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HomeMy WebLinkAbout15 - Sewer Rate Study Results o�aEW�Re CITY OF NEWPORT BEACH City Council Staff Report October 13, 2015 Agenda Item No. 15 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: George Murdoch, Municipal Operations Director 949-644-3011, gmurdoch@newportbeachca.gov PREPARED BY: Rachel Wilfert, Management Assistant TITLE: Sewer Rate Study Results ABSTRACT: The Municipal Operations Department retained the consulting services of HF&H Consultants, LLC ("HF&H") to prepare a sewer and recycled water rate study. The recycled water report was completed in June of 2014, and ended with the establishment a recycled rate structure in September of 2014. The sewer rate study analyzes the cost of service and makes recommendations regarding the rate and structure in compliance with State law. The study concluded that a rate increase is recommended to ensure adequate funds are available to continue to maintain a safe and healthy sewer infrastructure. RECOMMENDATION: a) Review the results and proposed recommendations of the sewer rate study; b) Direct staff to send rate notices to customers in compliance with Proposition 218 and Resolution 2009-58; and c) Set the date of January 12, 2016, for tabulation of protests and public hearing of proposed rates pending results of protests. FUNDING REQUIREMENTS: There are no funding requirements required for this action. This action directs staff to notice customers of the rate study in compliance with Proposition 218. DISCUSSION: Background The Municipal Operations Department operates and maintains approximately 197 miles of sewer mains, 4.7 miles of force mains, 4,922 manholes and cleanouts, 25,525 sewer laterals, and 21 sewer lift stations. Operations, maintenance and repair activities include: Sewer Rate Study Results October 13, 2015 Page 2 sewer line cleaning, root removal, manhole maintenance and repair, lift station operation and maintenance, sewer line video inspection, as well as sewer lateral maintenance, repair and replacement. Funding for operations, maintenance and replacement activities associated with the City's sewer system are collected from ratepayers through their municipal services bill. Salaries, maintenance, operations, and internal service expenditures for FY 2015-16 are estimated to be $3.2 million. Capital Improvement Projects (CIP) associated with maintaining and replacing the sewer infrastructure are based upon the Sewer Master Plan which was last updated in 2010. Funding for master plan projects is based upon the implementation cost of the facilities, and the quantity of work the City can reasonably administer each year. The programmed rate increases over the next five years allow the City to ramp up funding for capital projects and provide the City approximately $1.3 million annually by FY 2019-20 with the additional revenue generated from the recommended rate increases. The estimated revenue for FY 2015-16 is approximately $3.1 million. With the increase in outsourced services, reduced staff, and the amount of capital replacement projects, rates have not been increased in almost nine years. Rate increases are now necessary to maintain adequate reserve levels based on City policy of 50% of budget operations, coupled with increased capital needs based on the results of the 2010 Sewer Master Plan. Rate Study: In 2013, the City entered into an agreement with HF&H to conduct a Sewer and Recycled Water Rate Study, the first priority was to address the recycled water rates. The recycled rates were adopted by City Council on September 9, 2014, lowering the overall cost to our recycled water customers by 50%. The next phase of the study was to address the sewer rates. Attachment "A" is a draft report that includes details of the proposed sewer rates. Current sewer revenues do not provide adequate funding for operations. While current reserve balances are above the minimum balance, without rate increases, the fund balance dips below the minimum in FY 2016-17 and is negative by FY 2017-18. For more information of the fund balance impacts with and without the recommended rate increases, please refer to 'Figure 1' of this report. Currently the sewer rates include a fixed fee, sewer use charge and two additional surcharges of $2.00/month for each additional dwelling unit and $10.00/month for customers with two-inch or larger water meters, respectively. The proposed rate structure eliminates these surcharges and adds the costs to the monthly fixed charge. (Note: Sewer connections are typically the same size, therefore, water connection size is used to determine the amount of sewer demands on the system.) Sewer Rate Study Results October 13, 2015 Page 3 The proposed rates include: • Fixed charge - a monthly sewer service charge based on size of water connection. (Note: Sewer connections are typically the same size, therefore, water connection size is used to determine the amount of sewer demands on the system.) • Sewer use charge - a consumption charge per unit based on each customer's actual metered water use. (Note: The City does not measure or meter sewer use. Water use is used to determine sewer flow into the system) Current Structure FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 Monthly Sewer Use Charge 5/8" or 3/4" $4.50 $6.04 $6.71 $7.44 $8.26 $9.17 1" $4.50 $6.04 $6.71 $7.44 $8.26 $9.17 11/2" $4.50 $6.65 $7.38 $8.19 $9.09 $10.09 2" $14.50 $9.06 $10.06 $11.17 $12.40 $13.76 21/2" $14.50 $9.67 $10.73 $11.91 $13.22 $14.68 3" $14.50 $10.27 $11.40 $12.66 $14.05 $15.59 4" $14.50 $12.08 $13.41 $14.89 $16.53 $18.34 6" $14.50 $13.59 $15.09 $16.75 $18.59 $20.64 8" $14.50 $15.11 $16.77 $18.61 $20.66 $22.93 10" $14.50 $19.33 $21.46 $23.82 $26.44 $29.35 Monthly Sewer Use Charge (Sewer Only Customers) Rate per Account $6.25 $10.51 $11.66 $12.94 $14.37 $15.95 Consumption Charge Rate per HCF $0.35 $0.39 $0.43 $0.48 $0.53 $0.59 Sewer Surcharges Multi Unit surcharge (per DU) $2.00 Note 1 Note 1 Note 1 Note 1 Note 1 Note 1: The surcharge has been incorporated into the Monthly Sewer Use Charge under the revised structure For a comparison of how the new rate structure will affect sample residents, please see Attachment B. How do we compare? The chart presented in Figure 2 Neighboring Agency Comparison compares recent charges for sewer service among similar Orange County agencies, specifically ones that couple a fixed monthly use charge with a flow-based commodity charge (Costa Sewer Rate Study Results October 13, 2015 Page 4 Mesa and Huntington Beach charge a fixed charge only). Figure 2 indicates that the City's current and proposed sewer rates track the trend line along with its neighbors. Since the Sewer Rate Study was presented at the June 9 study session, two agencies (Costa Mesa Sanitary and Irvine Ranch Water District) have increased rates per a previously approved rate schedule, with a third agency (Huntington Beach) in the midst of a Proposition 218 noticing period to increase sewer rates. Study Session At the study session on June 9, 2015, the Municipal Operations Department presented the findings of the Sewer Rate Study to Council with assistance from HF&H Consultants. Following the presentation, staff was directed by Council to provide an operational analysis that analyzed the cost of outsourcing, and an assessment of potential increased efficiencies that could mitigate a rate increase. Finance Committee At the August 13, 2015, Finance Committee meeting, staff presented an overview of the services provided by the City's Sewer Division as well as the cost for