HomeMy WebLinkAbout01-28-19 City Commission Packet Materials - A3. Water and Wastewater Rate Study Work SessionCommission Memorandum
REPORT TO: Honorable Mayor and City Commission
FROM: Kristin Donald, Finance Director
SUBJECT: Water and Wastewater rate studies workshop
MEETING DATE: January 28, 2019
AGENDA ITEM TYPE: Action
RECOMMENDATION: Listen to the presentation; take public comment, and direct staff and
consulting firm regarding:
• Policy Issue 1 - Conservation-Based Residential Water Rates
• Policy Issue 2 - Drought Surcharges and Drought Reserve Funding
• Policy Issue 3 - Reserve Policies and Targets
• Policy Issue 4 - COSA based rate setting
BACKGROUND:
In August 2017, the City put out a request for proposals for water and wastewater rate studies
and AE2S Nexus, LLC was selected and signed a professional services agreement November 6,
2017. The expenditures are funded from the Water and Wastewater funds as outlined in the
budget.
AE2S presented the preliminary results of their rates studies for the water and wastewater funds
on August 20, 2018 Commission meeting. Based on the feedback from that meeting a
inflationary rate for water and wastewater was adopted and staff continued to work with the
consultant on the study. Staff have reviewed and revised capital plans for the funds, which were
then adopted December 3, 2018.
The next step is getting key policy decisions to complete the rate design. AE2S will be
conducting the discussion to get feedback on key policy areas:
Policy Issue 1 - Conservation-Based Residential Water Rates
1. Should Tier 1 be limited to primarily essential water use (6 CCF) or include some
element of minor outdoor consumption (8 CCF)?
2. Does the Commission agree that primary outdoor use tiers (2nd and 3rd Tier) be
established based on typical/peak Single Family residential watering needs?
3. Should the rate structure include an excessive outdoor water use tier (4th tier)?
4. Are there any concerns with the price step factors between tiers (see Table 1)?
Policy Issue 2 - Drought Surcharges and Drought Reserve Funding
Drought Surcharge Policy Feedback:
190
1. Is the drought surcharge rate structure as proposed in line with Commission policy
objectives?
2. Given the potential for significant surcharges in the event of Stage 3-4 drought, does
the Commission believe drought surcharges should be capped and to what level?
Drought Reserve Policy Feedback:
1. If surcharge caps are desired, should a corresponding drought reserve be funded?
2. What does the Commission believe should be the target reserve balance?
3. How many years is appropriate to accumulate the reserve?
4. Should the reserve be accumulated through a standard volumetric rate increase or a
user class increase based on the anticipated benefit of use of the reserves during
drought?
Policy Issue 3 - Reserve Policies and Targets
1. Given the current approach to funding Operating and Debt Reserves, does the
Commission have a desire to better define policy to include Renewal & Replacement,
Rate Stabilization, and Drought Contingency Reserves?
2. If the Commission desires to set policy for and develop any of these additional
Reserves, are the preliminarily proposed targets appropriate for planning purposes?
Policy Issue 4 - COSA based Rate-Setting
Water:
1. Going forward, does the Commission desire to apply user class-specific adjustments
to the Water rate structures that will work to generate revenue from each class that is
commensurate with the associated cost for each class?
2. If cost of service correction is a priority, how aggressively should it be approached?
Wastewater:
1. Going forward, does the Commission desire to apply user class-specific adjustments
to the Wastewater rate structures that will work to generate revenue from each class
that is commensurate with the associated cost for each class?
2. If cost of service correction is a priority, how aggressively should it be approached?
The final rate study will be brought back to the commission prior to the budget discussions in
May with rate adoption by September.
UNRESOLVED ISSUES: None
ALTERNATIVES: As suggested by the Commission
FISCAL EFFECTS: To be determined
Report compiled on: January 18, 2019
Attached: Policy Issue 1 - Conservation-Based Residential Water Rates Paper
Policy Issue 2 - Drought Surcharges and Drought Reserve Funding Paper
Policy Issue 3 - Reserve Policies and Targets Paper
Policy Issue 4 - COSA based Rate-Setting Paper
191
Policy Issue #1: Conservation-Based Residential Water Rates 1
POLICY ISSUE #1: CONSERVATION-BASED RESIDENTIAL WATER RATES
KEY
DRIVERS
KEY DEFINITIONS
ESSENTIAL USE
• The American Water Works Association’s M1 Manual, Principles of Water Rates, Fees, and Charges, defines
essential water use as “The quantity of water needed to meet basic human needs, including drinking water for
survival, basic hygiene and sanitation purposes, and household needs such as preparing food.”
• This study estimated essential water use through the review of winter consumption data when outdoor use is
negligible.
SINGLE FAMILY RESIDENTIAL USE
• Based on GIS analysis of Bozeman’s single family parcels, a typical single family residential user is approximately
8,100 square foot lot with 53 percent pervious area.
• Analysis of winter consumption data indicates that a typical single family residential user consumes approximately
4.67 CCF per month for essential use.
• In consideration of Bozeman’s climate and typical vegetative cover practices, the average monthly CCF for a
typical Single Family user to meet irrigation needs was determined to be 19 CCF.
EXCESSIVE USE
• For the purposes of this study, excessive use was defined as outdoor water use in excess of 2.0 times the typical
Single Family user’s outdoor water requirement for turfgrass during peak irrigation season of July, when conditions
are exceptionally hot and dry.
In 2014, the City completed an Integrated Water Resource Plan (IWRP) to
identify future water supply needs and outline recommendations for meeting
those needs. The City identified water conservation as the most important
component in managing the City’s future water supply. The commissioning
of a water rate study to evaluate and recommend conservation-based water
rates was a key component of the IWRP Implementation Plan.
A key component to any successful water conservation program is the
adoption of a conservation-based rate structure to send appropriate pricing
signals for inefficient use of water and to ultimately increase water use
efficiency over time. The conservation-based rates will apply specifically to
the single family residential user class. Single family residential was selected
because it is the largest user class within Bozeman’s water system and has
the greatest conservation potential, with approximately 70 percent of the
single family residential summer use going to lawns and landscapes.
192
Policy Issue #1: Conservation-Based Residential Water Rates 2
TIERED WATER RATE ALTERNATIVES
There is no perfect approach to designing conservation-based water rates, but the City can begin evaluating alternatives by defining
key characteristics of its current usage and approach to rates. As a part of the study and alternative development, the following tier
definitions were established:
The primary goals and considerations are identified and discussed below:
1. APPROPRIATE PRICING TO PROMOTE WATER USE EFFICIENCY:
The primary goal of each of the alternatives was not to eliminate outdoor use, but to reduce inefficient use and eliminate excessive use
on the water system from the Single Family residential customer class. With a tiered conservation based rate structure, the best way to
do this is to establish appropriate pricing signals as outdoor usage increases from responsible to inefficient to excessive.
2. EFFECTIVE REVENUE GENERATION:
Another goal is to maintain equal revenue generation within the first three tiers, with the intention that excessive usage in Tier 4 will
eventually be eliminated over time as customers realize the effect of pricing on their water use at this level. Before Tier 4 usage is
eliminated, the City can direct the revenue generated from this Tier towards a specific use such as the contemplated drought reserve
(see separate drought surcharge/reserve policy paper) or other water conservation initiatives.
3. ESSENTIAL AND RESPONSIBLE OUTDOOR USE AFFORDABILITY:
The primary consideration in the development of the tiers is the affordability of both essential and responsible outdoor use. The
amount of indoor water use required for basic living purposes is sometimes referred to as “Lifeline” water use and can be of particular
concern for fixed income users. In the tier pricing of each alternative, focus is placed on the ability to maintain a water rate in the first
tier that is affordable for this first block of usage where there is little ability for customers to reduce usage. Regarding Responsible
outdoor use, when striving for conservation, it is appropriate to charge more for outdoor water use than for indoor water use. However,
for the “Responsible Use” Tier 2, all alternatives were established to keep water as affordable as possible in this tier.
TIER 1
Essential Use
TIER 2
Responsible Outdoor Use
TIER 3
Inefficient Outdoor Use
TIER 4
Excessive Outdoor Use
69.0%
87.0%
100.0% 100.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Existing Alternative 1 Alternative 2 Alternative 3
Single Family and Low Income Residential
CHART 1: PROBABILITY OF ACHIEVING REVENUE TARGET
193
Policy Issue #1: Conservation-Based Residential Water Rates 3
4. THE RELATIONSHIP OF TIER SIZE TO PRICING REQUIRED:
An additional consideration is the relationship between tier size and volumetric rate required as water usage increases in each block.
The volumetric rate for each tier is directly related to the size of the tier and the total water sales anticipated within that tier. This is
especially important when considering the affordability of the essential use tier (Tier 1). As the size of Tier 1 increases, so does the rate
required with in this tier. This is primarily driven by the increase in the total water sales projected to be generated from the first Tier as
its size increases. Therefore, for all alternatives presented, this first tier size (and associated rate required) was established at or below the
existing first tier size.
With these goals and considerations in mind, Table 1 summarizes the current rate structure and the three alternative structures that
have been developed for consideration.
Chart 2 below represents the structure of the proposed alternatives as they relate to total annual consumption for a recent year (2017)
for the single family residential customer class.
