HomeMy WebLinkAbout19- Water Utility System Cost of Service and Rate Design Study
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 1
TECHNICAL MEMORANDUM
To: Kristin Donald, Finance Director
The City of Bozeman
From: Shawn Gaddie, PE
AE2S Nexus
Re: The City of Bozeman Water Utility System Cost of Service and Rate Design
Study
Date: July 31, 2019
INTRODUCTION
The City of Bozeman (the City) retained AE2S Nexus to complete a Water Utility System Cost
of Service and Rate Design Study (Study). In addition to reviewing the existing rate structure to
address general equitability and revenue adequacy goals, the goal of the study was to provide a
comprehensive review of the water system financial plan, including rates, capital and debt
financing, and asset renewal and replacement reserve funding. The focus of the study was to
develop an approach that would fully fund system expenses, including operations and
maintenance (O&M), equipment repair and replacement, and capital. Further, the intent of the
study was to accomplish full cost recovery based on the application of a justifiable and equitable
rate-setting approach. Specifically, the City’s objectives for completion of the study included the
following:
• Analyze and discuss the impact of existing and future capital improvements and water
supply acquisition;
• Assess revenue needs for the five-year planning period beginning 7/1/2018 (FY2019 –
2023), to include adequate coverage for operations and maintenance, capital projects, and
program activities and debt service;
• Analyze existing rate and fee structures and recommend alternatives based on findings;
• Advise the City on industry-accepted methodologies for allocating costs to the various
customer classes, provide a breakdown of these expenses, and show how they relate to
providing water services;
• Examine current user classes and current rate approaches;
• Evaluate existing rate structure with regard to changing patterns of consumption, growth
in customer base, annual revenues from rates, price elasticity of consumption, demands
on rate revenue and the effects of conservation on annual revenues;
• Examine adequacy of reserves for operating revenues and capital projects to determine
sufficient levels to offset low consumption/revenue years while also reducing spikes in
annual rate increases;
• Examine the City’s use of debt financing for capital improvements and make
recommendations related to its uses and limitations relative to maintaining a proper
balance for debt coverage and rate stabilization over this five-year period;
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 2
• Recommend a structure designed to cover all costs of that customer’s service plus return
a reasonable margin for proper operating reserves, capital improvements, adequate
supplies, and contributions to general administrative costs; and
• Evaluate potential Drought Contingency Reserve funding approaches for consideration
by the City.
To meet the City’s objectives, AE2S Nexus completed a study consisting of the following
components:
• Develop Test Year Revenue Requirements;
• Complete Cost of Service Analysis (COSA);
• Evaluate Rate Design Alternatives;
• Cost and Fee Benchmarking;
• Project Five-Year Revenue Adequacy based on Recommended Rate Design; and
• Document Results and Recommendations.
Throughout the Study, AE2S Nexus and the City met via videoconference or teleconference to
discuss assumptions and intermediate results. In addition, AE2S Nexus gave a presentation to the
Bozeman City Commission on August 20, 2018, to introduce the study methodology, provide
preliminary recommendations, and solicit direction on policy issues that would impact final rate
recommendations. To assist the Commission in understanding the basis of the study
recommendations, AE2S Nexus developed policy papers on key topics for review and
discussion. AE2S Nexus provided a second presentation to the City Commission on January 28,
2019, to provide updated results and information and gather policy direction on key issues. The
final results and recommendations were delivered to the City Commission on April 15, 2019.
This Technical Memorandum summarizes the assumptions, analysis, results, and
recommendations for the Study. Additional deliverables, including progress meeting and
Commission meeting slides, finalized rate models and policy papers have been provided under
separate cover.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 3
SYSTEM DESCRIPTION, CUSTOMER USAGE, AND RATE STRUCTURE
System Overview
The City’s water system consists of two water production facilities, six pressure zones, 22
pressure regulating facilities, two booster stations, four finished water storage reservoirs, 2,448
fire hydrants, and approximately 271 miles of transmission and distribution pipelines. The
Sourdough water treatment plant went online in 2014 and is a state-of-the-art membrane facility
with a total capacity of 22 million gallons per day (MGD).
Raw water is supplied by Middle Creek, Middle Creek Reservoir, Sourdough Creek, and Lyman
Creek. Prior to pumping to the distribution system, the raw water is treated in one of two water
production facilities, the Lyman Creek Water Treatment Plant or the Sourdough Canyon Water
Treatment Plant. Total estimated available capacity from the Lyman Creek Water Treatment
Plant is 3.74 MGD.
Customers and Usage
The water system serves approximately 13,400 accounts and billed an average of 5.24 MGD in
2017. Total average consumption for the facility is estimated at 5.73 MGD when accounting for
unbilled water use associated with parks and system water loss. Currently, six customer classes
are designated within the rate schedule: Single Family, Multi-Family, Commercial, Government,
Montana State University (MSU), and Industrial. In addition, Low-Income Residential users are
included in the Single Family class. Per the water rate resolution, users that qualify under the
State’s Low Income Property Tax Assistance Program receive a credit equal to the monthly
water service charge on their utility bill. All customer classes are billed based on metered water
usage as measured in units of one hundred cubic feet (CCF).
Table 1 summarizes the existing water customer accounts by user type. The City has seen
exceptional growth over the last decade. From 2013 to 2017, as shown in Table 1, customer
accounts increased by 2,244, equating to an average of 4.7 percent growth per year over that
period. Figure 1 is a graphical depiction of billed flow as tracked by the City for users, grouped
as Single Family, Multi-Family, Commercial, Government, MSU, and Industrial.
Table 1: Customer Accounts by User Type, 2013 - 2017
Users 2013 2014 2015 2016 2017
Single Family 8,083 8,366 8,714 8,995 9,784
Multi Family 1,960 2,022 2,090 2,159 2,339
Government 51 52 50 51 55
MSU 17 17 18 18 23
Commercial 1,043 1,062 1,081 1,103 1,196
Industrial 1 1 1 1 2
Total 11,155 11,520 11,954 12,327 13,399
Annual Increase in Meters 365 434 373 1,072
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 4
Figure 1: Historical Billed Flow, in one hundred cubic feet (CCF)
Table 2 summarizes billed flow for the past five years. On a system-wide basis, annual billed
flow has increased from 2.2 million CCF (2014) to 2.6 million CCF (2017). However, historical
flows per account in Table 3 illustrate the City’s conservation efforts. Annual city-wide
consumption has increased, but each user class has seen a decrease in use per account from 2013
to 2017. These decreases are largely attributed to the City’s conservation efforts and the
implementation of conservation rates. Increased consumption to the overall user class is
attributed to new users in the system. Water sales in 2017 were assumed to reflect a
representative year and were utilized as the test year for the COSA.
Table 2: Historical Billed Flow (CCF), 2013 – 2017
Total Billed
Flow Summary
(CCF)
2013 2014 2015 2016 2017 2017 Test
Year
(MGD)
Single Family 904,763 841,117 932,458 979,068 1,018,564 2.09
Multi-Family 544,818 540,782 557,643 578,246 615,966 1.26
Government 52,320 53,597 52,393 54,917 69,110 0.14
MSU 221,574 205,881 211,511 215,438 220,752 0.45
Commercial 601,371 562,078 594,706 579,606 604,163 1.24
Industrial 21,909 24,920 29,965 25,845 30,346 0.06
Total 2,346,755 2,228,375 2,378,676 2,433,120 2,558,901 5.24
Table 3: Historical Annual Flow per Account (CCF), 2013 – 2017
2013 2014 2015 2016 2017
Single Family 111.9 100.5 107.0 108.8 104.1
Multi Family 278.0 267.4 266.8 267.8 263.3
Commercial 576.6 529.3 550.1 525.5 505.2
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Single Family Multi Family Government MSU Commercial Industrial
Historical Annual Flow by User Class (in CCF)
2013 2014 2015 2016 2017
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 5
Irrigation and Peak Day Usage
To evaluate how best to allocate costs associated with peak day use, average daily irrigation
demand was calculated based on the difference between average summer and average winter
daily demands at the water plants. The maximum day irrigation demand for the system was
calculated as the difference between the recorded maximum day demand for both water
treatment plants combined less the average winter daily demand. The irrigation peaking factor
for the system was then calculated by dividing the maximum day irrigation demand by the
average day irrigation demand, yielding a value of 1.43 based on the average of data from 2011
through 2017. Maximum irrigation flow for each user class was calculated as the difference
between the maximum month use and the winter average for each user class. Table 4
summarizes maximum irrigation flow for the past five years.