operating and maintaining the sewer system. This overview also included the potential cost to outsource the services and the liability for maintaining a wastewater system. Options presented to the Committee included: • Keep the Wastewater Division as an in-house municipal function. • Engage a consultant to review the efficiency and effectiveness of the Division. • Consider outsourcing the maintenance function to a third party through a Request for Proposal Process (RFP). • Consider annexation of the system to another governmental entity such as a special district. In order to provide a basis for decision-making on outsourcing the Sewer Division, staff presented an overview of the services currently provided by the Division and the associated cost, and compared the Division's cost to the cost of outsourcing. It was noted in the presentation that the cost for outsourcing has been significantly impacted by the requirement to comply with prevailing wage. Three quotes were obtained from companies in the area to estimate the cost to maintain and repair the sewer infrastructure. By continuing to provide services through the City's Sewer Division, the City of Newport will save approximately $234,621 per year based on the comparison of costs outlined below. Sewer Rate Study Results October 13, 2015 Page 5 Hourly Hours AdministrativellFbta Annuat Contractor Rate Per Year Annual Cost Fee wCost City Cost $ 187.30 3,120 $ 584,379 N/A $ 584,379 Propipe $ 250 3,120 $ 780,000 $ 39,000 $ 819,000 National Plan Services $ 300 3,120 $ 936,000 $ 46,800 $ 982,800 Downstream $ 342 3,120 $ 1,067,040 $ 53,352 $1,120,392 Additionally, the Finance Committee inquired about the cost to annex the wastewater infrastructure, maintenance, and repair to another sanitation district. Unfortunately, these other districts also pay into the Public Employees Retirement System (PERS), so there would be little savings if any for salaries and benefits, the infrastructure would still need to be maintained, and the City would lose the ability to control rates. The City would also lose the ability to decide how it wishes to maintain the infrastructure. City Council adopted a Sewer Master Plan in 2010 which outlines how the City will maintain its sewer infrastructure. City staff will continually evaluate sewer services for efficiencies and cost effectiveness as ultimately the rates charged to recover the costs of these services are charged to the residents and businesses of Newport Beach. At the conclusion of the presentation, Finance Committee members made the following comments: 1. Staff is to continue to look for cost efficiencies including outsourcing; 2. If the City wants to control the rates and infrastructure maintenance, City Council should not consider annexation; 3. The City should continue to implement the Sewer Master Plan. Following some discussion the Finance Committee recommended that the Sewer Rate Study be moved to City Council for approval. Next Steps Following incorporation of the Finance Committee's comments and recommendations, staff presents and recommends the proposed sewer rate and structure to the City Council for final review and approval to move forward with adoption. Upon incorporation of the City Council's comments and recommendations, staff will be required to issue a Proposition 218 notice to the owners of parcels that are subject to the sewer rate pursuant to California Constitution Article XIII D, Section 6. There will be a 45-day public notice period. Following the public notice period, written protests will be tabulated at the January 12, 2016, City Council meeting. City Council may then conduct a public hearing on the proposed rate and proceed with rate establishment unless written protests against the proposed rate are presented by a majority of owners of the parcels subject to the rate. Sewer Rate Study Results October 13, 2015 Page 6 Notwithstanding a majority protest, the rate structure will become effective upon adoption with the annual rate increase occurring on January 1 for every year thereafter and with the final adjustment occurring January 1, 2020. ENVIRONMENTAL REVIEW: Staff recommends the City Council find this action 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. NOTICING: The agenda item has been noticed according to the Brown Act (72 hours in advance of the meeting at which the City Council considers the item). Attachments: Attachment A— Draft Sewer and Recycled Water Rate Study Attachment B — Sample Cost to Average Customer Figure 1 — Projected Fund Balance Figure 2 — Neighboring Agency Comparisons CITY OF NEWPORT BEACH Sewer and Recycled Water Rate Study •+Dy r „ . HF H HF&H Co ants, LLC P O CITY OF NEWPORT BEACH 592 Superior Avenue Newport Beach, CA 92663 WP()Zv\� woo H � SEWER AND RECYCLED WATER RATE STUDY !M' October 13, 2015 HF&H CONSULTANTS, LLC 201 North Civic Drive, Suite 230 Walnut Creek, CA 94596 ®tff&H CONSULTANTS,LLC All rights resemal. This document is printed on 100%recycled,post-consumer content paper 15-9 P O E Managing Tomorrow's Resources Today 201 N.Civic Drive,Suite 230 Robert D.Hilton,CMC Walnut Creek,California 94596 John W.Farnkopf,PE Telephone:925/977-6950 Laith B.Ezzet,CMC Fax:925/977-6955 Richard J.Simonson,CMC www.hfh-consultants.com Marva M.Sheehan,CPA Robert C.Hilton,CMC October 13, 2015 Mr. George Murdoch Utilities General Manager City of Newport Beach 592 Superior Avenue Newport Beach, CA 92663 Subject: Sewer and Recycled Water Rate Study Dear Mr. Murdoch: HF&H Consultants, LLC, is pleased to submit this Sewer and Recycled Water Rate Study to the City of Newport Beach (City). The report summarizes the analysis that was conducted to develop the recommended rates. A copy of the rate model is included in the appendix. The recycled water revenue increases and recycled water rate design sections presented in this report summarize the analysis that was previously submitted as a staff report and presented to City Council on April 29, 2014. The City Council subsequently adopted, by Resolution 2014-78 on September 9, 2014, the recommended Recycled Water rates in compliance with Proposition 218, effective October 9, 2014, and updated each January 1 thereafter. The City has demonstrated leadership in improving rate payer equity during a time when costs are increasing in compliance with regulatory mandates. It has been a privilege to assist the City with this step forward. Very truly yours, HF&H CONSULTANTS, LLC John W. Farnkopf, P.E. Senior Vice President 15-11 P O City of Newport Beach Sewer and Recycled Water Rate Study Table of Contents TABLE OF CONTENTS 1. EXECUTIVE SUMMARY................................................................................. 1 Findings And Recommmendations.........................................................................1 Sewer ............................................................................................................1 RecycledWater...............................................................................................2 2. INTRODUCTION........................................................................................... 4 StudyPurpose .....................................................................................................4 Rate Making Objectives........................................................................................4 Background .........................................................................................................4 Sewer ............................................................................................................4 RecycledWater...............................................................................................4 3. SEWER PROJECTED REVENUE INCREASES .................................................. 