TABLE 1: ALTERNATIVE SINGLE-FAMILY RESIDENTIAL STRUCTURE COMPARISON
Tier 1
Essential Use
Tier 2 Responsi-
ble Outdoor Use
Tier 3 Inefficient
Outdoor Use
Tier 4 Excessive
Outdoor Use
Tier Size (CCF)
Alternative 3 0-8 8-25 25-44 44+
Alternative 2 0-6 6-25 25-55 55+
Alternative 1 0-6 6-19 25+
Existing 0-8 8-15 15+
Rate per CCF
Alternative 3 $2.55 $3.57 $5.18 $7.76
Alternative 2 $2.40 $3.24 $4.54 $6.81
Alternative 1 $2.40 $3.00 $3.75
Existing $2.55 $2.75 $3.24
Step Factor
Alternative 3 1.40 1.45 1.50
Alternative 2 1.35 1.40 1.50
Alternative 1 1.25 1.25
Existing 1.08 1.18
8
6
6
8
7
19
19
19
75+
65+
30
19
35+
44+
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Existing
Alternative 1
Alternative 2
Alternative 3
34%
of Consumption
<3%
of Consumption
$2.55 $3.57 $5.18 $7.76
Policy Issue #1: Conservation-Based Residential Water Rates 4
ANALYSIS OF POTENTIAL RATE STRUCTURES
As described earlier, tier sizing was primarily established based on essential and responsible outdoor use data specific to the City
of Bozeman. The pricing signal and increase factors applied in the development of alternatives were based on the project teams
professional experience in developing successful conservation rate structures for other communities in Montana and across the region.
As stated earlier, judging the anticipated effectiveness of each rate structure alternative in reducing consumption and generating
appropriate revenue was done through the use of a probabilistic water sales forecasting model. The model allows for simulations to be
run considering multiple factors that could affect water demand such as weather, growth, and pricing structure. Chart 3 below indicates
the model simulation results regarding the projected decline in water sales as compared to the existing structure for the Single Family
user class for each of the presented alternatives.
ANALYSIS OF EXISTING TIERED SINGLE FAMILY RATE STRUCTURE:
Based on the results of the sales forecasting model and the Study teams experience with developing conservation based rate structures
for other clients throughout the region, the performance and sizing of the current rate structure was evaluated for effectiveness in
promoting conservation and options for improvement. The following bullets summarize the observations from this review:
• Tier 1 – The current size of this tier appears to be larger than necessary when considering essential use data. The City of Bozeman’s
average residential winter water use per account (i.e. when outdoor water use is negligible) is 4.67 CCF, which suggests quite a bit
of outdoor water use is likely being charged at the Tier 1 rate.
• Tier 2 – The rate for this tier appears to provide a minimal pricing signal over Tier 1 pricing to promote efficient outdoor
consumption with an increase factor of only 1.08 ($2.75/$2.55). It is recommended that this first step be established closer to a
1.25 increase factor over the Tier 1 pricing. Additionally, based on an analysis of typical residential lot size and irrigable area, it is
recommended that the City consider expanding this tier size to provide a more appropriate volume for the responsible irrigation
based on vegetative cover practices and climatic conditions in the Bozeman region.
• Tier 3 – This tier also appears to provide a less than adequate price signal. With an increase factor of 1.18 ($3.24/$2.75), this
price signal is greater than that from Tier 1 to Tier 2, but still appears to be inadequate for the third or final tier of the rate structure
where the goal is to persuade the customer to make better outdoor water use decisions and curb usage back to Tier 2 pricing.
Effective price signals for a third tier which is meant to address inefficient outdoor water use practices often are seen in the range of
a 1.25 to 1.50 factor of increase over Tier 2. Moreover, the review of successful conservation rates from around the region supports
the creation of a fourth tier to definitively distinguish inefficient water use from excessive water use.
1. Tier Sizing
2. Price Signal Adequacy
3. Appropriate Increase Factors Between Tiers
THE ANALYSIS OF ALTERNATIVES FOCUSES
ON IDENTIFYING AND CONSIDERING
THREE IMPORTANT CHARACTERISTICS
0.8%
6.8%
7.4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Alternative 1 Alternative 2 Alternative 3
Single Family and Low Income Residential
CHART 3: FORECASTED REDUCTION IN WATER SALES
195
Policy Issue #1: Conservation-Based Residential Water Rates 5
• Beyond Tier 3 – In the existing rate structure, there is no current consideration for excessive use pricing of large volume
residential consumers. The most effective conservation rate structures provide a clear distinction between residential consumers
with inefficient water use and those with excessive water use well outside the scope of reasonable consumption. A fourth tier
increase factor of at least 1.50 is recommended to make this distinction and send a clear price signal to those users putting excess
strain on the system.
SUMMARY OF ANALYSIS OF ALTERNATIVE SINGLE FAMILY RATE STRUCTURES
The following summarizes the Study teams observations for each alternative structure in consideration of the review of the effectiveness
of the existing rate structure and the results projected from the water sales forecasting analysis.
Alternative 1: Model results project that Alternative 1 is likely to provide the least effective conservation results as compared to the
current rate structure. This result was not unexpected considering that, of the three alternatives analyzed, this is the only one that does
not provide a fourth penalty tier for excessive use.
• Tier 1: Alternative 1 decreases essential use to 6 CCF, smaller than the current tier size of 8 CCF. This decrease in tier size also
lowers the projected total water use to be sold in this tier, resulting in lower rates for this tier.
• Tier 2: This tier is appropriately sized, based on the responsible outdoor water use defined in the analysis of single family
residential billing records. The increase factor of 1.25 ($3.00/$2.40) is the least aggressive of the alternatives but does send a
reasonable price signal for responsible outdoor use.
• Tier 3: The price signal from Tier 2 to 3 is equal to the price signal from Tier 1 to 2. This increase factor appears to be insufficient
to adequately deter inefficient and excessive usage. With inefficient and excessive consumption bundled under one rate in the third
tier, this structure acts in a similar fashion to the City’s current rate, as reflected in the minor 0.8 percent forecasted reduction.
Alternative 2: While not the most aggressive alternative considered for tier pricing and tier size compression, at a projected 6.8 percent
reduction, this alternative is projected to be effective in reducing inefficient and excessive outdoor consumption without unnecessary
limitations to outdoor water use.
• Tier 1: Like Alternative 1, Alternative 2 defines essential use at consumption up to 6 CCF, less than the current structure. This
savings is reflected in the decreased rate of $2.40 per CCF.
• Tier 2: This tier is sized to accurately reflect the typical responsible outdoor use of 19 CCF. This alternative also provides a greater
price signal than the existing structure or Alternative 1, with an increase factor of 1.35 ($3.24/$2.40) over Tier 1.
• Tier 3: Alternative 2 is projected to have a more effective conservation structure due to its differentiation between inefficient and
excessive water use. Tier 3 sizing of 30 CCF appears to provide a sufficient volume of outdoor use and provides an increase factor
of 1.40 ($4.54/$3.24) over Tier 2.
• Tier 4: Excessive use under Alternative 2 is defined as all use over 55 CCF (6+19+30). With this 4th tier and an increase factor of
1.50 ($6.81/$4.54), this alternative sends a much stronger price signal for excessive use as compared to Existing and Alternative 1.
Alternative 3: Alternative 3 was the most aggressive conservation rate structure considered with regard to tier pricing steps and tier
compression. While Alterative 3 has a greater forecasted reduction than Alternatives 1 and 2, it does not appear to be significantly more
effective than Alternative 2. In comparison to Alternative 2, Alternative 3 reduces the Tier 3 size by 9 CCF, while only improving the
expected consumption reduction by 0.6 percent, as indicated in Chart 3.
• Tier 1: Alternative 3 extends essential water use (Tier 1) to 8 CCF. By expanding volume in the first tier from 6 CCF to 8 CCF,
expected water sales in Tier 1 increase by greater than 60 percent, while flow in Tiers 2 and 3 are expected to decrease by 50 and
30 percent, respectively. The reduction in water sales at the higher Tier 2 and Tier 3 rates would force a higher rate at Tier 1 as
compared to Alternative 1 and 2, directly impacting essential water use pricing.
• Tier 2: Similar to Alternatives 1 and 2, Alternative 3 Tier 2 sizing is established at 19 CCF. This alternative has the highest Tier 2
increase factor at 1.40 ($3.57/$2.55). This tier covers up to 27 CCF rather than the 25 CCF as found in Alternatives 1 and 2 due to
the expanded size of Tier 1.
• Tier 3: Alternative 3 limits the inefficient water use (Tier 3) to 46 CCF, in comparison to the Alternative 2 cap of 55 CCF. As
stated, this creates the most significant compression of the Tiers 1-3 for any of the alternatives considered, which as a result creates
the highest pricing required of any alternative in Tiers 1-3.
• Tier 4: The rate for this tier sends the same price signal as the Alternative 2 pricing step for excessive outdoor use with the increase
factor of 1.50 ($7.76/$5.18).
196
Policy Issue #1: Conservation-Based Residential Water Rates 6
EFFECT OF POLICY CHANGE ON RATES AND AFFORDABILITY
As noted, a key consideration in the determination of the preferred rate structure alternative is the affordability and expected impacts
over existing rates. Table 3 shows the average monthly charge to a typical single family residential customer using the alternative
rate tiers and calculating the percentage change from the City’s existing rates at varying levels of usage. The table is constructed to
demonstrate the anticipated change in typical Single Family residential customer’s monthly bill based on winter, summer, and annual
usage under each alternative.
TABLE 3: ESTIMATED MONTHLY CHARGES – SINGLE FAMILY RESIDENTIAL CUSTOMER
4.67 CCF 19.3 CCF 129.19 CCF
Winter Average Summer
Average
Annual
Average
At Existing Rates $27.61 $69.28 $539.67
Alternative 1 Rates $26.91 $70.00 $538.36
% Change from Existing -2.50% 1.00% -0.24%
Alternative 2 Rates $26.91 $73.19 $554.32
% Change from Existing -2.50% 5.60% 2.71%
Alternative 3 Rates $27.61 $76.44 $575.46
% Change from Existing 0.00% 10.30% 6.63%
197
Policy Issue #1: Conservation-Based Residential Water Rates 7
PRELIMINARY RECOMMENDATIONS
Pending feedback from the Commission, based on the conservation
goals and considerations discussed herein, Alternative 2 is the
recommended approach of the Study team at this time.