Table 4: Maximum Irrigation Flow (CCF/day), 2013 – 2017
2013 2014 2015 2016 2017 2017 Test
Year
(MGD)
Single Family 4,411 4,632 4,184 4,948 5,442 4.07
Multi-Family 992 1,056 957 996 1,299 0.97
Government 344 317 319 353 428 0.32
MSU 312 191 65 95 254 0.19
Commercial 1,336 1,326 1,530 1,368 1,737 1.30
Industrial 93 25 19 7 41 0.03
City Park Irrigation 0.17
Total 7,488 7,547 7,074 7,767 9,201 7.05
Unmetered Park Irrigation
The City provides unmetered irrigation to a number of parks across the community. This
unmetered usage is estimated to be 17.5 million gallons annually or an average of 48,000 gallons
per day across 20.86 acres.
Bulk Water Usage
In addition to providing metered water use to connections inside and outside of the City, bulk
water sales are available from a fill station located at the vehicle maintenance shop. Total bulk
purchases in 2017 equated to 2.17 billion gallons. The current charge of $5.05 per thousand
gallons for bulk water provides an approximate 14.55 percent rate of return on bulk water sales.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 6
EXISTING RATE STRUCTURE
The City’s FY18 water rate structure consists of:
• A Fixed Monthly Service Charge that varies by meter size; and
• A Volumetric Rate:
o Inclining Block Tiered for Single Family/Low Income Residential users; and
o Constant Block Rate for all others.
The volumetric rates are charged per 100 cubic feet (CCF) of water use. The FY18 fixed charges
and volumetric rates are shown in Tables 5 and 6, respectively. In October 2018, rate
adjustments of three percent for Fixed Rates and five percent for volumetric rates were adopted.
The FY19 rates are also shown in Tables 5 and 6. The City also provides water to certain users at
special rates as shown in Table 7.
Table 5: Monthly Fixed Service Charge Structure
Meter Size FY18 Rate FY19 Rate
5/8” $15.70 $16.17
1” $20.80 $21.42
1-1/2” $32.73 $33.71
2” $47.59 $49.02
3” $82.26 $84.73
4” $131.92 $135.88
6” $245.85 $253.23
8” $388.73 $400.39
Table 6: Volumetric Rate Structure
Class FY18 Rate
($/CCF)
FY19 Rate
($/CCF)
Single Family and Low-Income Residential
0-8 CCF $2.55 $2.68
8-15 CCF $2.75 $2.89
Over 15 CCF $3.24 $3.40
Multi-Family $1.96 $2.06
Government $1.78 $1.87
MSU $2.22 $2.33
Commercial $1.78 $1.81
Industrial $1.72 $1.81
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 7
Table 7: 2018 Miscellaneous Rates
Customers FY18 Rate
Single Family – Flat Rate $68.62/month
City Park Irrigation $1,921/acre/year
Fire Protection $164,561.70/year
Bulk, non-potable $5.05/1,000 gallons
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 8
TEST YEAR REVENUE REQUIREMENTS AND REVENUES
To represent a typical year of operations and capital expenditures within the COSA analysis,
Test Year revenue requirements were calculated using the cash needs approach. The cash needs
approach accounts for Operation and Maintenance (O&M) expenses, debt service principal and
capital funded through rates (in lieu of depreciation), and debt service interest expense. Total
Test Year 2018 revenue requirements are shown in Table 8, where lines 1 through 12 reflect the
City’s FY18 budget and lines 13 and 14 are based on the average annual planned rate-funded
capital expenditures and debt service payment, respectively, for the period of 2019 through 2023.
The adjustments for budget Divisions 4010, 4020, and 4025 represent the portion of costs
associated with other City Departments, covered by transfers from each Department.
Table 8: Summary of Test Year 2018 Revenue Requirements
Water 2018 Budget Adjustment Adjusted 2018
1. Division: 4010 – Public Services Administration $237,997 $ (207,771) $30,226
2. Division: 4020 – Engineering $563,696 $ (492,107) $71,590
3. Division: 4025 – GIS $696,710 $ (608,228) $88,482
4. Division: 4610 – Water Plant Operations $2,860,555 $ - $2,860,555
5. Division: 4640 – Water Conservation $519,439 $ - $519,439
6. Division: 5010 – Water Operations $2,039,038 $ - $2,039,038
7. Division: 5020 – Utility Locates $105,450 $ - $105,450
8. Division: 5030 – Water Services $45,000 $ - $45,000
9. Division: 5040 – Water Construction $ - $ - $ -
10. Division: 5060 – Meter Reading $577,962 $ - $577,962
11. Division: 5070 – Hydrants $80,000 $ - $80,000
12. Division: 5080 – Water Valves $17,500 $ - $17,500
13. Average Annual Rate-Funded Capital (2019-2023) $1,873,887 $1,873,887
14. Average Annual Debt Service (2019-2023) $2,517,915 $2,517,915
Total $7,743,347 $3,083,697 $10,827,044
Table 9 summarizes the funding sources to be used for the Capital Improvement Plan (CIP)
through 2023. Existing and proposed debt service is shown in Table 10.
Table 9: Capital Improvement Plan
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Rate Revenue $3,517,200 $3,132,557 $1,942,500 $1,446,380 $1,479,500 $1,368,500
State Revolving
Fund (SRF) Loan $ - $ - $600,000 $10,000,000 $1,750,000 $4,000,000
Revenue Bonds $ - $ - $4,320,000 $8,000,000 $ - $ -
R&R Reserve Fund $ - $ - $ - $ - $ - $ -
Impact Fees $ - $ - $ - $ - $ - $ -
Total $3,517,200 $3,132,557 $6,862,500 $19,446,380 $3,229,500 $5,368,500
2019-2023 Average
Rate-Funded
Capital
$1,873,887
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 9
Table 10: Existing and Proposed Debt Service
Existing Debt Service 2018 2019 2020 2021 2022 2023
SRF Series 2011A $440,000 $452,987 $466,494 $481,039 $495,584 $510,649
SRF Series 2011B $407,000 $419,013 $431,506 $444,961 $458,416 $472,352
Annual Interest $310,000 $293,630 $276,060 $257,960 $239,310 $220,310
Proposed Debt Service
FY 2017 Series – SRF $160,112 $600,000 $600,000 $600,000 $600,000 $600,000
FY 2020 Series – Bond $- $- $- $290,372 $290,372 $290,372
FY 2020 Series – SRF $- $- $- $40,329 $40,329 $40,329
FY 2021 Series – Bond $- $- $- $- $607,630 $607,630
FY 2021 Series – SRF $- $- $- $- $672,157 $672,157
FY 2022 Series – SRF $- $- $- $- $- $117,627
Total Debt Service $1,317,112 $1,765,630 $1,774,060 $2,114,661 $3,403,798 $3,531,426
2019-2023 Average $2,517,915
Rate Revenues
Table 11 summarizes the Test Year 2018 rate revenues based on FY18 rates and projected FY18
accounts and water sales.
Table 11: Summary of Test Year Rate Revenues
User Class Test Year Revenue
Single Family Residential $4,527,851
Multi-Family Residential $1,733,758
Government $156,400
MSU $511,959
Commercial $1,369,418
Industrial $49,587
City Park Irrigation $40,072
Fire Protection $164,562
Total $8,553,607
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 10
COST OF SERVICE ANALYSIS (COSA)
Following the initial step of developing Test Year Revenue Requirements, the COSA process
follows standard industry methodology. The approach used in this analysis follows
recommended industry practices outlined in the American Water Work Association (AWWA)
Principles of Water Rates, Fees and Charges Manual of Water Supply Practices (M1). This
includes the following steps:
1. Cost Functionalization;
2. Cost Classification; and
3. Cost Allocation.
Cost Functionalization
Test Year budget line items were categorized into functional components based on the purpose
of each revenue requirement. The City’s Water budget contains the subdivisions shown in Table
8. Based on a detailed review of the line item budget and discussion with City staff, it was found
that the existing budget subdivisions can be further categorized into the following functions for
the purpose of the COSA:
• Administration: Includes all costs associated with the Public Services Administration,
Engineering, and GIS subdivisions and a portion of Rate-Funded Capital.