6 Revenue Requirements.........................................................................................6 Salaries ..........................................................................................................6 Benefits..........................................................................................................6 Operations & Maintenance...............................................................................6 Internal Services Allocation..............................................................................7 Operating Reserve Expense.............................................................................7 Capital Reserve Expense..................................................................................7 Miscellaneous Costs ........................................................................................7 Revenue Increases...............................................................................................7 FundBalance.......................................................................................................8 MinimumFund Balance ...................................................................................9 TargetFund Balance .......................................................................................9 4. SEWER RATE DESIGN ................................................................................. 10 Current Rate Structure .......................................................................................10 Proposed Rate Structure.....................................................................................10 Current and Proposed Customer Bill Comparisons ................................................ 12 Comparison with Neighboring agencies ...............................................................13 S. RECYCLED WATER PROJECTED REVENUE INCREASES .............................. 15 Revenue Requirements.......................................................................................15 Operating Expenses ......................................................................................15 Purchased Recycled Water.............................................................................15 Pump Station Operating and Maintenance ......................................................15 Depreciation .................................................................................................15 6. RECYCLED WATER RATE DESIGN ............................................................... 17 Current Rate Structure .......................................................................................17 Proposed Rate Structure.....................................................................................17 October 13, 2015 Page ! HF&H Consultants, LLC 15-13 City of Newport Beach Sewer and Recycled Water Rate Study Table of Contents CustomerBill Comparisons .................................................................................20 APPENDIX A. SEWER AND RECYCLED WATER RATE MODEL TABLE OF FIGURES Figure 1-1. Current and Proposed Sewer Rates...........................................................2 Figure 1-2. Average Current and Proposed Monthly Sewer Bills....................................2 Figure 1-3. Current and Proposed Recycled Water Rates .............................................3 Figure 3-1. Annual Revenue Requirement Components ..............................................6 Figure 3-2. Capital Projects.......................................................................................7 Figure 3-3. Projected Revenue Increases...................................................................8 Figure 3-4. Fund Balance With and Without Rate Increases........................................9 Figure 4-1. Fixed and Variable Revenue....................................................................10 Figure 4-2. Calculation of Monthly Fixed Charges ......................................................11 Figure 4-3. Calculation of Sewer Consumption Charge...............................................11 Figure 4-4. Five Year Sewer Rate Projections............................................................12 Figure 4-5. Customer Bill Comparison.......................................................................13 Figure 4-6. Residential Customer Bill Impacts ...........................................................13 Figure 4-7. Neighboring Agency Comparison.............................................................14 Figure 5-1. Revenue Requirement Projections...........................................................15 Figure 6-1. FY 2014-15 Revenue Requirement by Cost Category................................18 Figure 6-2. Calculation of Monthly Fixed Charges ......................................................19 Figure 6-3. Calculation of Commodity and Pump Station Charges...............................19 Figure 6-4. Five Year Recycled Water Rate Projections ..............................................20 ACRONYMS CIP Capital Improvement Plan EDU Equivalent Dwelling Unit; an average single-family residential customer EMU Equivalent meter unit FY Fiscal Year GPD Gallons Per Day HCF or CCF Hundred Cubic Feet of metered water; 748 gallons; a cube of water 4.6 feet on edge I&I Inflow and Infiltration; stormwater runoff that enters collection systems through surface or subsurface connections, cracks, or other openings O&M Operations and Maintenance OCSD Orange County Sanitation District OCWD Orange County Water District PAYGo Pay-As-You-Go, in reference to funding capital improvements from cash rather than from borrowed sources of revenue October 13, 2015 Page ii HF&H Consultants, LLC 15-14 City of Newport Beach Sewer and Recycled Water Rate Study Table of Contents SFR Single Family Residential ACKNOWLEDGEMENTS City Council Edward Selich, Mayor Diane Dixon, Mayor Pro Tem Kevin Muldoon, Council Member Tony Petros, Council Member Duffy Duffield, Council Member Scott Peotter, Council Member Keith Curry, Council Member City Finance Commission: Diane Dixon, Mayor Pro Tem Keith Curry, Council Member Tony Petros, Council Member Larry Tucker, Appointed Finance Commission Member City Staff George Murdoch, Utilities General Manager Dan Matusiewicz, Deputy Finance Director Rachell Wilfert, Management Assistant HF&H Consultants, LLC John Farnkopf, Sr. Vice President Sima Mostafaei,Senior Associate October 13, 2015 Page iii HF&H Consultants, LLC 15-15 City of Newport Beach Sewer and Recycled Water Rate Study Table of Contents October 13, 2015 Page iv HF&H Consultants, LLC 15-16 SEWER AND RECYCLED WATER RATE STUDY 15-17 This page intentionally left blank 15-18 City of Newport Beach Sewer and Recycled Water Rate Study 1. Executive Summary 1. EXECUTIVE SUMMARY This report summarizes the analysis of the City's sewer and recycled water rates. The analysis represents a collaborative effort of the City's Staff and consulting team. HF&H prepared the financial plan model using the City's FY 2015-16 preliminary operating budget for sewer, and the FY 2014-15 preliminary operating budget for recycled water. FINDINGS AND RECOMMMENDATIONS Sewer 1. Key Assumptions. Rates were set to generate revenue sufficient to fund the City's collection system expenses, local capital improvements funded from cash, and to maintain the City's reserves. 