A TIER 1 VOLUME OF 6 CCF IS RECOMMENDED
As noted previously, the average residential winter water use per account
is 4.67 CCF. When reviewing the data at a winter consumption level of 6
CCF, over 80 percent of all standard single family residential bills and 90
percent of all low income residential bills were found to use less than this
amount during this season of negligible outdoor consumption.
TIER 2 VOLUME OF 19 CCF IS RECOMMENDED
Analysis of local evapotranspiration (the sum of precipitation and
plant water lost to solar radiation), average single family residential lot
size, average single family residential pervious area, and single family
residential water use data by City Staff determined a prudent lawn
watering value to be 19.0 CCF.
TIER 3 VOLUME OF 30 CCF AND TIER 4 VOLUME EQUAL TO ALL USE
IN EXCESS OF TIER 3 IS RECOMMENDED
It is recommended that the new rate structure utilize four tiers to allow
aggressive incentives to reduce consumption for those users in great
exceedance of recommended watering practices. Based on local data,
City Staff calculated a monthly water volume equivalent to twice the peak
monthly water required (49 CCF = Tier 2 + Tier3) to irrigate an average
property size, accounting for evapotranspiration.
COMMISSION
FEEDBACK
REQUESTED
The City Commission is requested to provide feedback on the
alternatives presented while considering the following:
1. Should Tier 1 be limited to primarily essential water use (6 CCF) or
include some element of minor outdoor consumption (8 CCF)?
2. Does the Commission agree that primary outdoor use tiers (2nd
and 3rd Tier) be established based on typical/peak Single Family
residential watering needs?
3. Should the rate structure include an excessive outdoor water use
tier (4th tier)?
4. Are there any concerns with the price step factors between tiers
(see Table 1)?
198
Policy Issue #2: Drought Surcharge Rates and Drought Reserve Funding 1
POLICY ISSUE #2: DROUGHT SURCHARGE
RATES AND DROUGHT RESERVE FUNDING
KEY
DRIVERS
The DMP ultimately recommended a 4-stage drought response plan with defined system-wide water
reduction targets. Table 1 below summarizes the stages and associated targets at each stage:
In short, the recommended responses are as follows:
Per the recommendations of the DMP, the City is considering the development of drought rates
and reserves in order to address these vulnerabilities and to ensure the financial stability of the
water utility in the event of a drought. The drought rates and reserve are contemplated to serve two
key functions: reducing water use in times of drought and maintaining adequate revenues without
extreme rate increases once water use is reduced.
Stage 1 – Drought Watch asks for increased communication on dry conditions;
Stage 2 – Drought Advisory implements mandatory watering restrictions;
Stage 3 – Drought Warning prohibits lawn watering; and
Stage 4 – Drought Emergency rations water supplies for essential uses.
In 2017 the City of Bozeman (City) completed its Drought Management Plan
(DMP), outlining the City’s vulnerability to drought, describing ways to mitigate
that vulnerability, and providing a drought response strategy. The DMP
outlines the City’s drought related characteristics below:
“Chronic drought is a part of the Gallatin Valley’s history and is of
particular concern to the City of Bozeman as the City has experienced
rapid growth in recent decades. The impact of drought on Bozeman is
further compounded by its location in the headwaters of the Gallatin
River watershed, the susceptibility of the City’s source waters to
drought conditions, and limited water storage.”
TABLE 1: DROUGHT RESPONSE PLAN TARGETS
Drought
Stage
Stage 1:
Drought Watch
Stage 2:
Drought Advisory
Stage 3:
Drought Warning
Stage 3:
Drought Emergency
System-Wide Water
Reduction Target
10% 20% 30% 40%
199
Policy Issue #2: Drought Surcharge Rates and Drought Reserve Funding 2
OPTIONS FOR CONSIDERATION
Drought surcharge rates and drought reserves work hand-in-hand for drought management and the City should consider utilizing both
financial tools when planning for a drought scenario. Those unfamiliar with drought management planning may ask “Why is funding a
drought reserve with near-term increases necessary? Can’t the City just raise rates during a drought?”
The key to a successful drought management financial plan is a balanced integration of drought surcharge rates during a drought and the
funding of a drought reserve with near term regular rate increases before the drought occurs.
To analyze the options for establishing drought rates and a drought reserve, the project team analyzed potential drought rate structures,
the framework of a drought reserve, and the mechanisms for funding the reserve with near-term increases. Before adopting either the
rates or the reserve target, policy direction from the City Commission is desired in a number of key areas:
THERE ARE TWO KEY REASONS THAT SURCHARGING RATES DURING DROUGHT ALONE MAY NOT
BE THE BEST APPROACH TO COVER LOST REVENUE IN THE EVENT OF A DROUGHT:
1. If the City were to surcharge rates to cover all anticipated lost revenues in the event of a Stage 3 drought, Single Family
volumetric rates are projected to require an increase of nearly 186 percent. The effects of an increase of this nature would
likely cause further instability and potential for further revenue loss.
2. Additionally, the required rate increase will cause significant affordability issues. In the scenario described above, low-
volume essential use and low-income user’s costs are expected to see increases of nearly 80 percent.
FIGURE 1: THE RELATIONSHIP BETWEEN DROUGHT
SURCHARGES AND DROUGHT RESERVE FUNDING
Higher Drought Surcharges
Increase During Drought
Lower Near-Term Rate Increases
for Drought Reserve Funding
DROUGHT SURCHARGE RATES:
• Drought Rate Structure Design
• Maximum Rate Increase Targets for
Drought Pricing on Essential Use
• The Relationship Between the Drought
Reserve and Drought Rates
DROUGHT RESERVE FUNDING:
• Target Drought Reserve Balance and
Reserve Funding Timeframe
• Near-term Rate Increase strategy for
Funding the Drought Reserve
200
Policy Issue #2: Drought Surcharge Rates and Drought Reserve Funding 3
ANALYSIS OF OPTIONS | DROUGHT SURCHARGE RATE
DROUGHT RATE STRUCTURE DESIGN
The primary goal of a drought rate structure is to encourage conservation through increased rates in the event of a drought and to
supplement lost revenue from watering restrictions. Drought rates are different from the regular rate structures for water service in
that they are temporary in nature. When considering the design of drought rates, it is common practice to tie the drought declaration/
stage to the criteria for implementing and removing drought rates. As described in the DMP, the following guiding principles are key
considerations in the implementation of drought rates:
• There should be a clear relationship between price and demand.
• Drought rates should not be used alone but should be incorporated into an overall program to increase customer awareness of the
drought’s severity and importance of saving water.
• Drought rate pricing signals should be developed in a manner that carefully considers the cost of water for essential uses.
• Drought rates should match the severity of the drought and drought response measures.
• Public information is important in helping customers understand drought rates.
In order to achieve the objectives of these guiding principles, the project team developed and analyzed the potential effectiveness of a
class-based volumetric surcharge. A class-based volumetric surcharge incorporates an increasing block surcharge tied to the varying
reduction abilities of each user class. This method is often considered a more effective drought surcharge when compared to other
surcharge alternatives available such as a common fixed charge increase or an equivalent volumetric surcharge for all customers.
A key consideration in the development of a class-based volumetric surcharge structure is the ability of each class to reduce non-
essential water use. In order to determine the total water use reduction potential by class, the project team reviewed detailed winter vs.
summer water use records. Table 2 shows the estimated maximum outdoor water use reduction potential for each class based on this
review of winter vs. summer consumption for each class.
In reviewing the outdoor water use reduction potential for each class, it is important to note that there is varied potential in each class
to reduce use in times of drought. The Single Family Residential and Government classes display the largest potential to reduce water
use by eliminating a majority of outdoor watering practices as required in times of a Stage 3-Drought Warning and a Stage 4-Drought
Emergency. It is also important to note the difficulty in estimating reduction potential for MSU given the seasonal fluctuation in student
1. Is the proposed drought surcharge rate structure in line with
Commission policy objective?
2. Should drought surcharges be capped?
3. What are the surcharge rate cap goals?
KEY POLICY QUESTIONS
ASSOCIATED WITH DROUGHT
SURCHARGE RATES INCLUDE:
TABLE 2: ESTIMATED MAXIMUM WATER USE
REDUCTION POTENTIAL ON NON-ESSENTIAL OUTDOOR USE
TOTAL
Single Family and Low Income Residential 50%
Multi-Family Residential 16.%
Government 54%
MSU 14%
Commercial 28%
Industrial <5%
Total System-wide for all Classes 33%
201
Policy Issue #2: Drought Surcharge Rates and Drought Reserve Funding 4
population (i.e. student population declines when outdoor use increases in the summer). Lastly, in reviewing the usage demands for
Industrial, there appears to be insignificant outdoor water use, and therefore a minor ability to reduce water demands without affecting
day-to-day business practices.
In reviewing the total system-wide reduction potential indicated in Table 2, another key consideration is that even with the elimination
of all estimated outdoor water consumption, the overall estimated reduction does not achieve a target of 40% for a Stage 4 Drought
Emergency. Therefore, in order to achieve these target reductions, the specific actions by Stage and Class as indicated in the Drought
Response Measures section within the DMP would be required across all customer classes to achieve total reduction targets.
Considering estimated reduction potential by class on outdoor water use restrictions/additional reduction potential to be achieved
from targeted Drought Response Measures, the project team developed reduction targets by Class and Stage as presented in Table 3 to
achieve the total Stage Reduction Targets.
Considering the reduction targets by class and the guiding principles as outlined in the City’s DMP, the proposed drought surcharge
rate structure presented in Table 4 was developed to align with the following surcharge pricing goals:
• Surcharge Pricing Goal #1: Drought rate pricing signals should be developed in a manner that carefully considers the cost of
water for essential uses.