• Meters: Includes all costs associated with the Meter Reading subdivision.
• Treatment – Fixed: Includes all costs associated with the Water Plant operations other
than chemicals and electricity.
• Treatment – Variable: Includes chemicals and electricity associated with Water Plant
Operations.
• Transmission/Distribution: Includes a portion of the Water Operations, Utility Locates,
and Water Valves subdivisions. Functionalization as transmission or distribution is based
on the percentage of inch-miles of pipe equal to or greater than 12-inch (transmission)
and less than 12-inch (distribution).
• Hydrants: Includes all costs associated with the Hydrants subdivision.
• Conservation: Includes all costs associated with the Water Conservation subdivision.
• Debt: Includes all principal and interest payments associated with the water utility.
• Capital: Includes costs for infrastructure, improvements, and rate-funded capital.
Functionalization is based on the breakdown of planned projects for 2019 through 2023.
The resulting functionalization percentages are provided in Table 12 and the total resulting
functionalized revenue requirements are shown in Table 13.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 11
Table 12: COSA Functionalization Percentages
Function
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To
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Administrative 100% 100%
Meter 100% 100%
Treatment – Fixed 100% 100%
Treatment –
Variable 100% 100%
Transmission /
Distribution 38% 62% 100%
Storage 100% 100%
Pumping – Fixed 100% 100%
Pumping –
Variable 100% 100%
Hydrant 100% 100%
Conservation 100% 100%
Debt 100% 100%
Capital 6.2% 19.9% 74.0% 100%
Table 13: Functionalized Test Year Revenue Requirements
User Class Functionalized
Revenue Requirements
Administrative $305,807
Treatment – Fixed $5,414,870
Treatment – Variable $336,000
Transmission $840,323
Distribution $2,752,643
Assigned Hydrant $80,000
Conservation $519,439
Meter $577,962
Total $10,827,044
Cost Classification
Classification of the functionalized costs was based on whether the costs were associated with
number of customers served, amount of water pumped and distributed, amount of water treated,
or design parameters for treatment and distribution components. Classifications of each cost
function is described below. Classification percentages are presented in Table 14 and the total
classified costs are presented in Table 15.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 12
• Administration: Costs are classified 100 percent into the Customer classification.
• Treatment – Fixed: This expense is associated with meeting maximum day/irrigation
demands as well as average day usage. Based on total available system capacity of 25.74
MGD and a Test Year average day of 5.24, Treatment-Fixed costs were classified 20.4
percent as Commodity (5.24/25.47) and 79.6 percent as Capacity.
• Treatment – Variable: This expense varies directly with water usage and is assigned as
a 100 percent Commodity cost.
• Transmission: Like the Treatment – Fixed classification, this expense is associated with
meeting maximum day/irrigation demands as well as average day usage and is split
between Commodity at 20.4 percent and Capacity at 79.6 percent.
• Distribution: Classified similar to Treatment – Fixed and Transmission with a portion of
capacity allocation designated as fire protection. The fire protection portion was
determined based on fire flow and fire storage capacity design standards.
• Assigned Hydrant: This cost is classified 100 percent to Assigned Hydrant
classification.
• Conservation: Costs are classified 100 percent to the Conservation classification.
• Meter: Costs are classified 100 percent to the Meter classification.
Table 14: Classification Percentages
Function
Classification - %
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Me
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Administration 100%
Treatment – Fixed 20.4% 79.6%
Treatment – Variable 100.0%
Transmission 20.4% 79.6%
Distribution 20.4% 60.5% 19.1%
Assigned Hydrant 100.0%
Conservation 100.0%
Meter 100.0%
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 13
Table 15: Classified Test Year Revenue Requirements
Function
Classification - $
Cu
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Administration $305,807
Treatment – Fixed $1,102,997 $4,311,873
Treatment – Variable $336,000
Transmission $171,172 $669,151
Distribution $560,707 $1,665,539 $526,397
Assigned Hydrant $80,000
Conservation $519,439
Meter $577,962
Total $305,807 $2,170,876 $6,646,563 $80,000 $526,397 $519,439 $577,962
Cost Allocation
The final step in the COSA was to allocate the classified costs to the user types identified below:
• Single Family;
• Multi-Family;
• Commercial;
• Government;
• MSU;
• Industrial; and
• City Park Irrigation.
The allocation basis for each classification of cost is outlined below, with detailed cost allocation
presented in Tables 16 through 21. It should be noted that due to rounding, the sum or values or
direct multiplication of values in tables may vary slightly from the reported values.
• Customer: Allocated based on the number of equivalent meters, as calculated using the
equivalent meter cost basis developed by the AWWA. The application of equivalent
meter ratios recognizes that these costs vary depending on considerations such as size of
service pipe, materials used, locations of meters, etc.
• Meter: Allocation based on the total number of actual meters for all user classes.
• Supply, Treatment, Transmission, Distribution – Commodity: Allocated based on
proportionate share of actual average day flow to all user classes.
• Supply, Treatment, Transmission, Distribution – Capacity: Allocated based on
proportionate share of maximum day flow to all user classes.
• Assigned Hydrants and Fire Protection: Allocation based on proportionate share of
equivalent connections.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 14
• Conservation: Allocation based on proportionate share of allocated capacity of system
represented as maximum irrigation day flows in MGD to all user classes as presented in
Table 4.
Table 16: Customer Cost Allocation
# of Equivalent
Meters % Share Total
Single Family 9,835 62.9% $192,349
Multi-Family 3,275 21.0% $64,061
Government 153 1.0% $2,991
MSU 248 1.6% $4,852
Commercial 2,111 13.5% $41,282
Industrial 14 0.1% $272
City Park Irrigation 0.0% $ -
Total 15,636 100.0% $305,807
Table 17: Meter Cost Allocation
# of Meters % Share Total
Single Family 9,784 73.0% $422,030
Multi-Family 2,339 17.5% $100,892
Government 55 0.4% $2,373
MSU 23 0.2% $992
Commercial 1,196 8.9% $51,589
Industrial 2 0.01% $86
City Park Irrigation 0.0% $ -
Total 13,399 100.0% $577,962
Table 18: Commodity Cost Allocation – Supply, Treatment, Transmission, Distribution
Average Day
Flow (MGD) % Share Total
Single Family 2.26 39.5% $857,676
Multi-Family 1.37 23.9% $518,670
Government 0.16 2.7% $58,194
MSU 0.49 8.6% $185,883
Commercial 1.34 23.4% $508,732
Industrial 0.06 1.1% $23,577
City Park Irrigation 0.05 0.8% $18,144
Total 5.73 100.0% $2,170,876
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 15
Table 19: Capacity Cost Allocation – Supply, Treatment, Transmission, Distribution
Maximum
Flow (MGD) % Share Total
Single Family 12.54 48.7% $3,238,658
Multi-Family 4.96 19.3% $1,280,726
Government 0.92 3.6% $237,990
MSU 1.66 6.4% $428,585
Commercial 5.40 21.0% $1,393,548
Industrial 0.09 0.4% $24,025
City Park Irrigation 0.17 0.6% $43,031
Total 25.74 100.0% $6,646,563
Table 20: Cost Allocation – Assigned Hydrant and Fire Protection
Equivalent
Connections % Share Total
Single Family 9,835 62.9% $381,418
Multi-Family 3,275 21.0% $127,029
Government 153 1.0% $5,930
MSU 248 1.6% $9,622
Commercial 2,111 13.5% $81,859
Industrial 14 0.1% $539
City Park Irrigation 0 0.0% $ -
Total 15,636 100.0% $606,397
Table 21: Cost Allocation – Conservation
Design Flow
(MGD) % Share Total
Single Family 4.07 57.7% $299,921
Multi-Family 0.97 13.8% $71,603
Government 0.32 4.6% $23,615
MSU 0.19 2.7% $13,998
Commercial 1.30 18.4% $95,750
Industrial 0.03 0.4% $2,271
City Park Irrigation 0.17 2.4% $12,281
Total 7.05 100.0% $519,439
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 16
COSA RESULTS SUMMARY
Table 22 presents the COSA results for all user classes served by the City. The results of the
COSA are then compared to Test Year Revenue (estimated revenue at existing rates) collections
to assess equitability of the existing rates for each user class (Table 11). A comparison of cost
versus revenue share percentages for each user class is shown in Table 23.