2. Revenue Projections. The revenue increases enable the City to address collection and pump station improvement projects that were identified in the City's Sewer Master Plan. These increases enable the City to ramp up PAYGo funding for capital projects over the next five years; by the fifth year, the rates will enable the City to fund $1,300,000 per year on a pay-as-you-go cash basis without issuing debt. 3. Rate Design. The City's current sewer customers pay the sum of the following: a fixed monthly sewer use charge that is the same for all customers and a commodity charge based on metered water use during the monthly period. In addition, for meters 2-inch or larger, a $10.00 monthly surcharge is assessed, and for connections servicing two or more dwelling units on the same connection, a $2.00 per unit per month surcharge is assessed for any additional dwelling units. We recommend combining the two surcharges into the monthly use charge, and maintaining the commodity charge. Under the revised rate structure, customers will pay the sum of only two charges: a monthly sewer use charge, graduated based on the capacity of the connection, and the commodity charge. 4. Projected Rates. Figure 1-1 shows the sewer rates that are needed to cover the projected revenue requirements, and compares the revised structure to the current structure. In the revised rate structure, the service charges were graduated using an EMU multiplier that was based on the ratio of$4.50 to $14.50 (the current rate ratio), the effect of which is to increase the service charges for the larger services. The revised rate structure maintains the consumption charge, but includes the larger meter and additional dwelling unit surcharges as part of the monthly sewer use charge. October 13, 2015 Page 1 HF&H Consultants, LLC 15-19 City of Newport Beach Sewer and Recycled Water Rate Study 1. Executive Summary Figure 1-1. Current and Proposed Sewer Rates Current Revised Structure Structure FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 Monthlv Sewer Use Charge 5/8"or 3/4" $4.50 $5.44 $6.04 $6.71 $7.44 $8.26 $9.17 V $4.50 $5.44 $6.04 $6.71 $7.44 $8.26 $9.17 1 1/2" $4.50 $5.99 $6.65 $7.38 $8.19 $9.09 $10.09 2" $14.50 $8.16 $9.06 $10.06 $11.17 $12.40 $13.76 21/2" $14.50 $8.71 $9.67 $10.73 $11.91 $13.22 $14.68 Y $14.50 $9.25 $10.27 $11.40 $12.66 $14.05 $15.59 4" $14.50 $10.89 $12.08 $13.41 $14.89 $16.53 $18.34 6" $14.50 $12.25 $13.59 $15.09 $16.75 $18.59 $20.64 8" $14.50 $13.61 $15.11 $16.77 $18.61 $20.66 $22.93 10" $14.50 $17.42 $19.33 $21.46 $23.82 $26.44 $29.35 Monthly Sewer Use Charge(Sewer Onlv Customers) Rate per Account $6.25 $9.46 $10.51 $11.66 $12.94 $14.37 S15.95 Consumption Charge Rate per HCF $0.35 $0.35 $0.39 $0.43 $0.48 $0.53 $0.59 Sewer Surcharges Mufti Unit surcharge(per DU) $2.00 Note 1 Note I Note 1 Note 1 Note 1 Note 1 Note 1:The surcharge has been incorporated into the Monthly Sewer Use Charge under the revised structure. 5. Customer Bills. Figure 1-2 shows an average monthly residential and non- residential bill at the current rates, and the average bills over the five year projection period. In addition to paying the monthly sewer use charge based on the size of the connection, each customer's monthly bill includes a consumption charge that is determined by multiplying the consumption charge times the average monthly residential flow of 11.49 HCF and non-residential flow of 64 HCF, respectively. Figure 1-2. Average Current and Proposed Monthly Sewer Bills Monthly Flow Current (HCF) Structure FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 Single Family Residential 11.49 $8.52 $10.52 $11.65 $12.96 $14.35 $15.95 Non-Residential 64.00 $36.90 $34.02 $37.58 $41.89 $46.32 $51.52 Recycled Water 1. Key Assumptions. Rates were set to generate revenue sufficient to fund the City's recycled water system's operations and maintenance expense, the cost of October 13, 2015 Page 2 HF&H Consultants, LLC 15-20 City of Newport Beach Sewer and Recycled Water Rate Study 1. Executive Summary purchasing recycled water from OCWD, and capital replacement expense related to pump stations and meters. 2. Rate Design. The City's current recycled water customers pay the sum of two charges: a monthly fixed charge that is based on the size of the connection, and a commodity charge based on metered water use during the monthly period. The fixed and commodity charges are based on 80% of the potable water rate. We recommend unlinking the recycled water rate from the potable water rate and aligning the recycled fixed and commodity charges with the fixed costs and the cost of purchased water from OCWD, respectively. In addition to the fixed and commodity charges, pump station users will be charged a pump station charge based on the cost to operate and maintain the stations and convey recycled water. 3. Projected Rates. The rate projections are shown in Figure 1-3. Figure 1-3. Current and Proposed Recycled Water Rates Current FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 Monthly Service Charge 5/8"or 3/4" $13.82 $18.91 $19.29 $19.68 $20.07 $20.47 1" $23.03 $31.53 $32.16 $32.80 $33.46 $34.13 1 1/2" $46.06 $63.05 $64.32 $65.60 $66.91 $68.25 2" $73.70 $100.88 $102.90 $104.95 $107.05 $109.19 3" $138.18 $189.15 $192.94 $196.80 $200.73 $204.75 4" $230.30 $315.25 $321.56 $327.99 $334.55 $341.24 6" $460.61 $630.50 $643.11 $655.98 $669.10 $682.48 8" $736.98 $1,008.81 $1,028.99 $1,049.57 $1,070.56 $1,091.97 Monthly Commodity Charge Rate per HCF $2.46 $0.86 $0.87 $0.89 $0.91 $0.93 Monthly Pump Station Charge Rate per HCF none $0.36 $0.37 $0.38 $0.38 $0.39 October 13, 2015 Page 3 HF&H Consultants, LLC 15-21 City of Newport Beach Sewer and Recycled Water Rate Study 2. Introduction 2. INTRODUCTION STUDY PURPOSE The purpose of this study is to update the City's rates to ensure that they generate sufficient revenue and that the rate structures for sewer and recycled water reflect the City's current rate-making objectives. The study was commissioned by the City to evaluate the effect of certain rate structure modifications in response to input from its customers. RATE MAKING OBJECTIVES The City's current rate-making objectives include the following: • Provide revenue sufficiency and financial stability to cover the projected capital and O&M costs of providing recycled water and funding the City's Sewer fund. • Meet the City's operations and capital funds reserve targets for the sewer enterprise fund. • Rates should reflect equity of costs in proportion to the level of service. • Provide for efficient administration and execution of utility billing. • Minimize "rate shock" overall and to any specific customer class. • Rates should be clear and understandable to the customers. • The rates must comply with Proposition 218 and applicable State codes. BACKGROUND Sewer The City provides sewer service to approximately 64,465 customers. The City's existing sewer collection system consists of a network of force main and gravity sewers. This system is composed of approximately 197 miles of mainline gravity pipes, 4.7 miles of force mains with 4,922 manholes and cleanouts, and 25,525 sewer laterals with an approximate length of 121 miles in the public-rights-of-way. The City's service area lies within the OCSD who is responsible for treating the City's sewer. The City also owns and operates 21 pump stations in various areas which lift sewer from the lower areas and several island communities for treatment at OCSD's treatment plant. Recycled Water The City currently has five recycled water customers totaling 14 water connections. The customers