• Surcharge Pricing Goal #2: Drought rates should match the severity of the drought and drought response measures. Specifically,
Tiers 2-4 are significantly increased to penalize outdoor water use after the lawn water ban is established in Stage 3 and Stage 4
droughts.
• Surcharge Pricing Goal #3: Drought rates should be established to replace, as much as possible, the anticipated revenue lost from
water use reduction in each class.
TABLE 3: WATER USE REDUCTION TARGETS BY STAGE AND CLASS
STAGE 1 STAGE 2 STAGE 3 STAGE 4
Single Family and Low Income Residential 10.0% 20.0% 50.0% 55.0%
Multi-Family Residential 10.0% 16.0% 16.0% 26.0%
Government 10.0% 20.0% 55.0% 60.0%
MSU 10.0% 14.0% 14.0% 24.0%
Commercial 10.0% 20.0% 27.0% 36.0%
Industrial 10.0% 10.0% 10.0% 20.0%
Estimated Overall Reduction 10.0% 18.4% 33.0% 40.4%
Stage Reduction Target 10.0% 20% 30% 40%
TABLE 4: TARGET RATE INCREASES BY STAGE AND CLASS
Single Family and Low Income Residential
Tier 1 0.0% 10.0% 20.0% 25.0%
Tier 2 10.8% 29.0% 100.0% 200.0%
Tier 3 10.8% 29.1% 100.0% 200.0%
Tier 4 10.8% 29.1% 100.0% 200.0%
Multi-Family Residential 11.1% 19.0% 19.0% 25.0%
Government 11.1% 25.0% 25.0% 25.0%
MSU 11.1% 16.3% 16.3% 25.0%
Commercial 11.1% 25.0% 25.0% 25.0%
Industrial 11.1% 11.1% 11.1% 11.1%
202
Policy Issue #2: Drought Surcharge Rates and Drought Reserve Funding 5
Table 5 outlines the process used to develop the surcharge increase by class and stage in order to align with the stated pricing goals:
TABLE 5: DROUGHT STAGE AND USER CLASS SURCHARGE RATE DESIGN SUMMARY
USER CLASS
(Estimated Max Reduc-
tion from Outdoor Use)
PRICING GOAL #1
Essential Use Impacts
PRICING GOAL #2
Drought Surcharge Aligned
w/Drought Severity
PRICING GOAL #3
Replacement of Lost Revenue
from Water Sales Reductions
Single Family
and
Low Income
Residential
(50%)
In order to minimize impacts
to essential use pricing,
the largest increases were
applied to Tiers 2-4 for
outdoor consumption. In
addition, the maximum
surcharge was capped at
25% for Tier 1 essential use.
Stage 1 and 2 surcharges
established in Tiers 2-4 to
curb outdoor water use
to reduction goal. Stage
3 and Stage 4 surcharges
established to eliminate/
significantly penalize all
outdoor water use in Tiers
2-4.
Stage 1 and 2 surcharges
established to replace anticipated
lost revenue from water use
reduction. Stage 3 and Stage 4
restrictions are expected to result
in significant loss in revenue from
this class in Tiers 2-4. Additionally,
surcharge cap on Tier 1 increase
is not high enough to replace all
anticipated revenue loss from
higher Tier use.
Multi-Family
(16%)
Maximum surcharge is
capped at 25% in Stage 4.
Stage 1 surcharge established
to curb outdoor water use.
Stage 2, Stage 3, and Stage
4 surcharges established to
eliminated nearly all outdoor
use.
Stage 1-3 surcharges established
to replace lost revenue from water
reduction. With water use reduction
Policy Issue #2: Drought Surcharge Rates and Drought Reserve Funding 6
MAXIMUM INCREASE TARGET FOR DROUGHT PRICING ON ESSENTIAL USE
When considering a maximum increase target, the City should consider the realistic essential use impacts for all classes. When
considering Single Family residential users, the financial implication of the contemplated drought surcharge increases for minor
consumption and low-income users are significant given that these users are going to be asked to participate in replacing lost revenue
from higher consumption users when restrictions are implemented. The City of Bozeman’s essential use per residential user, defined as
the average single family residential winter water use per account, is 4.67 CCF. Table 6 below shows a comparison of the current Tier
1 volumetric rate, potential rate increases, and resulting monthly bill required to offset expected revenue losses from a Stage 3 drought.
The 186 percent rate increase is included to simulate the required rate increase during a Stage 3 drought if surcharge caps and a drought
reserve are not utilized.
THE RELATIONSHIP BETWEEN DROUGHT RESERVE AND DROUGHT RATES
As indicated in the sections prior, without the presence of surcharge caps and drought reserves to offset revenue loss, the one-time
surcharge rate increases and affordability implications are anticipated to be significant. To establish a mechanism to offset these
affordability concerns, the project team modeled the use of a drought reserve in combination with the capped surcharge increases for
each class. Drought rates and the drought reserve are mutually supporting and an effective drought management plan will utilize both
resources in the event of a drought. Droughts may last months, one year, or multiple years and the City will not know the full extent of
the drought until it has ended. For that reason, the City should consider the funding of a drought reserve to a target amount ahead of a
drought in order to draw upon the reserve in the time of need.
In summary of Pricing Goal #3 as discussed in Table 5, the draft surcharges for Stage 1 and Stage 2 are expected to adequately replace
anticipated revenue losses. Rate caps prevent most of the customer classes from fully recovering lost revenues during Stage 3 and Stage
4. To maintain financial stability in the face of decreasing revenues during these drought stages, the City should consider establishing a
policy identifying target drought reserves and how the reserve should be implemented in the event of a drought.
TABLE 6: POTENTIAL SURCHARGE INCREASES
IMPACTS ON SINGLE FAMILY TIER 1 ESSENTIAL USE
DRAFT SURCHARGE STRUCTURE - IMPACTS BY DROUGHT STAGE
STAGE 1 STAGE 2 STAGE 3 STAGE 4
EQUIVALENT ONE-TIME
SURCHARGE INCREASE*
Fixed Charge $15.70 $15.70 $15.70 $15.70 $15.70
Volumetric Rate $2.55 $2.81 $3.06 $3.19 $7.29
Volumetric Rate Surcharge (%) 0% 10% 20% 25% 186%
Monthly Bill @ 4.67 CCF $27.61 $28.80 $29.99 $30.59 $49.76
Monthly Bill Total Increase (%) 0% 4% 9% 11% 80%
* Equivalent one-time surcharge represents the total estimated increase on Tier 1 consumption that would be required (absent
of a surcharge cap) to replace the revenue lost from Tier 2-4 consumption in the event of a Stage 3 drought.
204
Policy Issue #2: Drought Surcharge Rates and Drought Reserve Funding 7
ANALYSIS OF OPTIONS | DROUGHT RESERVE
TARGET DROUGHT RESERVE BALANCE AND RESERVE FUNDING TIMELINE
The revenue shortfall analysis completed by the project team estimates that with a 25% surcharge rate cap in place, one year of a Stage 3
drought would create a revenue shortfall of approximately $2.2 million. Table 7 shows the estimated reserve requirements to fund the
shortfall created by a Stage 3 or 4 drought with a duration of one to three years.
Once the City has established the target reserve balance, it should create a policy for the funding length of time appropriate to fully fund
the reserve. When establishing this policy, the City should consider how this will affect user rates and potential risks associated with the
selected timeframe.
In considering user rate impacts, it should be noted that the rate impacts indicated in Table 8 are separate from those indicated prior
for drought surcharges. The rates indicated in Table 8 on the following page are the one-time increases (dependent upon the funding
timeframe selected) that would be required on every unit of water sold ahead of a drought in order to accumulate the required reserves
and minimize the required drought surcharges.
As shown in Table 8, a shorter timeframe will have a more dramatic impact on user rates and may cause an unintended change in
consumption. However, the longer the funding timeframe, the higher the risk a drought will occur before the reserve is fully funded.
1. What is the corresponding target level of reserves?
2. What is the timeframe for accumulating the reserves?
3. From which customer classes should the reserves primarily
be generated?
KEY POLICY QUESTIONS
ASSOCIATED WITH THE
DROUGHT RESERVE FUNDING
INCLUDE:
TABLE 7: DROUGHT RESERVE ESTIMATES BY STATE AND DURATION
STAGE 3 STAGE 4
1 Year $2,200,092 $2,524,039
2 Year $4,400,184 $5,048,078
3 Year $6,600,276 $7,572,117
205
Policy Issue #2: Drought Surcharge Rates and Drought Reserve Funding 8
DROUGHT RESERVE FUNDING STRATEGY
The City should also decide the method used to fund the drought reserve. There are two primary methods for consideration: common
volumetric increases across all classes and user class specific increases.
For the first method, the City could choose to fund the drought reserve with a volumetric surcharge applied to all units of water.
This method is perceived as fair and equitable by users and is relatively simple to implement. Table 8 is an example of the pricing
requirements of a common volumetric surcharge on all units of water.
The City may also wish to fund the drought reserve through a user class specific surcharge. For example, the Single Family,
Government, and Commercial user classes account for a large percentage of the system’s annual non-essential use consumption. The
City could decide that these users receive the primary benefit from funding the reserve, as they receive the largest benefit of the reserves
accumulated when revenue is lost from these classes after surcharge increase caps are enacted.
TABLE 8: RESERVE FUNDING EXAMPLE
YEAR TO BUILD RESERVE WATER SALES (CCF) RESERVE TARGET $/CCF
1 Year 2,526,015 $2,200,092 $0.87
2 Years 5,111,225 $2,200,092 $0.43
5 Years 13,236,685 $2,200,092 $0.17
8 Years 21,948,921 $2,200,092 $0.10
10 Years 28,032,673 $2,200,092 $0.08
206
Policy Issue #2: Drought Surcharge Rates and Drought Reserve Funding 9
PRELIMINARY RECOMMENDATIONS
It is recommended to consider the following:
DROUGHT SURCHARGE:
1. Establishing a class-based volumetric surcharge rate structure with
increases as outlined in Table 4;
2. Setting a maximum surcharge increase target for essential use to
address potential affordability issues.