The percent difference is calculated as the cost percentage minus the revenue percentage, divided
by the cost percentage. A percent difference with +/- five percent is generally considered to be
within an acceptable range. Where the percent difference is greater than +/- five percent, revision
to the rates and/or structure are deemed appropriate to improve the cost-revenue relationship
between user classes.
Table 22: COSA Results Summary
Total
Allocated Cost
Percent of
Cost
Single Family $5,392,051 49.8%
Multi-Family $2,162,982 20.0%
Government $331,091 3.0%
MSU $643,933 5.9%
Commercial $2,172,759 20.1%
Industrial $50,771 0.5%
City Park Irrigation $73,457 0.7%
Total $10,827,044 100.0%
Table 23: Cost versus Revenue Percentage Comparison
Percent of
Cost
Percent of
Revenue
%
Difference
Single Family 49.8% 54.0% +8.4%
Multi-Family 20.0% 20.7% +3.5%
Government 3.0% 1.8% -39.0%
MSU 5.9% 6.1% +2.6%
Commercial 20.1% 16.3% -18.7%
Industrial 0.5% 0.6% +26.1%
City Park Irrigation 0.7% 0.5% -29.6%
Total 100.0% 100.0%
The results of the Water COSA indicate that, based on the methodology applied 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
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 17
• The City Park 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. To correct cost
service inequities moving forward, user class-specific adjustments to the volumetric rates are
required.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 18
RATE DESIGN
The results of the COSA presented in Tables 22 and 23, as well as Revenue Adequacy goals,
were considered when reviewing potential rate design options. Rate Design was focused on each
component of the rate structure, including the following:
• Monthly Fixed Service Charge;
• Volumetric Rate per CCF:
o Base Rate per CCF; and
o Drought Contingency Rate per CCF; and
• Bulk Water Rates.
Water Utility Monthly Fixed Charge Rate Design
It is generally recommended that a utility recover revenue requirements associated with Meter
and Customer costs, as well as a portion of debt, through the fixed charge. The City’s existing
structure was found to adequately meet those revenue requirements. Fixed charges provide a
more stable revenue stream than volumetric charges. To avoid compromising the existing fixed
revenue stream for the utility, a revenue-neutral approach was taken. The fixed charge rate
design was based on the AWWA meter equivalent ratios to more equitably align the fixed
charges by meter size. Table 24 shows the actual FY18 monthly charges by meter size, the
calculated ratio of each charge to the charge for a 5/8-inch meter, and recalculated FY18 meter
charges based on the AWWA recommended equivalent meter ratios. The larger meter sizes
required the biggest adjustment to bring them in line with the AWWA meter ratios.
Table 24: Rate Design – Monthly Fixed Service Charge (FY18)
Meter Size
FY18
Monthly
Service
Charge
FY18 Ratio
to 5/8”
Meter
AWWA
Recommended
Equivalent
Meter Ratio
FY18
Monthly
Service
Charge Based
on AWWA
Ratios
% Change
5/8” $15.70 1.0 1.0 $15.30 -2.5%
1” $20.80 1.3 1.4 $21.42 +3.0%
1-1/2” $32.73 2.1 1.8 $27.54 -15.9%
2” $47.59 3.0 2.9 $44.37 -6.8%
3” $82.26 5.2 11 $168.30 +104.6%
4” $131.92 8.4 14 $214.20 +62.4%
6” $245.85 15.7 21 $321.30 +30.7%
8” $388.73 24.8 29 $443.70 +14.1%
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 19
Conservation Rates – Single Family Residential Volumetric Rate Design
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.
Single Family (and Low-Income Residential) users are charged for water use based on a three-
tier inclining block rate structure, as previously shown in Table 6. All other customer classes
pay for water use based on a single volumetric rate. To address conservation goals of the City,
rate design efforts were specifically focused on tiered residential water use. Rate design
involved the consideration of scenarios with three and four tiers, with the tiers defined follows:
• Tier 1 – Essential Use;
• Tier 2 – Responsible Outdoor Use;
• Tier 3 – Inefficient Outdoor Use; and
• Tier 4 – Irresponsible Use/Penalty Tier.
The AWWA M1 Manual defines essential 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.” Based on that definition, this study estimated essential
water use through the review of winter consumption data when outdoor use is negligible.
Analysis of winter consumption data indicates that a typical Single Family residential user
consumes approximately 4.67 CCF per month for essential use.
Based on a representative property size of 8,100 square feet and an average impervious area of
53 percent, a prudent lawn watering value was determined to be 19.0 CCF per month. This
matched well with analysis provided by City staff that showed that current consumption data for
users irrigating was 19.3 CCF per month for June through September. As a result, 19 CCF per
month was identified as an appropriate value for responsible outdoor use.
For the purposes of this study, excessive or irresponsible use was defined as outdoor water use
in excess of 2.0 times the typical Single Family outdoor water use required for turfgrass during
the peak irrigation month of July, when conditions are exceptionally hot and dry.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 20
Water Use
While a property size of 8,100 square feet was referenced in the discussion of how responsible
outdoor use was defined, it was noted during the course of the study that property sizes in the
City have changed dramatically over the years. To aid in developing volumes for the inclining
block tiers based on the definitions above and to understand the impact of changing block sizes
from the existing structure, water use was evaluated by residential property age. The age cohorts
evaluated included pre-1950s, 1950 to 1988, 1988 to 1990, and post-1990. The findings of that
evaluation were as follows:
• Newer lots sizes are trending downward;
• Outdoor water use for newer lots is trending up significantly, due to irrigation systems;
and
• Indoor water use for newer lots is trending down due to high efficiency appliances.
Figure 2 illustrates the average outdoor, average summer, and average indoor use per account for
each age cohort. The line on Figure 2 indicates the average parcel size for each cohort. Table 25
provides further detail on water use statistics by property age.
Figure 2: Residential Use per Account vs Parcel Size by Age Cohort
Pre-1950 1950 to 1988 1988 to 2009 Post-2009
Pa
r
c
e
l
S
i
z
e
(
s
q
.
f
t
.
)
Wa
t
e
r
U
s
e
(
H
C
F
)
0
5
10
15
20
25 12,000
11,500
11,000
10,500
9,500
8,500
7,500
11,000
9,000
8,000
7,000
2017 Residential Use vs. Parcel Size
Avg. Outdoor Avg. Summer Avg. Winter Avg. Parcel Size
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 21
Table 25: Summary of Water Use Statistics by Age Cohort
From the data in Table 25, the following conclusions can be made:
• A Tier 1 size of 6 CCF would be sufficient to provide for indoor water use;
• A Tier 1 size of 6 CCF would also provide for minor outdoor water use, especially in
newer developments;
• Due to irrigation system installations, newer developments would be most impacted by
changes to existing Tiers 2 and 3; and
• A Tier 2 upper limit of 25 CCF would provide adequate efficient outdoor water use for
most residential properties.
Water Use Considerations for Tier Sizing
Table 26 summarizes the existing tiered rate structure for Single Family users.
Table 26: FY18 Single Family Residential Volumetric Rate Structure
Tier Size (CCF) FY18
$/CCF
Tier 1 0 - 8 $2.55
Tier 2 8.01 – 15 $2.75
Tier 3 In excess of 15 $3.24
The primary consideration in the development of water use 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.