include Big Canyon and Newport Beach Country Club golf courses; East Bluff School, Our Lady Queen of Angels School, and the City which uses recycled water for irrigation of medians and parks. In 1991, the City entered into an agreement with OCWD for the distribution and sale of Green Acres Project water. The agreement stipulates the rules and regulations for the October 13, 2015 Page 4 HF&H Consultants, LLC 15-22 City of Newport Beach Sewer and Recycled Water Rate Study 2. Introduction City to provide recycled water. Included in this agreement is the stipulation that recycled water rates may not exceed 80% of the potable water rate. The agreement term is for 25 years with five 5-year automatic extensions, with an estimated ending term year of 2041. The City subsequently entered into "End User Agreements' for the sale of recycled water to large customers in 1996 for a 10-year term. These agreements, now expired, included provisions that OCWD and the City would provide funding to modify golf courses and construct pump stations to facilitate the use of recycled water. However, in 2011, the City and the Big Canyon Country Club entered into an agreement that provided for the delivery and sale of recycled water, and a pump station license agreement. October 13, 2015 Page 5 HF&H Consultants, LLC 15-23 City of Newport Beach Sewer and Recycled Water Rate Study 3. Sewer Projected Revenue Increases 3. SEWER PROJECTED REVENUE INCREASES REVENUE REQUIREMENTS Rate analysis begins by determining the revenue requirements that must be met by rates. For purposes of this study, a ten-year rate projection period was developed using a spreadsheet model (see Appendix A). However, only the first five years are shown in Figure 3-1 for rate-setting purposes. Figure 3-1 summarizes the major categories comprised in the revenue requirements, indicating the annual change. Figure 3-1. Annual Revenue Requirement Components FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 Salaries $ 947,547 $ 975,973 $ 1,005,253 $ 1,035,410 $ 1,066,472 Benefits 575,693 604,478 622,612 641,290 660,529 Operations & Maintenance 995,721 989,549 1,006,668 1,024,084 1,041,800 Internal Services Allocation 670,581 682,182 693,984 705,990 718,203 Operating Reserve Expense 1,580 (145,880) (74,251) 39,254 149,401 Capital Reserve Expense - 500,000 750,000 1,000,000 1,300,000 Miscellaneous Costs 13,477 13,710 13,947 14,188 14,434 Total Revenue Requirement $ 3,204,599 $ 3,620,012 $4,018,213 $4,460,216 $4,950,840 Salaries This cost category includes regular and overtime pay and is projected to increase gradually at about 3% per year during the projection period. No staff headcount increases are anticipated; the cost trend is driven primarily by cost of living adjustments set in labor agreements. Benefits This cost category includes health, dental, and vision as well as Other Post-Employment (OPEB) and Public Employment (PERS) retirement benefits. During the projection period these costs are projected to increase at about 5% per year. The cost trend is driven primarily by increases in health care benefit costs set in labor agreements. Operations & Maintenance This cost category includes non-personnel related operating and maintenance expenses, such as electrical utility costs, fuel, and non-capital materials and equipment. During the projection period, these costs are expected to increase gradually at about 1.73% per year, based on the five-year historical average of inflation for the Los Angeles area. October 13, 2015 Page 6 HF&H Consultants, LLC 15-24 City of Newport Beach Sewer and Recycled Water Rate Study 3. Sewer Projected Revenue Increases Internal Services Allocation The City has historically transferred funds from the Sewer Enterprise Fund to the General Fund as reimbursement for governmental costs incurred by the General Fund on behalf of the Enterprise. Much of this funding reimburses the General Fund for salaries, equipment, and program costs associated with general services. During the projection period, these costs are expected to increase gradually at about 1.73% per year, based on the five-year historical average of inflation for the Los Angeles area. Operatina Reserve Expense The City transfers rate revenue to its Operating Reserve during the projection period to smooth out the annual revenue requirements and meet the minimum fund balance requirement. Please refer to the section titled 'minimum fund balance' in this report for further discussion of the fund policy. Capital Reserve Expense The City's 30-year capital improvement program planned expenditures are summarized in Figure 3-2. Figure 3-2. Capital Projects Project CIP Project Description Cost Collection System Capacity Improvements $1,281,391 Collection System Condition Improvements $16,648,060 Pump Station Improvements $11,088,000 Total $29,017,451 The City plans to fund these capital improvements with cash from rate revenue. To accomplish this goal, the program is phased based upon the implementation cost of the facilities, and the quantity of work the City can reasonably administer each year. The programmed rate increases over the next five years allow the City to ramp up funding for capital projects and provide the City approximately $1.3 million annually by FY 2019-20 with the additional revenue generated from the recommended rate increases. Miscellaneous Costs This cost category includes non-capital office and shop equipment. During the projection period,these costs are expected to increase gradually at about 1.73% per year, based on the five-year historical average of inflation for the Los Angeles area. REVENUE INCREASES To determine how much additional rate revenue is required, the projected revenue requirements are compared to the revenue from current rates. The revenue from October 13, 2015 Page 7 HF&H Consultants, LLC 15-25 City of Newport Beach Sewer and Recycled Water Rate Study 3. Sewer Projected Revenue Increases current rates also reflects the impact of reduced water demand required of the City's customers to comply with the State Water Resources Control Board's emergency regulations. For the City's consumption charges, sewer flows from individual City customers are not metered; therefore water use data is the closest representation of flows that customers discharge to the City's system for conveyance and treatment. Estimating current rate revenue took into account 23,100 currently active meters whose flow equaled 4,320,000 HCF. We also included the annual surcharge revenue for meters 2" or larger, as well as the surcharge for multiple dwelling units serviced by the same meter. The resulting rate revenue for FY 2014-15, prior to rate increases, but net of 0.4% of bad debt, was estimated at $3,092,000. Based on this estimate, annual revenue increases were projected as shown in Figure 3-3. Figure 3-3. Projected Revenue Increases FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 Increase in Revenue from Rates 11% 11% 11% 11% 11% Revenue from Current Rates" $3,091,253 $3,091,253 $3,091,253 $3,091,253 $3,091,253 Revenue from Rate Increases FY14-15 (effective 1/1/15) $113,W $340,038 $340,038 $340,038 $340,038 FY15-16(effective 7/l/15) �� $188,721 $377,442 $377,442 $377,442 FY16-17 (effective 7/1/16) $209,480 $418,961 $418,961 FY17-18 (effective 7/1/17) $232,523 $465,046 FY18-19 (effective 7/1/18) $258,101 Subtotal-Revenue Increases $113,346 $528,759 $926,960 $1,368,964 $1,859,587 Total Rate Revenue $3,204,599 $3,620,012 $4,018213 $4,460,216 $4,950,840 Net Revenue Requirements $3204,599 $3,620,012 $4,018,213 $4,460,216 $4,950,840 