DROUGHT RESERVE:
1. Creating the reserve and a policy to utilize the drought reserve to
offset revenue shortfalls during stage 3 and stage 4 droughts;
2. Establish target reserve level corresponding to the City’s risk
tolerance;
3. Setting the drought reserve full funding timeframe also corresponding
to the City’s risk tolerance;
4. Funding the drought reserve through a volumetric surcharge to be
applied to either all units of water or priced specifically by user class.
COMMISSION
FEEDBACK
REQUESTED
Drought Surcharge Policy Feedback:
1. Is the drought surcharge rate structure as proposed in line with
Commission policy objectives?
2. Given the potential for significant surcharges in the event of Stage
3-4 drought, does the Commission believe drought surcharges
should be capped and to what level?
Drought Reserve Policy Feedback:
1. If surcharge caps are desired, should a corresponding drought
reserve be funded?
2. What does the Commission believe should be the target reserve
balance?
3. How many years is appropriate to accumulate the reserve?
4. Should the reserve be accumulated through a standard volumetric
rate increase or a user class increase based on the anticipated
benefit of use of the reserves during drought?
207
Policy Issue #3: Reserve Policies and Targets 1
POLICY ISSUE #3: RESERVE POLICIES AND TARGETS
KEY
DRIVERS
OPTIONS FOR CONSIDERATION
BASIS FOR THE POLICY DIRECTION SOUGHT
OPERATING RESERVE
An Operating Reserve is meant to address a system’s cash-flow needs and the lag between expenses incurred and
revenues received. Water systems can have wide ranges in operating revenue from month to month depending on the
season, while operating expenses are largely fixed and consistent from one month to the next.
RENEWAL AND REPLACEMENT (R&R) RESERVE
The Renewal and Replacement (R&R) Reserve is a capital reserve intended to meet on-going system renewal/
replacement needs. By consistently funding such a reserve, a system can avoid capital-driven spikes in utility cash flow
requirements.
DEBT SERVICE RESERVE
Debt Service Reserves are typically established based on terms within bond documents. Most debt covenants require
the establishment of a restricted reserve based on the highest annual payment. The required reserve amount is held
for the life of the loan and can be used to make the final payment.
RATE STABILIZATION RESERVE
A Rate Stabilization Reserve is established to dampen necessary rate increases in the event of unexpected expenses or
decreased revenues.
DROUGHT RESERVE
Drought Reserves are considered in areas where the water supply is limited, at risk or particularly susceptible to
climatic conditions in any given year. Targets for such reserves are system-specific and account for the level of risk
acceptable to the utility decision makers. This topic is addressed in a separate paper.
Direction given on this topic will be key to establishing final rate strategy recommendations.
Reserve management is an important aspect of operating financially
sustainable utilities. While the majority of utility costs are fixed and relatively
stable from month to month, revenues can fluctuate widely due to seasonality,
climate fluctuations, emergencies, or conservation efforts. The City of
Bozeman maintains operating and capital reserve accounts for its utilities to
manage revenue volatility and avoid spikes in required rate increases. The
City has incorporated reserve planning into its budget, capital and rate-
planning efforts to periodically evaluate the suitability of reserve funding
goals and targets given the near- and long-term revenue needs for the Water
and Wastewater systems.
208
Policy Issue #3: Reserve Policies and Targets 2
ANALYSIS OF OPTIONS | WATER SYSTEM
OPERATING RESERVE
The American Water Works Association (AWWA) recommends a minimum operating reserve balance equal to 45 days of operating
and maintenance (O&M) expenses. It is common, however, for utilities to set reserve targets ranging from 90 and 180 days. The
City’s operating reserve currently has a target balance of 45 days. Due to successful conservation efforts, the City of Bozeman has seen
decreasing water use, yet continues to have high summer water demands. This variability results in greater than 50 percent of water
revenue generation occurring in the months of June through October, with less than seven percent monthly in the remaining months.
Due to on-going conservation efforts and the potential for further reductions in water use, recommendations from the 2018 study
include adoption of an operating reserve target equal to 90 days of O&M expense. Table 1 shows the target operating reserve balance
from 2019 to 2024.
RENEWAL AND REPLACEMENT RESERVE
An industry rule of thumb suggests that, at a minimum, systems should set aside funds in reserves annually in an amount equal at least
to annual depreciation. This is the current approach used by the City. Depreciation, however, is known to be inadequate in terms of
providing future replacement of assets. As a result, it is suggested that systems consider the Replacement Cost New (RCN) when
determining reserve targets and annual contributions. A third approach involves analysis using a Weibull distribution to estimate the
remaining lifespan of system pipelines and calculate projected annual reinvestment needs. For the purpose of this study, the third
method was utilized to estimate necessary R&R pipeline reserve contributions for 2019 to 2024. In addition, adjusted depreciation
values were used to estimate the annual replacement needs for vertical assets.
Once the annual contributions were established, planned additions to the asset base through rate-funded capital and debt service
principal payments were subtracted from the annual estimated renewal needs to correct for investments/reinvestments being made to
the system. Table 2 summarizes the planning level values used to project revenue adequacy and the need for future revenue increases
under this approach. Due to significant debt obligations, additional contributions to capital reserve were not projected for 2020 through
2024. This indicates the City is annually making a prudent level of investment in its system.
TABLE 1: ESTIMATED WATER OPERATING RESERVE BALANCE (2019-2024)
2019 2020 2021 2022 2023 2024
Operating Reserve
(Water Enterprise Fund)
$1,590,159 $1,652,124 $1,716,863 $1,784,506 $1,855,188 $1,919,192
TABLE 2: APPROACH TO WATER R&R RESERVE PLANNING (2019-2024)
2019 2020 2021 2022 2023 2024
Adjusted Depreciation (Facilities) $2,421,007 $2,493,637 $2,728,446 $3,276,966 $3,375,275 $3,476,534
+ Forecasted Renewal and
Replacement (Pipelines)
$202,361 $272,229 $272,229 $272,229 $272,229 $272,230
= Total Forecasted Reinvestment $2,623,368 $2,765,866 $3,000,675 $3,549,195 $3,647,504 $3,748,763
- Rate-Funded CIP $980,273 $2,017,226 $2,114,886 $1,603,041 $1,655,232 $1,570,506
- DS Principal $1,175,873 $1,209,470 $1,429,027 $2,140,405 $2,268,488 $2,484,239
= Additional Capital Contribution $467,222 $ - $ - $ - $ - $ -
209
Policy Issue #3: Reserve Policies and Targets 3
Debt Service Reserve
The City manages its water debt service reserve fund in accordance with requirements within the bond covenants. No policy changes
are required due to the specificity of the reserve levels stipulated within the bond covenants. Table 3 summarizes the estimated debt
service reserve balances required from 2019 to 2024.
Rate Stabilization Reserve
A utility can fund the rate stabilization reserve by allocating available surplus or a specific portion of net revenues. The City has not yet
established a rate stabilization reserve; however, the reserve is recommended and has been incorporated into the preliminary increase
strategy established in Policy Paper #4 – Cost of Service-Based Rate Setting. Note that given other reserve considerations facing the
Water Utility, at this time a specific target level for rate stabilization was not recommended to avoid potentially increasing rate revenue
requirements to fund multiple reserves at once. In the absence of adoption and implementation of drought contingency reserve goals,
it is suggested that the City revisit the rate stabilization concept to develop a target. It is common to set a target for such a reserve
based on the amount of revenue need to offset a specified percentage rate increase (ranging two to 10 percent) or a value equal to some
percentage of annual rate-funded capital.
TABLE 3: ESTIMATED WATER DEBT SERVICE RESERVE BALANCE (2019-2024)
2019 2020 2021 2022 2023 2024
Bond Reserve Fund $1,774,060 $2,114,661 $3,403,798 $3,531,426 $3,810,789 $4,271,806
Bond Reserve Target $1,774,060 $2,114,661 $3,403,798 $3,531,426 $3,810,789 $4,271,806
Bond Reserve Target Met? Yes Yes Yes Yes Yes Yes
210
Policy Issue #3: Reserve Policies and Targets 4
ANALYSIS OF OPTIONS | WASTEWATER SYSTEM
OPERATING RESERVE
The AWWA recommends a minimum operating reserve balance equal to 45 days of operating and maintenance (O&M) expenses.
While wastewater revenues are often not as volatile as water system revenues, it is still very common to see wastewater operating
reserve targets ranging from 60 to 180 days of O&M expense. To provide consistent goals for the Water and Wastewater utilities, an
operating reserve target equal to 90 days of O&M expense is recommended. Table 4 shows the target operating reserve balance from
2019 to 2024.
RENEWAL AND REPLACEMENT RESERVE
The City currently sets reserves based on annual depreciation. For the purpose of this study and similar to the approach for the Water
Utility, a Weibull analysis was utilized to estimate necessary R&R pipeline reserve contributions for 2019 to 2024. In addition, adjusted
depreciation values were used to estimate the annual replacement needs for vertical Wastewater Utility assets (Facilities).
Once the annual contributions were established, the required additional capital contributions were calculated by subtracting planned
additions to the asset base through rate-funded capital and debt service principal payments from the annual estimated renewal needs
to correct for investments/reinvestments being made to the system. Table 5 summarizes the projected annual pipeline reinvestment
needs, along with adjusted depreciation values for the facilities to estimate necessary R&R reserve contributions for 2019 to 2024.