Age Grouping Pre-1950 1950 to 1988 1988 to 2009 Post-2009
Total Count 1377 1850 3605 2186
% of Total 15%21%40%24%
Average Winter 5.0 5.8 5.1 3.8
Upper Quartile 4.4 5.2 4.9 3.6
Median 4.8 5.5 5.1 3.8
Lower Quartile 5.6 6.4 5.3 3.9
Average Summer 11.3 14.8 21.7 22.0
Upper Quartile 10.1 12.5 19.4 20.3
Median 11.0 13.6 21.3 22.8
Lower Quartile 12.5 17.5 24.4 23.0
Winter Usage Summary
Summer Usage Summary
Winter vs. Summer Water Usage by Age Grouping
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 22
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.
The following bullets summarize the observations related to the existing tier structure in terms of
potential effectiveness in balancing affordability, conservation, and revenue generation. Rate
design alternatives were then developed to provide improvements in these areas.
• 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 purpose of the tiered pricing is to promote efficient outdoor water
consumption. The rate for this tier appears to provide a minimal pricing signal, with an
increase factor of only 1.08 ($2.75/$2.55) over the Tier 1 rate. 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 levels. Effective price signals for a third tier that 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.
• 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.
Volumetric Rate Design Alternatives
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.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 23
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 drought
reserve or other water conservation initiatives, if desired.
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 required rate for 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, the Tier 1 size (and associated rate required) was established at or
below the existing Tier 1 size.
With these goals and considerations in mind, Table 27 summarizes the current rate structure and
three alternative structures that were developed for consideration as potential approaches to limit
inefficient outdoor water use. Figure 3 represents the structures of the proposed alternatives as
related to total annual consumption for a recent year (2017) for the Single Family residential
customer class.
Table 27: Summary of Volumetric Tiered Rate Structure Alternatives
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 24
Figure 3: Comparison of Tier Structure Alternatives
Analysis of Potential Rate Structures
In evaluating rate design alternatives, three important characteristics were considered:
1) Tier sizing;
2) Price signal adequacy; and
3) Appropriate increase between the tiers.
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 professional experience of the project team in developing
successful conservation rate structures for other communities in Montana and across the region.
The anticipated effectiveness of each rate structure alternative in reducing consumption and
generating appropriate revenue was evaluated through the use of a probabilistic water sales
forecasting model. The forecasting model allows for simulations to be run considering multiple
factors that could affect water demand such as weather, growth, and pricing structure. Figure 4
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.
The results illustrated in Figure 4 were developed using a probabilistic revenue forecasting
model developed by the Alliance for Water Efficiency. This tool utilizes 15 to 90 years of
rainfall and maximum temperature data, along with standard price elasticity values, to evaluate
the potential revenue risk associated with a change to the rate structure and pricing configuration.
The discussion that follows summarizes 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.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 25
Figure 4: Forecasted Reduction in Water Sales by Alternative
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 shown in Figure 4.
Alternative 2: While not the most aggressive alternative considered for tier pricing and tier size
compression, at a projected 6.8 percent reduction in water use, 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.
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
Forecasted Reduction in Water Sales
Single Family and Low Income Residential
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 26
• 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 the existing structure 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 forecasted greater water
use 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 Figure
4.
• Tier 1: Alternative 3 treats all water use up to 8 CCF (Tier 1) as essential water use. By
expanding volume in the first tier from 6 CCF (Tier 1 limit for Alternatives 1 and 2) 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).
Based on extensive analysis by City staff and the AE2S Nexus project team, Alternative 2 was
the approach recommended to the City Commission. This rate configuration was approved by
the Commission on April 15, 2019.
Multi-Family Residential and Non-Residential Volumetric Rate Design
Under the current constant block rate design for all user classes other than Single Family
Residential, the City has the ability to make cost of service-based adjustments by varying the
annual rate adjustments to each class. As a result, no rate design recommendations were made
for these user classes.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 27
Bulk Water Rates
As part of the Study, the City desired an understanding of the COSA-based rate associated with
the sale of bulk water. To calculate a bulk rate based only on use of the supply, treatment, and
transmission system, the Test Year COSA was adapted to reflect revenue requirements based the
industry standard Utility method versus the Cash method. Under the Utility method, capital
revenue requirements are represented by depreciation and a return on rate base.
Based on the location of the fill station, it was assumed that costs associated with the supply,
treatment and transmission components of the system were applicable costs for bulk water, as
well as costs associated with the bulk fill station. Table 28 summarizes the results of the bulk
rate calculations. The top portion of the table establishes the rate base while the bottom
calculates the weighted average costs of capital and the minimum return on the rate base for bulk
water.
Table 28: Determining Bulk Water Base Rate and Current Return Rate
A Total Return on Rate Base $2,622,501
Total Rate Base $130,304,525
12.5% of Working Capital $804,405
Work in Progress $2,940,891
B Total Book Value $134,049,821
Total % Return (A/B) 1.96%
C Weighted Average Costs of Capital (WACC) 2.09%
Minimum Return on Rate Base for Bulk (B+C) 4.04%
As shown above in Table 28, a weighted average cost of capital (WACC) equal to 2.09 percent
was calculated. This value is used as the differential between the return on rate base charged to
inside users versus outside users. Using the utility method with cash differential to calculate the
total return on rate base, the inside users are charged a return on rate base of 1.96 percent and the
bulk rate would be based on a minimum of 4.04 percent return on the applicable rate base. Table
29 shows potential bulk rates at varying rates of return. The City currently charges $5.05 per
thousand gallons, which equates to a rate of return of 14.55 percent. A rate of return value of 15
percent is recommended, which would result in a calculated rate of $5.15 per thousand gallons.
Table 29: Bulk Rates at Varying Rates of Return
Return Rate
(%)
Return on
Rate Base
O&M +
Depreciation
Total Cost to
Bulk Users
Calculated
Rate ($/kgal)
3.00% $1,458 $3,887 $5,345 $2.46
5.00% $2,430 $3,887 $6,317 $2.91
10.00% $4,860 $3,887 $8,747 $4.03
14.55% $7,073 $3,887 $10,960 $5.05
15.00% $7,290 $3,887 $11,177 $5.15
* kgal = thousand gallons
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 28
City Park Irrigation Rates
As an additional part of the Study, the City desired an understanding of the cost associated with
irrigating City Parks. At an assumed irrigable area of 20.86 acres, the results of the COSA
suggest the cost of irrigating City Parks is approximately $3,500 per acre per year. This is
almost twice the current charge of $1,921 per acre.
However, the City noted that some areas are irrigated using non-potable water, and that changes
are being made to irrigation in some of these areas. As a result, it is reasonable to reassess the
actual potable water usage to City Parks once these changes have been completed. Overall, the
cost associated with irrigation of City Parks was less than one percent of overall revenue
requirements.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 29
DROUGHT RATES
In 2017, the 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.”
The DMP ultimately recommended a four-stage drought response plan with defined system-wide
water reduction targets. Table 30 summarizes the stages and associated targets at each stage:
Table 30: Drought Response Plan Targets
Drought Stage Stage 1:
Drought Watch
Stage 2:
Drought Advisory
Stage 3:
Drought Warning
Stage 4:
Drought Emergency
System-Wide Water
Reduction Target 10% 20% 30% 40%
In short, the recommended responses are as follows:
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.
Per the recommendations of the DMP, the City is proposing drought rates and formation of a
drought reserve 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 will serve two key functions:
1) Reducing water use in times of drought; and
2) Maintaining adequate revenues without extreme rate increases once water use is reduced.
Drought Surcharge Rates
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.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 30
To meet the DMP’s reduction goals, the City has decided to implement 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. To determine the total water use reduction
potential by class, the project team reviewed detailed winter versus summer water use records.
Table 31 shows the estimated maximum outdoor water use reduction potential for each class
based on this review of winter versus summer consumption for each class.
Table 31: Estimated Maximum Water Use Reduction Potential on Non-Essential Outdoor
Use
Total
Single Family Residential 50%
Multi-Family Residential 16%
Government 54%
MSU 14%
Commercial 28%
Industrial < 5%
Estimated Overall Reduction 33%
In reviewing the total system-wide reduction potential indicated in Table 31, another key
consideration was that even with the elimination of all estimated outdoor water consumption, the
overall estimated reduction would not achieve a target of 40 percent for a Stage 4 Drought
Emergency.