Surplus/(Deficit) after Increase $0 $0 $0 $0 $0 "Includes bad debt allowance of 0.4% of existing revenue and cutbacks to consumption charge revenue based on conservation efforts FUND BALANCE The FY 2014-15 estimated year-end fund balance is projected to be $2,790,000, which is higher than the minimum operations balance of $1,593,000. Figure 34 shows the fund balance is above the minimum balance throughout the five year rate projection period, however, the ten-year outlook shows the fund balance meeting the target in FY 2024-25 based on the projected revenue increases. Fluctuations in annual flow will affect revenue generation and the resulting fund balance. The City is advised to carefully monitor the fund balance in the event of downward fluctuations in flow. October 13, 2015 Page 8 HF&H Consultants, LLC 15-26 City of Newport Beach Sewer and Recycled Water Rate Study 3. Sewer Projected Revenue Increases Figure 3-4. Fund Balance With and Without Rate Increases $3.50 (Operations+Capital) $3.00 N C O $2.50 Keservesw ith Kate Increase $2.00 m O00 c $1.50 Minimum Balance (Operations) 0 $1.00 d � 8 Reserves without $0.50 1. Rate Increase $0.00 FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 Minimum Fund Balance The minimum balance (red line) is the balance that is required to meet the City's operating expenses during the year. If this minimum balance were maintained, the Sewer Fund should be able to fund its monthly cash flow over this extended period without relying on the General Fund for a short-term loan. When the Operations Reserve balance is below the minimum balance, the likelihood increases that temporary funding from the General Fund will be required to meet cash flow needs. The City's reserve policy dictates that the minimum Operations Reserve balance be set equal to 50% of annual O&M expenses. Target Fund Balance The proposed revenue increases move the fund balance (solid green line) upward toward the target balance (blue line). The target balance is the sum of the minimum balance for operations (red line) plus an allowance for capital projects. This allowance provides liquidity to fund construction for projects on a pay-as-you-go basis. With adequate capital reserves, the City is able to pay construction contractors without encroaching on the Operations Reserve. The allowance is based on the average annual budgeted capital improvement projects. October 13, 2015 Page 9 HF&H Consultants, LLC 15-27 City of Newport Beach Sewer and Recycled Water Rate Study 4. Sewer Rate Design 4. SEWER RATE DESIGN CURRENT RATE STRUCTURE The City currently has 23,100 active accounts who pay the sum of two charges every month for Sewer service: a basic service charge of $4.50 per account plus a sewer consumption charge of $0.35 per HCF based on metered water use during the billing period. In addition to the charges specified above, customers with a water service connection of 2"or greater pay a $10.00 monthly surcharge. Moreover, customers with more than one dwelling unit that is serviced by the same connection pay a surcharge of $2.00 for each additional dwelling unit. Lastly, the City's 485 sewer customers who do not purchase potable water from the City are charged $6.25 per account per month. PROPOSED RATE STRUCTURE The proposed rate structure is based on the revenue generated by the current rate structure and categorizes the revenue into two categories: fixed revenue and variable revenue. Fixed revenue is considered fixed because it does not vary based on flow, while variable costs vary because they are based on the amount of water purchased, or sewage produced and therefore, are solely comprised of the sewer consumption charge. For the purpose of rate design, the sewer use charge for customers who do not purchase water from the City was analyzed separately. Figure 4-1 presents the breakdown of the current revenue by revenue category: Figure 4-1. Fixed and Variable Revenue Current Revenue Fixed Revenue Sewer Use Charge (per account) $1,179,651 Surcharge (2"meters or greater) $61,586 Surcharge (per additional DU) $314,371 Total Annual Fixed Revenue $1,555,608 Variable Revenue Consumption Charge (per HCF) $1,511,712 Total Annual Variable Revenue $1,511,712 Subtotal $3,067,320 Sewer Use Charge (per account)* 36268.00 Grand Total** 53,103.588 *Sewer Revenue from customers who do not purchase potable water from the City of Newport Beach **Gross revenues; does not account for bad debt October 13, 2015 Page 10 HF&H Consultants, LLC 15-28 City of Newport Beach Sewer and Recycled Water Rate Study 4. Sewer Rate Design In order to determine the monthly charge by size of connection, we first converted the number of active meters to equivalent meter units (EMU) as shown in Figure 4-2. The EMU multiplier by meter size is the same multipliers used to determine the fixed charge by meter size for the current sewer rates; in other words, it is the ratio between $4.50 to $14.50, or 1 to 3.2. The monthly charge for an EMU of 1.00 is derived by dividing the total fixed revenue of $1,556,000 by the total number of EMUS, or 23,815. This quotient was then divided by 12 to convert from an annual charge of $71.59 to a monthly charge of $5.44. The service charges were then graduated using the EMU multipliers, the effect of which is to increase the service charges for the larger services. Note the total annual revenue of $1,556,000 from fixed charges in Figure 4-2 is equal to the total annual fixed revenue presented in Figure 4-1. Figure 4-2. Calculation of Monthly Fixed Charges Total Total Monthly Annual Active EMU Total Service Fixed Meter Size Accounts Multiplier EMUS Charge Revenue a b a*b c a*c*12 5/8"or 3/4" 15,357 1.00 15,357 $5.44 $1,003,119 V 6,276 1.00 6276 $5.44 $409,948 1 1/2" 364 1.10 400 $5.99 $26,154 2" 886 1.50 1,329 $8.16 $86,810 2 1/2" 1 1.60 2 $8.71 $105 3" 34 1.70 58 $9.25 $3,775 4" 119 2.00 238 $10.89 $15,546 6" 54 2.25 122 $12.25 $7,936 8" 11 2.50 28 $13.61 $1,796 10" 2 3.20 6 $17.42 $418 23,104 23,815 $1,555,608 The sewer consumption charge was derived using the monthly meter readings in HCF for all customers. Figure 4-3 presents the derivation of the proposed sewer consumption charges. Fi ure 4-3. Calculation of Sewer Consumption Charge Current Usage Charge Cost Category Revenue (HCF) per HCF Variable Revenue $1,511,712 4,320,000 $0.35 For sewer customers who do not purchase potable water from the City, and therefore, do not have a proxy for their sewer flows, an average flow per account was derived by using average water use per single family residential account. The 11.49 HCF average October 13, 2015 Page 11 HF&H Consultants, LLC 15-29 City of Newport Beach Sewer and Recycled Water Rate Study 4. Sewer Rate Design use was determined using FY 2011-12 customer billing data and dividing total single family consumption by the number of single family accounts. Next, using the revised rate structure, the $9.46 charge shown in Figure 4-4 represents the average single family bill per month. It was calculated as the monthly sewer use charge of $5.44 per account plus the product of the $0.35 consumption charge times 11.49 HCF. Using the fixed and variable rates as calculated in Figure 4-2 and Figure 4-3, a five-year rate plan was prepared based on the City's Sewer revenue requirements as presented in Figure 3-1. The rates included in the 5-year plan reflect annual rate increases starting in FY 2015-16 to keep pace with the increase in the revenue requirements. The proposed 5- year rate plan is shown in Figure 4-4. Figure 4-4. Five Year Sewer Rate Projections Current Revised Structure Structure FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 Monthly Sewer Use Charge 5/8"or 3/4" $4.50 $5.44 $6.04 $6.71 $7.44 $8.26 $9.17 1" $4.50 $5.44 $6.04 $6.71 $7.44 $8.26 $9.17 11/2" $4.50 $5.99 $6.65 $7.38 $8.19 $9.09 $10.09 2" $14.50 $8.16 $9.06 $10.06 $11.17 $12.40 $13.76 2 1/2" $14.50 $8.71 $9.67 $10.73 $11.91 $13.22 $14.68 3" $14.50 $9.25 $10.27 $11.40 $12.66 $14.05 $15.59 4" $14.50 $10.89 $12.08 $13.41 $14.89 $16.53 $18.34 6" $14.50 $12.25 $13.59 $15.09 $16.75 $18.59 $20.64 8" $14.50 $13.61 $15.11 $16.77 $18.61 $20.66 $22.93 10" $14.50 $17.42 $19.33 $21.46 $23.82 $26.44 $29.35 Monthly Sewer Use Charge (Sewer Only Customers) Rate per Account $6.25 $9.46 $10.51 $11.66 $12.94 $14.37 $15.95 Consumption Charge Rate per HCF $0.35 $0.35 $0.39 $0.43 $0.48 $0.53 $0.59 Sewer Surcharges Multi Unit surcharge(per DU) $2.00 Note 1 Note 1 Note 1 Note 1 Note 1 Note I Note h The surcharge has been incorporated into the Monthly Sewer Use Charge under the revised structure. CURRENT AND PROPOSED CUSTOMER BILL COMPARISONS Figure 4-5 presents a comparison of monthly customer bills using the current rate structure and the recommended revised rate structure. The rates used to calculate the revised bills are the FY 2015-16 charges presented in Figure 44. It is notable that current customers who are subjected to the multiple dwelling $2.00 monthly surcharge will experience a decrease in their monthly bill. This occurs based on the revisions to the monthly sewer use charge. The graduated rates, based on meter capacity, better reflect associated flow assumed per dwelling unit, and its equivalent. October 13, 2015 Page 12 HF&H Consultants, LLC 15-30 City of Newport Beach Sewer and Recycled Water Rate Study 4. Sewer Rate Design Figure 4-5. Customer Bill Comparison Average Numberof Monthly Current FY 15-16 Dwelling Flow Monthly Monthly Difference Customer Name Meter Size Units (HCF) Bill Bill M Single Family Residential(low flow) 5/8"- V 1 2 $ 5.20 $ 6.82 $1.62 Single Family Residential(avg flow) 5/8"- V 1 11 $ 8.35 $ 10.32 $1.97 Single Family Residential(high flow) 5/811- 11, 1 16 $ 10.10 $ 12.26 $2.16 Multi Family Residential 3" 55 243 $ 209.55 S 104.68 ($104.87) Commercial 4" 1 595 $ 224.75 $ 243.24 $18.49 Commercial 8" 141 2,074 $1,022.40 $ 820.85 ($201.55) Commercial 6" 1 1,584 $ 568.90 $ 628.98 $60.08 RESIDENTIAL CUSTOMER IMPACTS Using the City's FY 2011-12 customer billing data, Figure 4-6 illustrates the distribution of monthly billed sewer customer flow. It is important to note that the FY 2011-12 customer billing data is considered a snapshot in time and does not reflect continuous changes in customer behavior; additional factors (economic, climate) may impact consumption patterns in the future. Figure 4-6 indicates that customers who are billed 10 HCF or less on a monthly basis comprise 50% of total bills. Moreover, 90% of monthly bills are 27 HCF or less. This indicates that 90% of customers will not see more than an increase of$2.00 per month, per year, over the five year projection period. Figure 4-6. Residential Customer Bill Impacts 100% 90% 80% 70% 'm z 60% c 0 � 50% `o C 40% d u a 30% 20% 30% 0% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 90 85 90 95 100 HCF per Bill per Month October 13, 2015 Page 13 HF&H Consultants, LLC 15-31 City of Newport Beach Sewer and Recycled Water Rate Study 4. Sewer Rate Design COMPARISON WITH NEIGHBORING AGENCIES Based on available sources, Figure 4-7 shows the recent charges for sewer service among similar Orange County agencies, specifically ones that charge a fixed monthly use charge coupled with a flow-based commodity charge. Larger agencies tend to have lower rates because they can take advantage of economies of scale and have a larger base of customers over which to distribute fixed costs. Figure 4-7 indicates that the City's current and proposed sewer rates track the trend line along with its neighbors (identified with red diamonds in Figure 4-7). Figure 4-7. Neighboring Agency Comparison $20 ■ Buena Park $15 0 Seal Beach ■ Garden Grove SD m Huntington Beach $10 ew o e vine Ranch WD M ■ La Habra Newport Beach-Current Costa Mesa SD Fullerton $5 $0 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 Population of Service Area October 13, 2015 Page 14 HF&H Consultants, LLC 15-32 City of Newport Beach Sewer and Recycled Water Rate Study 5. Recycled water Projected Revenue Increases S. RECYCLED WATER PROJECTED REVENUE INCREASES REVENUE REQUIREMENTS The City's FY 2013-14 revenue requirement served as the basis for determining the revenue requirement projections through FY 2018-19. Figure 5-1 summarizes the sources and assumptions for the data as well as the projected expenditure trends: Figure 5-1. Revenue Requirement Projections FY 13-14 FY 14-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 Operating Costs $ 40,488 $ 41,188 $ 41,901 $ 42,626 $ 43,363 $ 44,114 Purchased Recycled Water 167,598 173,417 179,438 182,810 186,245 189,745 Pump Station Operating&Mainte 39,408 47,218 48,104 49,007 49,927 50,864 Depreciation 17,500 17,543 17,587 17,632 17,678 17,724 Total Revenue Requirement $ 264,994 $ 279,366 $ 287,030 $ 292,075 $ 297,213 $ 302,446 Operating Expenses This cost category includes administration and overhead expenses that are calculated as 10% of the total recycled water revenue requirement and 1% of the budgeted general fund overhead charged to the water fund, respectively. During the projection period, the City's operating expenses are projected to increase gradually at about 1.73% per year, based on the five-year historical average of general inflation for the Los Angeles area. Purchased Recycled Water This cost category for FY 13-14 was based on the actual water purchases in FY 12-13 multiplied by the cost of purchased water from OCWD of $360 per acre foot. During the projection period, the City's purchased water costs are projected to increase gradually at about 1.88% per year, based on the five-year historical average of OCWD purchased water charges per acre foot. Pump Station Operating and Maintenance This cost category for FY 13-14 was based on the actual cost of inspections, scheduled and corrective maintenance, source changeovers and pump station rehabilitation and maintenance as provided by the city. During the projection period, the City's pump station operating and maintenance costs are expected to increase gradually at about 1.73% per year, based on the five-year historical average of general inflation for the Los Angeles area. Depreciation This cost category includes replacement costs for pump station facilities and water meters. The annual pump station facility replacement cost was based on $600,000 in October 13, 2015 Page 15 HF&H Consultants, LLC 15-33 City of Newport Beach Sewer and Recycled Water Rate Study 5. Recycled water Projected Revenue Increases construction costs, amortized over 40 years. The annual meter replacement cost was based on the American Water Works Association's standard cost of $259 per meter per year, amortized over 15 years. During the projection period, the City's pump station facility replacement costs are held constant at $15,000 per year, while the meter replacement costs are projected to increase gradually at about 1.73% per year, based on the five-year historical average of inflation for the Los Angeles area. October 13, 2015 Page 16 HF&H Consultants, LLC 15-34 City of Newport Beach Sewer and Recycled Water Rate Study 6. Recycled Water Rate Design 6. RECYCLED WATER RATE DESIGN The following section was previously submitted as a separate report dated April 24, 2014. The City Council