Rate-funded capital from the capital improvements plan and debt service principal was subtracted from the total annual reinvestment
estimates to calculate an annual contribution to Wastewater reserves that can be drawn upon for future capital investment needs.
TABLE 5: APPROACH TO WASTEWATER R&R RESERVE PLANNING (2019-2024)
2019 2020 2021 2022 2023 2024
Adjusted Depreciation (Facilities) $3,041,025 $3,132,255 $3,226,223 $3,323,010 $3,422,700 $3,525,381
+ Forecasted Renewal and
Replacement (Weibull Analysis)
$639,210 $892,859 $892,859 $892,859 $892,859 $892,859
= Total Forecasted Reinvestment $3,680,235 $4,025,114 $4,119,082 $4,215,869 $4,315,559 $4,418,240
- Rate-Funded CIP $1,969,875 $1,784,964 $1,854,904 $1,353,424 $1,370,842 $1,638,837
- DS Principal $1,576,880 $1,612,880 $1,916,759 $1,954,759 $1,992,759 $2,391,474
= Additional Capital Contribution $133,480 $627,270 $347,419 $907,685 $951,958 $387,929
TABLE 4: ESTIMATED WASTEWATER OPERATING RESERVE BALANCE (2019-2024)
2019 2020 2021 2022 2023 2024
Operating Reserve $1,566,534 $1,644,861 $1,727,104 $1,813,459 $1,904,132 $1,980,297
211
Policy Issue #3: Reserve Policies and Targets 5
Debt Service Reserve
No major policy changes are required due to the specificity of the reserve levels stipulated within the bond covenants. Table 6 shows the
estimated debt service reserve balances required from 2019 to 2024.
Rate Stabilization Reserve
Beyond funding the Operating, R&R, and Debt Service reserves, it is recommended that the City identify a Rate Stabilization reserve
that can be used to dampen unanticipated rate increases and/or fund unplanned capital needs. The City has not yet established a rate
stabilization reserve; however, the reserve is recommended and has been incorporated into the preliminary increase strategy established
in Policy Paper #4 – Cost of Service-Based Rate Setting. It is common to set a target for such a reserve based on the amount of revenue
need to offset a specified percentage rate increase (ranging two to 10 percent) or a value equal to some percentage of annual rate-funded
capital. For the purpose of this study, a specific target value has not been identified. To avoid increasing rate revenue requirements
simply for the purpose of funding a reserve account but to have some guideline for funding level, the City could consider a minimum
balance within the range of $300,000 to $600,000, which correlate to approximately five to 10 percent increases on the volumetric rate.
TABLE 6: ESTIMATED WASTEWATER DEBT SERVICE RESERVE BALANCE (2019-2024)
2019 2020 2021 2022 2023 2024
Bond Reserve Fund $1,788,592 $1,788,592 $1,788,592 $1,788,592 1,788,592 $1,788,592
Bond Reserve Target $1,788,592 $1,788,592 $1,788,592 $1,788,592 $1,788,592 $1,788,592
Bond Reserve Target Met? Yes Yes Yes Yes Yes Yes
212
Policy Issue #3: Reserve Policies and Targets 6
PRELIMINARY RECOMMENDATIONS
Tables 7 and 8 outline the recommended Water and
Wastewater reserve policies, pending Commission feedback.
TABLE 7: RECOMMENDED WATER RESERVE POLICIES AND TARGETS
RESERVE TARGET/POLICY TARGET
Operating Reserve 90 days of O&M Expense $1,590,000 (Year 1 Target)
Renewal & Replacement
5-Year Target based on Projected
Renewal Deficiency
$668,000 (2024 Target)
Debt Service Reserve
1-Year Total Payment per Bond
Covenants
$1,774,000 (Year 1 Target)
Rate Stabilization Reserve
Floating Target based on Capital
Needs or Offset to X% Rate
Increase
To Be Determined from Final Rate
Modeling
Drought Contingency Reserve
Discussed in a separate policy
paper
Dependent on Policies established
TABLE 8: RECOMMENDED WASTEWATER RESERVE POLICIES AND TARGETS
RESERVE TARGET/POLICY TARGET
Operating Reserve 90 days of O&M Expense $1,567,000 (Year 1 Target)
Renewal & Replacement
5-Year Target based on Projected
Renewal Deficiency
$3,356,000 (2024 Target)
Debt Service Reserve
1-Year Total Payment per Bond
Covenants
$1,789,000 (Year 1 Target)
Rate Stabilization Reserve
Floating Target based on Cash
Funded Capital Needs or Offset to
X% Rate Increase
To Be Determined from Final Rate
Modeling
COMMISSION
FEEDBACK
REQUESTED
1. Given the current approach to funding Operating and Debt Reserves, does
the Commission have a desire to better define policy to include Renewal &
Replacement, Rate Stabilization, and Drought Contingency Reserves?
2. If the Commission desires to set policy for and develop any of these
additional Reserves, are the preliminarily proposed targets appropriate for
planning purposes?
NEXT STEPS
If the Commission agrees to establish any Renewal & Replacement, Rate
Stabilization, and/or Drought Reserves and establishes planning level targets, the
project team will incorporate those parameters into the rate models and provide
rate strategies for the City to meeting the financial objectives of the Water and
Wastewater Utilities.
213
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 1
POLICY ISSUE #4: COST OF SERVICE-BASED
RATE SETTING | WATER AND WASTEWATER
KEY
DRIVERS
APPROACH
The City of Bozeman strives to follow the Industry Standard practice of
establishing a fair and equitable rate structure designed to generate revenue
from each class that is commensurate with the cost to serve each class.
The City of Bozeman provides water and wastewater service to residential
and commercial user classes, Montana State University (MSU), and an
industrial customer. The City is undergoing a period of rapid growth and is
planning to ensure continued equitability to customers through all stages
of this growth period. To assist City leaders in managing the City’s water
resources and water infrastructure, ensure overall financial health of the
utilities, and to maintain fair and equitable rate structures for water and
wastewater services, the City completed a comprehensive Water and
Wastewater Rate Study.
Related to the Water Utility in particular, the City is considering enhancing
its existing conservation rate structure, adopting a drought surcharge, and
funding a drought reserve to further address resource management and
system readiness in the face of water scarcity. These topics will be addressed
in separate policy papers.
FIGURE 1: COSA METHODOLOGY
FUNCTIONALIZATION
Functionalize
Budget into
Primary
Categories of
Service
Classify Costs of
Primary Budget
Categories Based
on Causative
Elements
Allocate Costs
to Specific User
Classes
CLASSIFICATION ALLOCATION
A Cost of Service Analysis (COSA) is typically completed periodically to address changes in service requirements, revenue
requirements, operational practices, system expansion/modification, and other objectives as they relate to how the user classes
drive cost. A graphic depicting an industry-standard approach to COSA is shown in Figure 1.
214
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 2
The methodology involves development of typical Test Year revenue requirements (operation and maintenance expenses and capital
expenditures), as well as the review by class of account numbers, average and peak flows, irrigation demand (for the Water Utility), and
strength values (for the Wastewater Utility) from a year of typical operations.
Test Year costs are then evaluated in terms of system function and are ultimately allocated to each user class based on number of
accounts, average and maximum flow, and strength contributions (in the case of Wastewater). The resulting allocated costs are then
compared to revenue generated by each class, on a percentage basis, to assess the equitability of the rate structure.
The results of the 2018 Water and Wastewater analyses are shown in Tables 1 and 2, respectively. The values in Tables 1 and 2
were derived based on the 2018 budget, a five-year average of rate-funded capital, and 2017 user accounts, flow values, and flow
characteristics (for Wastewater).
The percent difference columns in Tables 1 and 2 are calculated as the revenue percentage minus the cost percentage, divided by
the cost percentage. A percent difference within +/- 10 percent is generally considered to be within an acceptable range. A percent
difference outside of +/- 10 percent indicates that revisions to the rates and/or structure should be considered to improve overall
equitability.
TABLE 1: 2018 WATER COSA RESULTS
CUSTOMER CLASS % OF COST % OF REVENUE % DIFFERENCE
Single Family/Low Income Residential 49.8% 53.0% +6.3%
Multi-Family Residential 20.0% 20.3% +1.5%
Government 3.1% 1.8% -40.2%
MSU 6.0% 6.0% +0.6%
Commercial 20.1% 16.0% -20.2%
Industrial 0.5% 0.6% +23.6%
City Park Irrigation 0.7% 0.5% -30.9%
Total 100% 100%
TABLE 2: 2018 WASTEWATER COSA RESULTS
CUSTOMER CLASS % OF COST % OF REVENUE % DIFFERENCE
Single Family Residential 36.3% 41.7% +15.0%
Multi-Family Residential 24.4% 23.5% -3.6%
Commercial 25.4% 22.5% -11.3%
Government 1.3% 1.2% -8.9%
MSU 10.3% 8.3% -19.7%
Industrial 2.3% 2.8% +19.8%
Total 100% 100%
215
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 3
POLICY ISSUES TO ADDRESS | WATER
The results of the Water COSA indicate that, based on the assumptions in this analysis, there is some disparity between the user classes
under the existing rate configuration. In particular, on a percentage basis:
• The Government class is contributing revenue sizably less than its cost;
• The Commercial class is contributing revenue less than its cost;
• The Industrial class is contributing revenue greater than its cost; and
• The City Park Irrigation class is contributing revenue less than its cost.
It should be noted that the results of this analysis regarding differences by class are relatively consistent with the last Cost of Service
analysis performed for the City in 2008. Therefore, the key policy issue to address by the City Commission is in regard to the approach
for correcting and establishing cost-based Water rates into the future.