Considering estimated reduction potential by class on outdoor water use restrictions/additional
reduction potential to be achieved from targeted Drought Response Measures, the reduction
targets by Class and Stage as presented in Table 32 were determined to achieve the total Stage
Reduction Targets.
Table 32: Water Use Reduction Targets by Stage and Class
Stage 1 Stage 2 Stage 3 Stage 4
Single Family 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% 20.0% 30.0% 40.0%
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 31
Considering the reduction targets by class and the guiding principles as outlined in the City’s
DMP, a proposed configuration of drought surcharge rate adjustments was developed and are
presented in Table 33. The strategy in Table 33 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 33: Drought Rate Increases by Stage and Class
Stage 1 Stage 2 Stage 3 Stage 4
Single Family/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%
Table 34 outlines the process used to develop the surcharge increase by class and stage in order
to align with the stated pricing goals.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 32
Table 34: Drought Stage and User Class Surcharge Rate Design Summary
User Class
(Estimated Max
Reduction 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%)
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 eliminate nearly
all outdoor use.
Stage 1-3 surcharges established to
replace lost revenue from water
reduction. With water use reduction
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.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 33
Drought Reserve Funding
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, it was recommended that the City consider funding a drought reserve to a target
amount ahead of a drought in order to draw upon the reserve in the time of need.
As noted in Table 34, the rate adjustments for Stage 1 and Stage 2 are expected to adequately
replace anticipated revenue losses under Stage 1 and Stage 2 drought conditions. However, the
rate caps outlined in Table 34 are anticipated to 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, it was recommended that the City consider
establishing a policy identifying target drought reserves and how the reserve should be
implemented in the event of a drought.
After soliciting input from City staff and the Commission, a Drought Contingency Reserve target
equal to one year’s revenue short fall based on Stage 3 reductions was recommended. The
revenue shortfall analysis estimates that with a 25 percent surcharge rate cap in place, one year
of a Stage 3 drought would create a revenue shortfall of approximately $2.2 million. The Reserve
will be funded by drought contingency surcharges over a ten-year period. Table 35 shows the
calculations for the Drought Reserve Funding Target.
Table 35: One-Year Funding Target Calculation
Revenue Target $6,426,838
Projected Revenue – Stage 3 Drought $4,226,746
Revenue Surplus/(Shortfall) ($2,200,092)
One-Year Target $2,200,092
Ten Years of Water Sales (CCF) 27,594,709
The City chose to fund the drought reserve with a common volumetric surcharge applied to all
units of water. This method is perceived as fair and equitable by users and is relatively simple to
implement. The final recommended drought surcharge rates are shown in Table 36.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 34
Table 36: Recommended Drought Surcharge Rates, $/CCF
2019 2020 2021 2022 2023
Single Family/Low-Income Residential
Tier 1 $0.08 $0.08 $0.08 $0.08 $0.08
Tier 2 $0.08 $0.08 $0.08 $0.08 $0.08
Tier 3 $0.08 $0.08 $0.08 $0.08 $0.08
Tier 4 $0.08 $0.08 $0.08 $0.08 $0.08
Multi-Family Residential $0.08 $0.08 $0.08 $0.08 $0.08
Commercial $0.08 $0.08 $0.08 $0.08 $0.08
Government $0.08 $0.08 $0.08 $0.08 $0.08
MSU $0.08 $0.08 $0.08 $0.08 $0.08
Industrial $0.08 $0.08 $0.08 $0.08 $0.08
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 35
REVENUE ADEQUACY
Revenue adequacy is evaluated to determine the short-term and long-term adequacy of the
existing rates, and to propose potential rate adjustments to ensure that the existing rates and any
proposed changes do not negatively impact the City’s financial position in the future. This
section summarizes background pertaining to projected revenue requirements, the assumptions
used to evaluate revenue adequacy, specific recommendations for FY20 rates, and projected rates
for 2020 through 2023 for the City’s Water Utility.
Financial Model and Assumptions
A multi-year financial model was developed for the City. The model was built using the City’s
current operations and funding policies based upon financial information provided by the staff.
The model was used to project the net revenue requirements (total revenue requirements less
miscellaneous operating and non-operating revenue), revenue generated from proposed rates, and
the corresponding revenue surplus or deficiency. Since there is obvious uncertainty associated
with projecting into the future, it is recommended that the rate assumptions should be re-
evaluated and updated on an annual basis in conjunction with budget and capital planning. The
revenue adequacy assumptions are noted below:
O&M Assumptions
• 2018 Budget as a basis.
• Three (3) percent annual index rate for General Inflation.
• Five (5) percent annual index rate for Chemicals and Power.
• Four (4) percent annual index for Flow-related Cost.
• Five (5) percent annual index for Labor.
Capital Assumptions
• Annual capital expenditure projections were based on the provided Capital Improvements
Plan (CIP) for 2019-2023. Annual cash-funded amounts include:
o 2019: $3,132,557
o 2020: $1,942,500
o 2021: $1,446,380
o 2022: $1,479,500
o 2023: $1,368,500
Debt Assumptions
• Existing Debt: Approximately $15.76 million outstanding principal on State Revolving
Fund (SRF) Loans.
• Coverage: The SRF loans require 110 percent coverage annually.
• Future Debt to be Repaid with Utility Revenues: Future revenue requirements account
for the following planned debt issuances as listed in the CIP.
o 2020: $600,000 for Sourdough Tank Inspection and Improvements;
o 2021: $10,000,000 for Lyman Tank and Transmission Main Construction;
o 2022: $1,750,000 for PRV Phase 1 Mechanical and Structural Upgrades; and
o 2023: $4,000,000 for Hyalite Dam and Reservoir Optimization Improvements.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 36
• Future Debt to be Repaid with Impact Fee Revenues: Future revenue requirements
account for the following planned debt issuances as listed in the CIP:
o 2020: $4,320,000 for Sourdough Transmission Main Replacement; and
o 2021: $8,000,000 for a Well Field project.
Reserve Assumptions
• Operating Reserve: Funded to a targeted level of 90 days O&M expense based on
existing reserve policies (FY19 Target is $1,590,159). Revenue sources include rate
revenue and miscellaneous income. Reserve funds would meet rate revenue shortfalls and
unplanned O&M expenditures. Any revenues in excess of target would be transferred to
other reserve funds until such a time as all reserve funds are funded at target levels.
• Renewal/Replacement Reserve: Funded to the five-year target level based on projected
renewal deficiency using Weibull Analysis for horizontal (pipeline) infrastructure and
adjusted annual depreciation values reflecting future replacement values for above
ground assets. The sum of these two values yields total annual adjusted depreciation and
represents the minimum recommended annual capital investment/reinvestment in the
system. To account for planned investment through rate-funded capital and debt service
principal payments, these values are then subtracted from the total adjusted depreciation
to determine if additional annual contribution to capital reserves is required. Table 37
summarizes the estimation of annual contribution to capital renewal/replacement
reserves. For FY20 through FY23, Table 37 shows that the City’s planned contributions
through the CIP and debt repayment exceed the estimated adjusted annual depreciation.
Table 37: Projected Minimum Renewal/Replacement Reserve Contributions
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Adjusted Depreciation (for Vertical Assets) $2,105,411 $2,421,007 $2,493,637 $2,728,446 $3,276,966 $3,375,275
Forecasted Renewal and Replacement (Weibull
Analysis – for Horizontal Assets) $202,361 $202,361 $272,229 $272,229 $272,229 $272,229
Total Adjusted Depreciation $2,307,772 $2,623,368 $2,765,866 $3,000,675 $3,549,195 $3,647,504
Rate-Funded CIP $743,454 $980,273 $2,032,382 $2,178,736 $1,741,546 $1,877,664
Debt Service Principal $1,143,461 $1,175,873 $1,209,470 $1,429,027 $2,140,405 $2,268,488
Additional Capital Contribution $420,857 $467,222 $ - $ - $ - $ -
• Debt Service Reserve: Funded to a target level of one-year total debt service payment
based upon bond covenants (FY19 Target is $1,774,060). Contributions include transfers
in from the Operating Reserve. Reserve fund usage is limited to debt service payments
only.