subsequently adopted the recommended rates in compliance with Proposition 218, effective October 9, 2014. The following text summarizes the rates documented in the April 2014 report and subsequently adopted by the City Council. CURRENT RATE STRUCTURE The City currently has five recycled water customers totaling 14 connections. These customers pay the sum of two charges every month for water service: a basic service charge based on the size of the service connection plus a commodity charge based on metered water use during the billing period. In 1991, the City entered into an agreement with OCWD for the distribution and sale of recycled water. The agreement stipulated that the recycled water rate may not exceed 80% of the potable water rate. It is the City's current practice to charge customers 80% of the potable water rate based on that agreement. PROPOSED RATE STRUCTURE Under the new rate structure, the recycled water rates will no longer be linked to 80% of the potable water rates. The proposed rate structure is based on the FY 2014-15 revenue requirement, and categorizes the expenses into three categories: fixed costs, variable costs and pump station-related costs. Fixed costs are considered fixed because they do not vary based on flow, and include the annual cost of meter reading and replacement, as well as administrative and overhead. Variable costs vary because they are based on the amount of water purchased, and therefore, are solely comprised of the annual cost of purchased water from OCWD. Pump station-related costs are comprised of inspections, maintenance, and rehabilitation & replacement that are directly related to the pump stations. Figure 6-1 presents the breakdown of the FY 2014-15 revenue requirement by cost category: October 13, 2015 Page 17 HF&H Consultants, LLC 15-35 City of Newport Beach Sewer and Recycled Water Rate Study 6. Recycled Water Rate Design Figure 6-1. FY 2014-15 Revenue Requirement by Cost Cate ory FY2014-15 Fixed Costs Administration $25,433 Overhead $12,208 Meter Reading $1,514 Meter replacement $2,543 Other agency fees $2,035 Total Fixed Costs $43,732 Variable Costs Purchased Water $173,417 Total Variable Costs $173,417 Pump Station Costs Inspections $7,021 Maintenance $13,109 Rehab& Replacement $42,087 Total Pump Station Costs $62,218 Total Revenue Requirement $279,366 In order to determine the monthly charge by size of connection, we first converted the number of active meters to equivalent meter units (EMU) as shown in Figure 3-2. The EMU multiplier by meter size is the same multipliers used to determine the fixed charge by meter size for potable water rates. The monthly charge for an EMU of 1.00 is derived by dividing the total fixed costs of $43,732 by the total number of EMUS or 192.70. This quotient was then divided by 12 to convert from an annual charge of $226.94 to a monthly charge of $18.91. The service charges were then graduated using the EMU multipliers, the effect of which is to increase the service charges for the larger services. Note the total annual revenue of $43.732 from fixed charges in Figure 6-2 is equal to the total fixed costs presented in Figure 6-1. October 13, 2015 Page 18 HF&H Consultants, LLC 15-36 City of Newport Beach Sewer and Recycled Water Rate Study 6. Recycled Water Rate Design Figure 6-2. Calculation of Monthly Fixed Charges Total Monthly FY 14-15 Active EMU Total Service Annual Meter Size Accounts Multiplier EMUs Charge Revenue a b a*b c a*c*12 5/8"or 3/4" 0 1.00 0 $18.91 $0 V 0 1.67 0 $31.53 $0 1 1/2" 0 3.33 0 $63.05 $0 2" 8 5.33 42.67 $100.88 $9,684 3" 3 10.00 30.01 $189.15 $6,810 4" 0 16.67 0 $315.25 $0 6" 2 33.34 66.68 $630.50 $15,132 8" 1 53.34 53.34 $1,008.81 $12,106 14 192.70 $43,732 The commodity and pump station charges were derived using the FY 2012-13 monthly meter readings in HCF for all customers, and FY 2012-13 monthly meter readings for pump station customers in HCF, respectively. Figure 6-3 presents the derivation of the proposed commodity and pump station charges for FY 2014-15: Figure 6-3. Calculation of Commodity and Pump Station Charges FY12-13 FY14-15 FY14-15 Usage Charge Cost Category Costs (HCF) per HCF Variable Costs $173,417 202,793 $0.86 Pump Station Costs $62,218 172,426 $0.36 Using the FY 2014-15 rates as calculated in Figure 6-2 and Figure 6-3, a five-year rate plan was prepared based on the City's recycled water revenue requirements as presented in Figure 5-1. The proposed five-year rate plan is shown in Figure 6-4. October 13, 2015 Page 19 HF&H Consultants, LLC 15-37 City of Newport Beach Sewer and Recycled Water Rate Study 6. Recycled Water Rate Design Figure 6-4. Five Year Recycled Water Rate Projections Current FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 Monthly Service Charge 5/8"or 3/4" $13.82 $18.91 $19.29 $19.68 $20.07 $20.47 P $23.03 $31.53 $32.16 $32.80 $33.46 $34.13 1 1/2" $46.06 $63.05 $64.32 $65.60 $66.91 $68.25 2" $73.70 $100.88 $102.90 $104.95 $107.05 $109.19 3" $138.18 $189.15 $192.94 $196.80 $200.73 $204.75 4" $230.30 $315.25 $321.56 $327.99 $334.55 $341.24 6" $460.61 $630.50 $643.11 $655.98 $669.10 $682.48 8" $736.98 $1,008.81 $1,028.99 $1,049.57 $1,070.56 $1,091.97 Monthly Commodity Charge Rate per HCF $2.46 $0.86 $0.87 $0.89 $0.91 $0.93 Monthly Pump Station Charge Rate per HCF none $0.36 $0.37 $0.38 $0.38 $0.39 CUSTOMER BILL COMPARISONS Figure 6-5 presents a comparison of monthly customer bills using the current rate structure and the recommended revised rate structure. The rates used to calculate the revised bills are the Year 1 charges presented in Figure 64. It is notable that all current recycled water customers will experience no less than a 44% bill decrease with the recommended structure change. Figure 6-5. Customer Bill Comparison Average Monthly Current Revised Flow Monthly Monthly Difference Difference Customer Name Meter Size (HCF) Bill Bill ($) (%) Newport Beach Country Club 6" 6,650 $16,820 $8,717 ($8,103) --1,X4,, Our Lady Queen of Angels 2" 151 $446 $230 ($215) -48% Big Canyon Country Club 8" 5256 $13,668 $5,504 ($8,164) -60% Big Canyon Country Club 6" 2,463 $6,518 $3,625 ($2,894) -44% Eastbluff School 3" 321 $928 $464 ($464) -50% October 13, 2015 Page 20 HF&H Consultants, LLC 15-38 APPENDIX A. SEWER AND RECYLED WATER RATE MODEL 15-39 P O 0 HF&H Consultants, LLC 201 N. Civic Drive, Suite 230 Walnut Creek, CA 94596 15-41 Attachment B — Sample of Cost to Customer Comparison Average Number of Monthly Current FY 15-16 Dwelling Flow Monthly Monthly Difference Customer Name Meter Size Units (HCF) Bill Bill ($) Single Family Residential(low flow) 5/8" - 1" 1 2 $ 5.20 $ 6.82 $1.62 Single Family Residential (avg flow) 5/8" - 1" 1 11 $ 8.35 $ 10.32 $1.97 Single Family Residential (high flow) 5/8" - 1" 1 16 $ 10.10 $ 12.26 $2.16 Multi Family Residential 3" 55 243 $ 209.55 $ 104.68 ($104.; Commercial 4" 1 595 $ 224.75 $ 243.24 $18.49 Commercial 8" 141 2,074 $1,022.40 $ 820.85 ($201.55) Commercial 6" 1 1,584 $ 568.90 $ 628.98 $60.08 15-42 Figure 1 — Projected Fund Balance $3.50 - Target Balance (Operations + Capital) $3.00 N C O with Rate Increase N . $2.00 41 m � c $1.50 ,i `.� Minimum Balance v ` (Operations) $1.00 %, a Reserves without $0.50 Rate Increase $0.00 `` FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19 FY 2019-20 15-43 Figure 2 — Neighboring Agency Comparisons $20 ■ Buena Park $15 ■ Seal Beach ■ Garden Grove SD m $10 Newpo seP Huntington Beach vine RanchWD ■ 0 ■ La Habra Costa Beach - Current ■ Costa Mesa SD ■ Fullerton $5 $0 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 Population of Service Area 15-44