POLICY ISSUES TO ADDRESS | WASTEWATER
The results of the Wastewater COSA indicate that, based on the assumptions in this analysis, there is some disparity between the user
classes under the existing rate configuration. In particular, on a percentage basis:
• The Single Family Residential class is contributing revenue slightly greater than its target cost;
• The Commercial class is contributing revenue slightly less than its target cost;
• The MSU class is contributing revenue less than its target cost; and
• The Industrial class is contributing revenue greater than its target cost.
The key policy issue to address by the City Commission is in regard to what approach, if any, should be taken to correct and establish
cost-based Wastewater rates into the future.
OPTIONS FOR CONSIDERATION | WATER
The Water COSA results showed that Government, Commercial, and City Park Irrigation user classes are contributing revenue at a level
less than their associated costs of service. The Industrial user class is contributing revenue at a level greater than its associated cost of
service. To correct cost of service inequities moving forward, the City should consider user class-specific adjustments to the volumetric
rates. Table 3 illustrates how the rate adjustments by class can work toward cost of service correction and Table 4 shows the resulting
Water cost of service percentage differentials associated with the rates in Table 3. Boxes shaded in green highlight when the cost of
service for the user class is projected to fall within the goal of +/-10 percent.
TABLE 3: COST OF SERVICE CORRECTIVE VOLUMETRIC RATES - WATER
2019 2020 2021 2022 2023
USER CLASS $/CCF $/CCF $/CCF $/CCF $/CCF
Single Family/Low
Income Residential
Tier 1 $2.68 $2.40 $2.40 $2.40 $2.40
Tier 2 $2.89 $3.27 $3.30 $3.33 $3.36
Tier 3 $3.40 $4.59 $4.64 $4.69 $4.74
Tier 4 $ - $6.88 $6.95 $7.02 $7.09
Multi-Family Residential $2.06 $2.10 $2.14 $2.18 $2.22
Commercial $1.81 $1.95 $2.07 $2.19 $2.32
Government $1.87 $2.02 $2.14 $2.27 $2.41
MSU $2.33 $2.42 $2.52 $2.57 $2.62
Industrial $1.81 $1.81 $1.81 $1.81 $1.81
CFF = ONE HUNDRED CUBIC FEET
216
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 4
IT IS IMPORTANT TO NOTE THE FOLLOWING WHEN REVIEWING
THE RATE ILLUSTRATIONS RESULTS IN TABLES 3 AND 4:
• The forecasted increases are developed in consideration of meeting the projected future rate revenue requirements of the Water
Utility over the next five years. These revenue requirements may vary based on decisions the Commission may make with this
study and into the future regarding operations, maintenance, capital improvements, and reserve funding levels. If changes are made
to the rate revenue requirements, up or down, a revised increase by class adjustment strategy would likely be required.
• Single Family Residential: The jump in cost of service differential shown in 2020 is largely related to increase in revenue expected
from the draft revised conservation-based rate structure. If the Commission requests changes to the tiered pricing strategy of this
structure (see Conservation rate structure policy paper), this will affect the projected cost of service targets for this class.
• Multi-Family Residential: Given the increases in projected revenue requirements that are expected to largely be covered by
increased rate revenue from the residential class (with adjustments to the tiered rate structure), the Multi-Family cost of service
differential is corrected downward to target with minimal projected adjustment to the volumetric rate for this class into the future.
• Commercial: The commercial class was shown to have a relatively high seasonal water use peaking factor. This high peaking
factor on the system resulted in higher allocation of peak demand-related cost for this user class. The results of the COSA for this
class seem reasonable when taking into consideration the relatively low volumetric rate paid on all seasonal peak consumption.
Currently the commercial class only pays $1.81 per one hundred cubic feet (CCF) versus $2.89/CCF and greater in the residential
class for pricing in the upper tiers.
• Government: The cost of service results for this class were similar to the Commercial class, but with a greater differential due to
higher seasonal peak demands. Currently the Government class pays $1.87/CCF versus $2.89/CCF and greater in the residential
class. Cost of service for this class will be difficult to correct without significant one-time adjustments.
• MSU: Similar to Multi-Family Residential, increased rate revenue from the residential class is driving down the cost of service
differential and requiring minimal projected adjustment to the volumetric rate for this class into the future.
• Industrial: The cost of service results for this class are driven largely by relatively steady year-round demands. Cost of service is
shown to be correctable in the next three years by maintaining the existing volumetric rate for this user across the modeled period.
TABLE 4: WATER COST OF SERVICE % DIFFERENTIAL
USER CLASS 2019 2020 2021 2022 2023
Single Family/Low Income Residential +2.9% +12.0% +11.0% +10.1% +9.2%
Multi-Family +10.9% -1.3% -1.1% -0.7% -0.4%
Government -40.8% -45.2% -44.7% -44.1% -43.5%
MSU +7.5% -2.9% -3.2% -5.2% -7.2%
Commercial -14.8% -21.1% -18.7% -16.3% -13.8%
Industrial +30.8% +14.1% +11.5% +9.1% +6.7%
217
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 5
OPTIONS FOR CONSIDERATION | WASTEWATER
The Wastewater COSA results showed that, with the exception of the Single Family Residential user class, each non-industrial user class
is contributing revenue at a level less than its associated cost of service.
As of 2018, the Multi-Family Residential, Commercial, Government, and MSU user classes were subject to the same volumetric charge
for wastewater flow. To correct cost of service inequities moving forward, these user classes would need to have class-specific volumetric
rates. Table 5 illustrates how individualized rates by class can work toward cost of service correction. Table 6 shows the cost of service
percentage differentials associated with the rates in Table 5. Boxes shaded in green highlight when the cost of service for the user class is
projected to fall within the goal of +/- 10 percent as a result of the cost-based volumetric rate structure changes.
TABLE 5: COST OF SERVICE CORRECTIVE VOLUMETRIC RATES - WASTEWATER
2019 2020 2021 2022 2023
USER CLASS $/CCF $/CCF $/CCF $/CCF $/CCF
Single Family Residential $3.28 $3.28 $3.28 $3.28 $3.28
Multi-Family Residential $3.36 $3.49 $3.63 $3.78 $3.85
Commercial $3.36 $3.56 $3.77 $4.00 $4.24
Government $3.36 $3.70 $4.06 $4.47 $4.92
MSU $3.36 $3.63 $3.92 $4.23 $4.57
Industrial $5.50 $5.67 $5.83 $6.01 $6.19
Commercial $1.81 $1.95 $2.07 $2.19 $2.32
Government $1.87 $2.02 $2.14 $2.27 $2.41
MSU $2.33 $2.42 $2.52 $2.57 $2.62
Industrial $1.81 $1.81 $1.81 $1.81 $1.81
CFF = ONE HUNDRED CUBIC FEET
TABLE 6: WASTEWATER COST OF SERVICE % DIFFERENTIAL
USER CLASS 2019 2020 2021 2022 2023
Single Family Residential +18.1% +15.7% +13.3% +10.0% +8.8%
Multi-Family Residential -2.7% -2.0% -1.4% -0.7% -1.3%
Commercial -13.7% -12.4% -11.1% -9.8% -8.2%
Government -21.8% -19.4% -16.9% -14.2% -11.1%
MSU -22.6% -18.7% -14.6% -10.5% -5.8%
Industrial +4.7% +2.8% +0.8% -0.9% -2.5%
218
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 6
IT IS IMPORTANT TO NOTE THE FOLLOWING WHEN REVIEWING
THE RATE ILLUSTRATIONS RESULTS IN TABLES 5 AND 6:
• The forecasted increases are developed in consideration of meeting the projected future rate revenue requirements of the
Wastewater Utility over the next five years. These revenue requirements may vary based on decisions the Commission may make
with this study and into the future regarding operations, maintenance, capital improvements, and reserve funding levels. If changes
are made to the rate revenue requirements, up or down, a revised increase by class adjustment strategy would likely be required.
• Single Family Residential: These differentials are slightly different than those presented for 2018 in Table 2 due to the fact that
they are projected for the year 2019 with an across-the-board increase and no change to the rate structure. Under this approach,
in 2019 the disparity for this user class becomes even more pronounced. If user class-specific adjustments are implemented in the
future, the City can work to bring the revenue percentage for this user class closer to its target.
• Multi-Family Residential: The COSA results showed that the rate structure was sufficient to generate revenue from this user
class that is in line with its cost of service. As a result, the across-the-board increase adopted in 2019 affects the cost of service
relationship for this class very little. If user class-specific adjustments are implemented in the future, the City can hold revenue
from this user class in line with its cost by applying minimal increases.
• Commercial: Similar to the Water COSA results for this user class, the commercial class was shown to be contributing less than
its cost under the existing rate structure. Due to the food service industry-related components of its wastewater stream, one-third
of the cost of the Industrial Pretreatment Program (IPP) were allocated to this user class, making the unit cost for wastewater from
this user class distinctly different from the Residential classes and the Government class. If a user-class specific approach to rate
adjustments is adopted, this class will likely see moderate increases for several years to bring the revenue percentage in line with the
cost percentage.
• Government: The 2019 COSA differential in Table 6 for this class is noticeably different from the 2018 value in Table 2 due to
the across-the-board increase in 2019, which exacerbated what was a slight inequity. This is largely because of the small size of this
customer class relative to the other classes. If user class-specific adjustments are implemented in the future, the City can bring
revenue from this user class in line with its cost by applying moderate increases.
• MSU: One-third of the cost associated with the IPP was allocated to this user class due to the food service-related components
of its waste stream, making the unit cost for wastewater from this user class distinctly different from the Residential classes and
the Government class. In a addition, due to the large area covered by this user class, Inflow and Infiltration (I/I) flow, which was
allocated in part to all user classes based on user connections, was allocated based on sewer shed area. This contributes in part to
the cost of service disparity calculated for this class. To most accurately account for I/I flow from MSU, wastewater flow could be
metered. In the absence of metering wastewater flow, if a user-class specific approach to rate adjustments is adopted, this class will
likely see moderate increases for several years to bring the revenue percentage in line with the cost percentage.