• Drought Contingency Reserve: Funded to a target level of one year of revenue
deficiency in five years (FY23 Target is $1,100,046). Contributions only include
revenues from Drought Contingency Rates.
• Rate Stabilization Reserve: Funded to a floating target level based on cash-funded
capital needs. Contributions include transfers in from Operating Reserve. Reserve funds
would be used for unplanned capital investment and to minimize the need for sporadic
rate increase due to large CIP items.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 37
Revenue Assumptions
• Fixed Rate Revenue: Revenue generated from the fixed rates was based on the number
of meter connections by size in 2018. Beginning in 2019 and for future years, Single
Family meters were increased by 3.8 percent annually, Multi Family by 3.1 percent
annually, and Commercial by 1.7 percent annually. Government, MSU, and Industrial
meter counts were held constant.
• Volumetric Rate Revenue: Revenue generated from volumetric rates was based on
projected year-end water sales for 2018. Beginning in 2019, Single Family/Low-Income
Residential flows were increased by 2.55 percent annually, Multi-Family by 3.01 percent
annually, MSU by 2.55 percent annually, and Commercial by 1.67 percent annually.
Government and Industrial flows were held constant.
• All other miscellaneous income was held constant through the study period.
Utility Cash Balance Assumptions
• The projected Operating Reserve balance at the end of FY18 is $1,542,708.
• The projected Bond Covenant Reserve balance at the end of FY18 is $1,765,630.
• The projected Renewal/Replacement Reserve balance at the end of FY18 is $460,857.
• The projected Rate Stabilization Reserve balance at the end of FY18 is $6,841,367.
Revenue Adequacy Model Projections
The evaluation of the Water Utility revenue adequacy entailed development of two (2) primary
rate model scenarios:
• Baseline Scenario – This model reflects increasing O&M expenses, growth of both flow
and meters, and the incorporation of the CIP, but holds rates at the current (2018) level
throughout the five-year planning period. This is the “do nothing” scenario and serves to
illustrate the effect that delaying necessary utility rate increases may have on utility
finances.
• Rate Adjustment Scenario – In addition to the adjustments to revenue requirements,
flow, and meters noted for the Baseline Scenario, this model incorporates recommended
adjustments to the utility rates and projects utility finances over the five-year planning
period based on the recommended rate adjustments. In addition to overall revenue
adequacy, the rate adjustments account for cost of service-based adjustments, reserve
balances and targets, and debt service coverage. The Baseline and Rate Adjustment
Scenario revenue adequacy models were developed to extend through the year 2028 but
are shown in the following tables through 2023.
It should be noted that revenue and expense requirements for any utility can vary significantly
over the course of five years. It is recommended that the City review and update the model on an
annual basis to make adjustments to the rate plan for the coming year, as appropriate.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 38
Revenue Adequacy Results
Baseline Scenario
Under the Baseline Scenario, in which no rate increases are applied but annual revenue
requirements grow, a revenue deficiency exists in all years. The results of the Baseline Scenario
are summarized in Table 38 and Figure 5. Under this scenario, the objective of funding a self-
sufficient Water Utility is not met. This approach is not recommended.
Table 38: Baseline Revenue Adequacy Results
2019 2020 2021 2022 2023
O&M $6,448,979 $6,700,279 $6,962,833 $7,237,163 $7,523,818
Rate Funded Capital $3,132,557 $1,942,500 $1,446,380 $1,479,500 $1,368,500
Debt Repayment $1,765,630 $1,774,060 $2,114,661 $3,403,798 $3,531,426
Total Revenue Requirements $11,347,166 $10,416,839 $10,523,874 $12,120,461 $12,423,744
Fixed Rate Revenue $3,034,655 $3,134,305 $3,237,436 $3,344,173 $3,454,644
Volumetric Rate Revenue $5,083,891 $5,289,739 $5,416,757 $5,548,315 $5,683,427
Impact Fee Revenue for Debt Payment $600,000 $600,000 $861,335 $1,468,965 $1,468,965
Miscellaneous Revenue $223,403 $223,403 $223,403 $223,403 $223,403
Total Revenue $8,941,949 $9,247,448 $9,738,931 $10,584,856 $10,830,439
Operating Surplus/(Deficiency) ($3,348,775) ($2,176,082) ($1,918,556) ($3,223,905) ($3,420,530)
Operating Reserve Balance $1,590,159 $1,652,124 $1,716,863 $1,447,908 $0
Repair/Replacement Reserve Balance $1,023,558 $2,070,249 $1,394,279 $0 $0
Bond Reserve Balance $1,774,060 $2,114,661 $3,403,798 $3,531,426 $3,386,029
Rate Stabilization Reserve $4,081,497 $1,462,849 $0 $0 $0
Drought Contingency Reserve $0 $0 $0 $0 $0
Figure 5: Baseline Revenue Adequacy Results
0.0%0.0%0.0%0.0%0.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
$16,000,000
FY18 FY19 FY20 FY21 FY22 FY23
Projected Water Fund Balances
Bond Covenant Reserve Account Operations and Maintenance Reserve Account
Renewal/Replacement Reserve Account Drought Contingency Reserve
Rate Stabilization Reserve Account Operating and Bond Reserve Target
Stacked Reserve Target Bond Reserve Target
Drought Contingency Reserve Target Aggregate Rate Increase
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 39
Rate Adjustment Scenario
To address the objectives of meeting revenue requirements, building target reserve levels, and
equitably recovering costs from user classes, the rate projections shown in Table 39 were
developed. Based on the implementation of the rate recommendations in Table 39, Table 40
summarizes the overall projected revenue adequacy, including the coverage requirement to be
achieved. Note that the FY19 rates in Table 39 were implemented while the study was in
progress, in October 2018. Figure 6 illustrates the projected revenues and expenses through
2023, and Figure 7 depicts projected reserve fund cash balances through the same period.
Table 39: Rate Adjustment Scenario Rate Structure Projections
2019 2020 2021 2022 2023
Monthly Service Charge
5/8” $16.17 $16.17 $16.17 $16.17 $16.17
1” $21.42 $22.64 $22.64 $22.64 $22.64
1-1/2” $33.71 $29.11 $29.11 $29.11 $29.11
2” $49.02 $46.89 $46.89 $46.89 $46.89
3” $84.73 $117.33 $137.51 $157.69 $177.87
4” $135.88 $172.08 $190.18 $208.28 $226.38
6” $253.23 $287.75 $305.03 $322.30 $339.57
8” $400.39 $427.79 $441.51 $455.22 $468.93
Flow Charge ($/CCF)
Single Family and Low-Income
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 $2.06 $2.10 $2.14 $2.18 $2.22
Government $1.87 $2.24 $2.69 $3.23 $3.88
MSU $2.33 $2.42 $2.52 $2.62 $2.72
Commercial $1.81 $1.95 $2.11 $2.28 $2.46
Industrial $1.81 $1.81 $1.81 $1.81 $1.81
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 40
Table 40: Rate Adjustment Scenario Revenue Adequacy Results
2019 2020 2021 2024 2023
O&M $6,448,979 $6,700,279 $6,962,833 $7,237,163 $7,523,818
Rate Funded Capital $3,132,557 $1,942,500 $1,446,380 $1,479,500 $1,368,500
Transfer to Drought Reserve $187,854 $202,081 $206,849 $211,793 $216,871
Transfer to Capital Reserve $467,222 $0 $0 $0 $0
Debt Repayment $1,165,630 $1,174,060 $1,253,327 $1,934,834 $2,062,461
Total Revenue Requirements $11,402,242 $10,018,920 $9,869,389 $10,863,290 $11,171,650
Fixed Rate Revenue $3,125,695 $3,247,844 $3,374,440 $3,505,567 $3,641,389
Volumetric Rate Revenue $5,469,187 $6,658,878 $7,020,455 $7,407,976 $7,822,554
Drought Surcharge $187,854 $202,081 $206,849 $211,793 $216,871
Miscellaneous Revenue $223,403 $223,403 $223,403 $223,403 $223,403
Total Revenue $9,006,139 $10,332,206 $10,825,147 $11,348,739 $11,904,218
Operating Surplus/(Deficiency) ($2,396,103) $313,285 $955,759 $485,449 $732,567
Debt Service Coverage 168% 227% 214% 158% 159%
Operating Reserve Balance $1,590,159 $1,652,124 $1,716,863 $1,784,506 $1,855,188
Repair/Replacement Reserve Balance $968,079 $1,008,079 $1,048,079 $1,088,079 $1,128,079
Bond Reserve Balance $1,774,060 $2,114,661 $3,403,798 $3,531,426 $3,810,789
Rate Stabilization Reserve $4,349,383 $4,220,102 $3,781,985 $4,032,163 $4,374,685
Drought Contingency Reserve $187,854 $389,935 $596,784 $808,577 $1,025,448
Figure 6: Projected Revenues and Revenue Requirements – Rate Adjustment Scenario
4.2%
16.6%
2.2%2.3%2.4%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
2018 2019 2020 2021 2022 2023
Total Revenues vs. Total Expenses
Total Revenues Total Revenue Requirements Aggregate Rate Increase
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 41
Figure 7: Projected Water Fund Cash Balances
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
2018 2019 2020 2021 2022 2023
Projected Water Fund Balances
Bond Covenant Reserve Account Operations and Maintenance Reserve Account
Renewal/Replacement Reserve Account Drought Contingency Reserve
Rate Stabilization Reserve Account Operating and Bond Reserve Target
Stacked Reserve Target Bond Reserve Target
Drought Contingency Reserve Target
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 42
2019 Water Bill Impacts
To provide perspective on the magnitude of the rate projections in Table 39, bill impacts based
on 2019 rate recommendations have been estimated for average water use values specific to each
type of user. Table 41 presents the projected 2019 monthly bills for the amount of water listed
compared to the monthly charge at existing rates. The dollar and percentage value of the monthly
increase is also presented.
