12. Variable revenue projections rely on the City's projected sales of
approximately 7 million HCF for FY2010 through FY2014. Projected sales, however,
will be revised to account for a conservation rate structure, during the second phase of the
Study. Adjustments to these projections will vary according to how aggressive the
conservation rate structure is.
charges. As the City implements tiered water rates, it may consider requesting and exemption from the requirements of
BMP 11.
,••� It ®AK City of Newport Beach, CA
• • • CONSULTING Water Ublity Financial Plan 4-2
' • . •' ..,.,,,................. 5317004
•
•
J
Section 5
Monthly Service Charge Meter Equivalency
•
5. Monthly Service Charge Meter Equivalency
•
5.1. Current Meter Equivalency Schedule
Table 5 -1 presents the current monthly service charge and the corresponding meter
equivalency ratio for each meter size.
Table 5 -1: Current Monthly Service Charge & Meter Equivalency Schedule
Meter Size
Monthly
Service
Charge
Meter
Equivalency
Ratio
314"
$ 4.50
1.00
1 "
5.50
1.22
11/2"
7.00
1.56
2"
9.50
2.11
3"
18.00
4.00
V
25.50
5.67
6"
38.50
8.56
8..
45.00
10.00
10"
45.00
10.00
12"
45.00
1 0.00
5.2. Proposed Meter Equivalency Schedule
The current meter equivalency schedule for the City's monthly service charge does not
adequately reflect the relative costs of reading, maintaining, and replacing different meter
sizes. Further, the current schedule does not account for the relative flow capacities of
different meter sizes, which often serves as a basis for the relative amounts of meter -
based charges. Red Oak recommends using the American Water Works Association's
(AWWA) estimate of meter flow capacity from the M6 manual as the basis for the City's
meter equivalency schedule. These flow estimates indicate the relative amounts of water
that can flow through each meter size, expressed in gallons per minute. These relative
capacities serve as an empirical basis for allocating costs among different meter sizes and
provide a more defensible rationale for the determination of relative meter charges.
California's Proposition 218 and Government Code §54999 both require proportionality
in the determination of water rates, which the proposed meter equivalency schedule helps
to address. Table 5 -2 presents the current and proposed meter equivalency schedules.
'•,• RMAK City of Newport Beach, CA
CONSULTING Water utility Financial Plan 5-1
5317004
Figure 5 -1 presents the current and proposed meter equivalency schedules in comparison
to other utilities within the region. Note that the current meter equivalency schedule for
the City is conservative in its escalation compared to other water agencies in the region,
with the exception of the City of Anaheim.
Figure 5 -1: Meter Equivalency Schedule Regional Comparison (FY2009)
,4c
uo
100
80
60
40
20 sIDC
0
Newport Reach Newport Beech Anaheim
icurrent) (Proposed)
"a Ranch Laguna Beach
Hun ingtm
Beads
•314" a1' a11r2' •2• 03' 64' 6" .8'
Mesa Garden Grove
Cmsdidated
i FMA K City of Newport Beach, CA
4 CONSULTING Water Utility Financial Plan 5-2
'•. •' 5317004
•
is
Section 5
Monthly Service Charge Meter Equivalency
Table 5 -2: Current
& Proposed Meter Equivalency Schedules
.
Meter Equivalency Ratio
Meter Size
Number of
Current Proposed
Meters
3/4"
17,445
1.00 1.00
1"
6,762
1.22 1.67
11/2"
495
1.56 3.33
2"
1,373
2.11 5.33
3"
48
4.00 10.00
4"
80
5.67 16.67
6"
28
8.56 33.33
a"
14
10.00 53.33
10"
0
10.00 95.87
12"
0
10.00 154.20
Figure 5 -1 presents the current and proposed meter equivalency schedules in comparison
to other utilities within the region. Note that the current meter equivalency schedule for
the City is conservative in its escalation compared to other water agencies in the region,
with the exception of the City of Anaheim.
Figure 5 -1: Meter Equivalency Schedule Regional Comparison (FY2009)
,4c
uo
100
80
60
40
20 sIDC
0
Newport Reach Newport Beech Anaheim
icurrent) (Proposed)
"a Ranch Laguna Beach
Hun ingtm
Beads
•314" a1' a11r2' •2• 03' 64' 6" .8'
Mesa Garden Grove
Cmsdidated
i FMA K City of Newport Beach, CA
4 CONSULTING Water Utility Financial Plan 5-2
'•. •' 5317004
•
is
•
Section 6
Proposed Water Rates
6. Proposed Water Rates
In order to implement the proposed financial plan, the City should adjust its current
monthly service charge and commodity charge to the rates presented below for the
financial plan period FY2010 through FY2014. These rates will allow the City to meet
the revenue targets presented in the five -year financial plan, which will cover its rising
expenditures for purchased water and other O &M items, capital improvement financing
needs, and proposed reserve requirements. These rates will also meet the proposed
transition to a composition of rate revenue in which fixed charges account for slightly
less than 30% of total rate revenue, allowing for more revenue stability. Tables 6 -1
through 6 -4 present the proposed rates for the financial plan period FY2010 through
FY2014. Note that these rates are anticipated to be implemented on January 1 of each
year.
L I
�.' RMAK City of Newport Beach, CA
CONSULTING Water Utility Rnancial Plan
5317004 6 1
..,.,.................