• Industrial: The results in Table 2 showed this user class paying more than its associated cost of service by approximately 20
percent. By making cost of service-based adjustments to the volumetric rate and the strength charges (discussed below), the City
is able to correct this inequity.
219
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 7
INDUSTRIAL COST OF SERVICE AND RATE DESIGN
In contrast to the non-industrial users, the Wastewater COSA results indicate the Industrial user class is providing revenue at a
percentage that exceeds its cost percentage. Rate design efforts evaluating the cost of strength parameters were completed to determine
the appropriate strength charges.
The 2018 rate schedule included a separate volume charge for the Industrial user class, as well as charges for pounds of biochemical
oxygen demand (BOD), total suspended solids (TSS), Phosphorous, and Nitrogen in excess of domestic limits identified in the rate
resolution. As part of the COSA, costs associated with each parameter were identified. In addition, total BOD contributed by all
customers, and specifically by the Industrial class, was reviewed to develop a recommended modification to the existing approach
to BOD charges. This resulted in a recommendation to Commission in August 2018 for a one-time correction to implement a
simplified practice that is consistent with other utilities in the region and with City Ordinance. Table 7 summarizes the August 2018
recommended adjusted rate schedule for high strength parameters.
The rates shown in Table 7 reflect the cost associated with each strength component. As a result of anticipated increased strength-
related revenue generation from industry resulting from the adjusted rate approach, the flow rate for the industrial user class was also
recommended to be reduced in August 2018 as shown previously in Table 5 (to maintain equitability for the industrial user class).
TABLE 7: COST OF SERVICE CORRECTIVE HIGH STRENGTH RATES - WASTEWATER
2018 RATE
APPROACH
2018 CHARGE PER
POUND ($)
ADJUSTED RATE
APPROACH
ADJUSTED
CHARGE PER
POUND ($)
BOD
Lbs. of BOD up to 830
lbs./day
$0.031
Lbs. of BOD in excess of
250 mg/L
$0.33
Lbs. of BOD in excess of
830 lbs./day
$0.45
Lbs. of BOD in excess
of 830 lbs./day, monthly
peak day
$0.33
TSS
Lbs. of TSS in excess of
350 mg/L
$0.30
Lbs. in excess of 350
mg/L
$0.51
Phosphorus Lbs. in excess of 5 mg/L $5.05 Lbs. in excess of 5 mg/L $5.55
MG/L = MILLIGRAMS PER LITER
220
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 8
PRELIMINARY RECOMMENDATIONS | WATER
In September 2018, the Commission adopted the Water Volumetric rates shown in Table 8.
It is further recommended that the City annually evaluate projected rate revenues in conjunction with budget and capital planning and
consider user class-specific adjustments over time to work toward better equitability between the user classes. Figures 2 and 3 present
an example of varied increases and the resulting cost of service relationship over time. Figures 4 and 5 present an approach involving
across-the-board increases, resulting in maintaining or exacerbating rate inequities.
TABLE 8: ADOPTED VOLUMETRIC RATES | WATER
USER CLASS $/CCF
Single Family Residential
Tier 1: 0-8 CCF $2.68
Tier 2: 8-15 CCF $2.89
Tier 3: 15+ CCF $3.40
Multi-Family Residential $2.06
Government $1.87
MSU $2.33
Commercial $1.81
Industrial $1.81
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
2019 2020 2021 2022 2023 2024
Monthly Bill at 3 CCF ($)
COSA Based User Rate Adjustments
Single Family/Low Income Residential Multi Family Residential
Commercial Government
MSU Industrial
Average
FIGURE 2: COSA-BASED VARIED WATER
VOLUMETRIC RATE ADJUSTMENTS
CFF = ONE HUNDRED CUBIC FEET
221
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 9
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
2019 2020 2021 2022 2023 2024
% Difference from COSA Target
COSA Target Tracking
Single Family/Low Income Residential Multi Family Residential
Commercial Government
MSU Industrial
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2019 2020 2021 2022 2023 2024
Monthly Bill at 3 CCF ($)
COSA Based User Rate Adjustments
Single Family/Low Income Residential Multi Family Residential
Commercial Government
MSU Industrial
Average
FIGURE 3: COSA-BASED VARIED WATER RATE COSA RESULTS
FIGURE 4: ACROSS-THE-BOARD WATER RATE ADJUSTMENTS
Target Range +/- 10%
222
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 10
-60.0%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
2019 2020 2021 2022 2023 2024
% Difference from COSA Target
COSA Target Tracking
Single Family/Low Income Residential Multi Family Residential
Commercial Government
MSU Industrial
FIGURE 5: ACROSS THE BOARD WATER RATE COSA RESULTS
Target Range +/- 10%
223
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 11
PRELIMINARY RECOMMENDATIONS | WASTEWATER
In September 2018, the Commission adopted the volumetric rates shown in Table 9.
In addition, updated rates for BOD, TSS, Phosphorus, and Nitrogen were adopted. It is further recommended that the City annually
evaluate projected rate revenues in conjunction with budget and capital planning and consider user class-specific adjustments over time
to better address equitability between the user classes. Figures 6 and 7 present an example of varied increases and the resulting cost of
service relationship. Figures 8 and 9 present an approach if common across the board increases are applied, which is projected to result
in maintaining or exacerbating rate inequities.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
COSA Based User Rate Adjustments
Residential Multi Family Commercial Government
MSU Industrial Average
TABLE 9: ADOPTED VOLUMETRIC RATES | WASTEWATER
USER CLASS $/CCF
Single Family Residential $3.28
Multi-Family Residential $3.36
Commercial $3.36
Government $3.36
MSU $3.36
Industrial $5.50
FIGURE 6: COSA-BASED VARIED WASTEWATER RATE ADJUSTMENTS
CFF = ONE HUNDRED CUBIC FEET
224
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 12
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
COSA Based User Rate Adjustments
Residential Multi Family Commercial Government
MSU Industrial Average
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
% Difference from COSA Target
COSA Target Tracking
Single Family Multi Family Commercial Government MSU Industrial
FIGURE 7: COSA-BASED VARIED WASTEWATER RATE COSA RESULTS
FIGURE 8: ACROSS-THE-BOARD VOLUMETRIC
WASTEWATER RATE ADJUSTMENTS
Target Range +/- 10%
225
Policy Issue #4: Cost of Service-Based Rate Setting | Water and Wastewater 13
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
% Difference from COSA Target
COSA Target Tracking
Single Family Multi Family Commercial Government MSU Industrial
FIGURE 9: ACROSS-THE-BOARD WASTEWATER RATE COSA RESULTS
Target Range +/- 10%
COMMISSION
FEEDBACK
REQUESTED
Water:
1. Going forward, does the Commission desire to apply user class-specific
adjustments to the Water rate structures that will work to generate
revenue from each class that is commensurate with the associated cost
for each class?
2. If cost of service correction is a priority, how aggressively should it be
approached?
Wastewater:
1. Going forward, does the Commission desire to apply user class-
specific adjustments to the Wastewater rate structures that will work
to generate revenue from each class that is commensurate with the
associated cost for each class?
1. If cost of service correction is a priority, how aggressively should it be
approached?
NEXT STEPS
Feedback on this topic, as well as the topics of Reserve Funding, Conservation Rates, Drought Rates
and Drought Reserves will tie in directly with the Cost of Service-based rate setting approach. Given
direction on all of these topics, the project team will provide updated documentation and rate models
that will assist the City in moving forward in the manner directed by the Commission.
226
target of 26% by Stage 4, the
surcharge cap of 25% prevents full
revenue replacement.
Government
(54%)
Maximum surcharge is
capped at 25% by Stage 2.
Similar to Single-Family Stage
1 and Stage 2 surcharges
established to curb outdoor
water use to reduction goal
and Stage 3 and Stage 4
surcharges established to
eliminate nearly all outdoor
water use.
Stage 1 and 2 surcharges
established to replace lost revenue
from water reduction. With water
use reduction target of 60% by
Stage 4, the surcharge cap of 25%
prevents full revenue replacement.
MSU
(14%)
Maximum surcharge is
capped at 25% in Stage 4.
Stage 1 surcharge established
to curb outdoor water use
to reduction goal. Stage
2, Stage 3, and Stage 4
surcharges established to
eliminate outdoor water use.
With maximum reduction target
of 24%, Stage 1-4 surcharges
anticipated to replace all revenue
loss (i.e. reduction target never
exceeds surcharge increase cap)
Commercial
(28%)
Maximum surcharge is
capped at 25% by Stage 2.
Similar to Single-Family Stage
1 and Stage 2 surcharges
curb outdoor water use
to reduction goal. Stage
3 and Stage 4 surcharges
established to eliminate
nearly all outdoor water use.
Stage 1 and 2 surcharges
established to replace lost revenue
from water reduction. With water
use reduction target of 36% by
Stage 4, the surcharge cap of 25%
prevents full revenue replacement.
Industrial
(<5%)
Primarily one customer with
very limited current outdoor
water use and limited
ability to reduce, maximum
surcharge was capped at
11.1% by Stage 1.
At 10% total reduction target,
Stages 1-3 surcharges
established to eliminate all
outdoor water use.
Stage 1-3 surcharges established
to replace anticipated lost revenue
from water reduction. With further
rationing anticipated in Stage 4,
Cap of 11.1% insufficient to replace
anticipated revenue loss.
203
$2.40 $3.24 $4.54 $6.81
$2.40 $3.00 $3.75
$2.55 $2.75 $3.24
Hundred Cubic Feet (CCF)
Tier 1
Tier 2
Tier 3
Tier 4
CHART 2: COMPARISON OF TIER STRUCTURE
34%
of Consumption
15%
of Consumption
5%
of Consumption
194