Table 41: Projected Monthly Bill at Recommended Rates
Monthly Bill at
FY19 Rates
FY20 Monthly Bill at
Recommended Rates
Monthly $
Change % Change
Single Family
3 CCF, 5/8” Meter $24.21 $23.61 ($0.60) -2.5%
8 CCF, 5/8” Meter $37.61 $37.75 $0.14 +0.4%
20 CCF, 5/8” Meter $74.84 $77.95 $3.11 +4.2%
30 CCF, 5/8” Meter $108.84 $118.05 $9.21 +8.5%
60 CCF, 5/8” Meter $210.84 $269.20 $58.36 +27.7%
Multi-Family
6 CCF, 5/8” Meter $28.53 $29.25 $0.72 +2.5%
Commercial
24 CCF, 1” Meter $64.86 $71.36 $6.49 +10.0%
Government
24 CCF, 2” Meter $93.90 $100.65 $6.76 +7.2%
MSU
24 CCF, 1.5” Meter $89.63 $89.11 ($0.53) -0.6%
Industrial
24 CCF, 2” Meter $92.46 $92.25 ($0.20) -0.2%
Cost of Service Alignment
Table 42 summarizes the projected COSA difference between cost and revenue percentages for
the rate adjustment scenario. The goal is to achieve a percent difference +/- five to ten percent.
The projected percent difference for each user class over the planning period is shown in the
lower half of the table. The actual percent difference values will vary, but the projections
generally show a movement in the direction of correcting any cost of service disparity for all user
classes. The green shading indicates when the cost versus revenue percent difference is expected
to fall within the +/- five to 10 percent goal.
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 43
Table 42: Projected COSA Differences
Target 2019 2020 2021 2022 2023
Percent of Revenue:
Single Family Residential 49.8% 51.6% 56.1% 55.3% 54.5% 53.7%
Multi-Family Residential 20.0% 22.3% 19.8% 19.8% 19.8% 19.7%
Commercial 20.1% 17.2% 15.9% 16.5% 17.2% 17.9%
Government 3.0% 1.8% 1.9% 2.1% 2.3% 2.6%
MSU 5.9% 6.5% 5.8% 5.8% 5.7% 5.6%
Industrial 0.5% 0.6% 0.5% 0.5% 0.5% 0.5%
Total 100.00% 100% 100% 100% 100% 100%
Percent Difference from Target
Single Family Residential 2.9% 11.9% 10.3% 8.7% 7.1%
Multi-Family Residential 10.9% -1.5% -1.7% -1.9% -2.2%
Commercial -14.8% -21.2% -18.0% -14.8% -11.5%
Government -40.8% -40.3% -33.2% -25.1% -15.9%
MSU 7.5% -3.1% -3.8% -4.7% -5.8%
Industrial 30.8% 13.9% 10.8% 7.8% 4.7%
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 44
RECOMMENDATIONS
As described in this memorandum, the following changes to the rate structure are recommended:
• Monthly Service Charges: Adopt the FY20 service charges in Table 39 and work
to gradually bring the charges by meter size into alignment with the AWWA
equivalent meter factors.
• Single Family Inclining Block Rate Structure: Adopt the four-tiered including
block approach identified and described as Alternative 2 on pages 19 through 26.
Adopt the FY20 rates in Table 39.
• All user classes other than Single Family Residential: Implement the rates in
Table 39 and apply COSA-based volumetric rate adjustments over time to remedy
existing inequities between the user classes.
• Drought Reserve Surcharge: Adopt a surcharge of $0.08 per CCF for all metered
water sales to fund a Drought Contingency reserve.
• Bulk Water Rate: Consider adjusting this rate to $5.15 per thousand gallons in
FY20. This represents a two percent increase.
• City Park Irrigation: Re-evaluate the cost of this service once existing irrigation
projects are complete and a better estimate of acreage irrigated with potable water is
developed.
In addition to the rate recommendations above, the following general recommendations were
developed in conjunction with completion of the Water Rate Study.
• Review Water Revenue Adequacy Annually. The City has undertaken this project
to obtain a financial tool to assist in management financial health of the Water Utility.
Although the projections herein contain proposed rate adjustments through 2023, a
change in actual revenues or expenses from those projected could significantly impact
the Utility. As a result, it is strongly recommended that the City closely monitor
revenues and expenses as compared to those projected in the rate model, adjusting as
necessary, and update the projected rate adjustments based on the desired objective of
achieving consistent revenue adequacy and meeting cash reserve target balances.
• Strive to Correct Cost of Service Inequities. Implementing the recommended
changes to the water rates over time will allow a gradual cost of service correction.
The model calculates COSA percentages for each year and the City should monitor
those results and consider COSA when making changes to the future rates.
• Set Target Levels and Fund Reserves. It is recommended that the City establish
and maintain the reserves noted below. Target levels are recommended as the
minimum balance, but for the purpose of this analysis, Operating and Capital Reserve
funds were capped at the recommended level to push excess reserves into a Rate
Stabilization fund. Once all funds are fully funded at the target level, additional funds
could be added at the City’s discretion.
o Operating Reserves: Target = 90 days of operating expenses (approximately
$1,590,159 in 2019).
o Bond Covenant Reserve: 1 Year Total Payment per Bond Covenants
(approximately $1,774,060 in 2019).
City of Bozeman: Water Utility System Cost of Service & Rate Design Study 45
o Renewal/Replacement Reserve: Annual contribution based on minimum
calculated renewal/replacement contribution needs.
o Rate Stabilization Reserve: Target = Floating Target Based on reinvestment
projections and programmed Rate-Funded Capital and Debt Principal
repayment.
o Drought Contingency Reserves: 5-Year Target = 1 Year Stage 3 Drought,
10-Year Target = 2 Year Stage 3 Drought (approximately $1,100,046 in 2023
and $2,200,092 in 2028).
• Develop Drought Rate and Reserve Implementation Policies. It is recommended
that the City establish policies outlining the utilization of the drought reserve and
setting a maximum surcharge increase target for essential use. The City should
approve a policy to utilize the drought reserve to offset revenue shortfalls during
Stage 3 and Stage 4 droughts. The City should also develop a policy outlining the
maximum surcharge target for essential use to address potential affordability issues.
• Monitor Near-Term Revenue Stability. Recommended increases to water rates
may result in changes to water usage. Conservative water usage growth has been
assumed in the analysis, but it will be important to make adjustments to the
assumptions as actual usage information becomes available. Therefore, the City
should closely monitor revenue stability.