Table 6 -1: Current & Proposed Commodity Charges
Current
1
2
3
4
5
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
Commodity Charge
2.08
2.20
2.46
2.73
2.96
3.08
•
Table 6-2: Current &
Proposed Monthly Service Charges
Current
1
2
3
4
5
Monthly Service
Charge FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
3/4"
$ 4.50
$ 1.18
$ 5.76
$ 7.53
$ 8.78
$ 9.15
1 "
5.50
1.97
9.60
12.55
14.63
15.24
11/2"
7.00
3.94
19.20
25.09
29.26
30.49
2"
9.50
6.31
30.72
40.14
46.81
48.78
3"
18.00
11.83
57.61
75.27
87.77
91.46
4"
25.50
19.71
96.01
125.45
146.28
152.43
6"
38.50
39.42
192.02
250.91
292.57
304.85
8..
45.00
63.07
307.23
401.45
468.10
487.76
10°
45.00
113.36
552.25
721.60
841.42
876.75
12"
45.00
182.34
888.28
1,160.69
1,353.41
1,410.24
L I
�.' RMAK City of Newport Beach, CA
CONSULTING Water Utility Rnancial Plan
5317004 6 1
..,.,.................
Section 6
Proposed Water Rates
Table 6-3: Proposed Capital Charges
Current 1 2 3 4 5
Capital Charge FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
3/4"
$ 7.08
$ 7.33
$ 7.59
$ 7.85
$ 8.13
ill
- 11.80
12.22
12.65
13.09
13.55
11/2"
23.61
24.43
25.29
26.18
27.09
2"
37.77
39.10
40.46
41.88
43.35
3"
- 70.83
73.30
75.87
78.53
81.27
4"
- 118.04
122.17
126.45
130.88
135.46
6"
- 236.09
244.35
252.90
261.75
270.91
8"
- 377.74
390.96
404.64
418.80
433.46
10"
- 678.98
702.75
727.34
752.80
779.15
12"
1,092.13
1,130.35
1,169.92
1,210.86
1,253.24
Table 6-4: Current & Proposed Combined Fixed Charges
• •.' R ®%K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 6 -2
5317004
•
E
Current
1
2
3
4
5
Combined Fixed Charges
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
3/4"
$ 4.50
$ 8.27
$ 13.09
$ 15.11
$ 16.63
$ 17.27
1"
5.50
13.78
21.82
25.19
27.72
28.79
11/2"
7.00
27.55
43.64
50.38
55.43
57.58
2"
9.50
44.08
69.82
80.61
88.69
92.12
3"
18.00
82.65
130.91
151.14
166.30
172.73
4"
25.50
137.75
218.18
251.90
277.16
287.88
6"
38.50
275.50
436.37
503.81
554.32
575.76
8"
45.00
440.80
698.19
806.09
886.91
921.22
10"
45.00
792.34
1,254.99
1,448.95
1,594.22
1,655.90
12"
45.00
1,274.47
2,018.64
2,330.61
2,564.27
2,663.48
• •.' R ®%K City of Newport Beach, CA
CONSULTING Water Utility Financial Plan 6 -2
5317004
•
E
Section 7
Bill Comparisons & Impacts
•
7. Bill Comparisons & Impacts
•
•
Figure 7 -1 presents the single family residential monthly bill impact distribution for
FY2010 rates. This bill distribution is based on the City's calendar year 2007
consumption history. The blue columns indicate the percentage of single family
residential monthly bills that will increase by the corresponding amount on the horizontal
axis, assuming consumption is similar to calendar year 2007. The red line indicates the
cumulative percentage of monthly bills at each amount of change in bill. For example, the
figure shows that 67% of monthly bills will increase by no more than $10. It also shows
that approximately 15% of monthly bills will increase by between $4 and $5. Note that
over 90% of monthly bills will increase by no more than $15.
Figure 7 -1: FY2010 Single Family Residential Customer Monthly Bill Impact
16% 100%
N
3
m
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m
e'
4
9
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Figure 7 -2 presents the current monthly bill for 3/4" meters that consume 18 HCF per
month, compared with the bill under the proposed rates for FY2010, and the bills at other
agencies within the region. Note that it is anticipated that several, if not all of the regional
agencies presented below, will likely increase their rates in FY2010 to address rising
purchased water costs.
•'• ; RE ®,q K City of Newport Beach, CA
• CONSULTING water Utility Financial Plan F7-1
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14%
80%
12%
70%
10%
67" of monlhl' tills vnl
mcreasebv no mope flan
60%
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t sew
w'w
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40%
y e96
30%
4%
20%
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e'
4
9
U
Figure 7 -2 presents the current monthly bill for 3/4" meters that consume 18 HCF per
month, compared with the bill under the proposed rates for FY2010, and the bills at other
agencies within the region. Note that it is anticipated that several, if not all of the regional
agencies presented below, will likely increase their rates in FY2010 to address rising
purchased water costs.
•'• ; RE ®,q K City of Newport Beach, CA
• CONSULTING water Utility Financial Plan F7-1
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esCity of Newport Beach
P.O. Box 1768
Newport Beach, CA 92658-8915
City of Newport Beach
Information and Notice of Public Hearing
And Protest Procedure
Proposed Water Rate Charges
TO: Doe, John & Jane
12345 Main Street
Newport Beach, CA
94590
E
Attachment B
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EXTRA SPACE
-
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