HomeMy WebLinkAbout19- Wastewater Cost of Service and Rate Design Study
City of Bozeman: Wastewater 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 Wastewater 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 Wastewater Cost of Service
and Rate Design Study (Study). The goal of the study was to provide justifiable and equitable
methodologies for appropriate user fees that are adequate to fully fund the expenses associated
with the wastewater utility system, equipment repair and replacement, and capital. Specifically,
the objectives for completion of the study included the following:
• Analyze and discuss the impact of existing and future capital improvements;
• 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,
program activities and debt service;
• Analyze existing rate and fee structure 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 wastewater services;
• Examine current user classes and current rate approaches;
• Evaluate existing rate structure with regard to changing patterns of consumption and
associated wastewater discharge, growth in customer base, annual revenues from rates,
and demands on rate revenue;
• Examine adequacy of reserves for operating revenues and capital projects to determine
sufficient levels to offset low 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;
• Recommend a structure designed to cover all costs of each customer’s service plus return
a reasonable margin for proper operating reserves, capital improvements, adequate
supplies, and contributions to general administrative costs;
City of Bozeman: Wastewater Cost of Service & Rate Design Study 2
• Provide a sampling of a minimum of three (3) customers per classification showing the
difference of charges between existing and proposed rates; and
• Provide a comparison of current and alternative wastewater rates from surrounding
utilities.
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, the AE2S Nexus team 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 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: Wastewater Cost of Service & Rate Design Study 3
SYSTEM DESCRIPTION AND USER CHARACTERISTICS
System Overview
The Water Reclamation Facility (WRF) is located on the northwest edge of town along Interstate
90. The City’s wastewater collection system consists of over 2,233 inch-diameter-miles of pipe
and seven lift stations. Daily influent flow for 2017 for the system was an average of 5.23
million gallons per day (MGD). Per the City’s WRF Facility Plan, the 2034 design criteria reflect
an average day value of 8.5 MGD and a peak day capacity of 12.7 MGD.
Customers and Usage
This system serves approximately 12,545 accounts with an average billed consumption of 3.65
MGD. Currently, six customer classes are designated within the rate schedule: Single Family
Residential, Multi-Family Residential, Commercial, Government, Montana State University
(MSU), and Industrial. Single and Multi-Family Residential customers are billed using average
usage during the winter quarter, while all other customer classes are billed based on monthly
metered water usage. Table 1 summarizes the 2017 wastewater customer accounts by user class.
Table 2 summarizes the average and maximum daily influent flow values for the past five years.
Figure 1 is a graphical depiction of billed flow as tracked by the City for users, grouped as Single
Family Residential, Multi-Family Residential, Commercial, Government, MSU, and Industrial.
Billed flow is reported in units of one hundred cubic feet (CCF). For the period of 2013 through
2017, annual growth in overall wastewater flows was 2.2 percent. The annualized changes in
wastewater flows for each individual user class were:
• Single Family Residential: +2.7%;
• Multi-Family Residential: +3.7%;
• Commercial: +1.1%;
• Government: +4.0%;
• MSU: -0.1%; and
• Industrial: +7.0%.
Table 1: 2017 Customer Accounts by User Type
Users Number of Meters
Single Family Residential 9,172
Multi-Family Residential 2,193
Commercial 1,108
Government 51
MSU 20
Industrial 1
Total 12,545
City of Bozeman: Wastewater Cost of Service & Rate Design Study 4
Table 2: Historical Average Daily and Maximum Influent Flows
WRF Influent Flow
(MGD)
Average Max
2013 4.73 7.32
2014 5.18 7.20
2015 4.87 6.27
2016 5.01 6.23
2017 5.23 6.98
Figure 1: Historical Billed Flow by User Class
Table 3 summarizes billed flow from 2013 through 2017. For all users, excluding MSU, 2017
was assumed to be a representative year and was utilized as the test year for the COSA.
Realizing a fluctuation in yearly flow totals for MSU, the historical 5-year average (2013-2017)
was used for a representative test year for MSU. To account for all influent into the plant, the
difference between total billed flow and total WRF influent, 1.58 MGD, was assumed to
represent inflow/infiltration (I/I) contributions to the system.
-
100,000
200,000
300,000
400,000
500,000
600,000
2013 2014 2015 2016 2017
Bi
l
l
e
d
F
l
o
w
(
C
C
F
)
Historical Billed Flow
Single Family Residential Multi-Family Residential Commercial Government MSU Industrial
City of Bozeman: Wastewater Cost of Service & Rate Design Study 5
Table 3: Historical Billed Flow 2013 – 2017
Total Billed Flow
Summary (CCF*) 2013 2014 2015 2016 2017 Test Year
(MGD)
Single Family Residential 446,562 450,623 474,008 475,792 495,854 1.02
Multi-Family Residential 414,812 430,939 442,832 451,298 479,693 0.98
Commercial 511,285 486,697 504,677 507,890 533,700 1.09
Government 23,103 27,037 24,238 25,266 27,052 0.06
MSU 221,574 205,881 211,511 215,438 220,752 0.44
Industrial 21,909 24,920 29,965 25,147 28,950 0.06
Total 1,639,245 1,626,097 1,687,231 1,700,831 1,786,001 3.65
Test Year Influent 5.23
Assumed Test Year I/I 1.58
* One hundred cubic feet
The City currently serves one industrial customer (Darigold) that is subject to permitting through
the City’s Industrial Pretreatment Program (IPP). Darigold does contribute surchargeable
strength levels and is referred to as an Industrial High Strength user for the purposes of this
Study. Table 4 summarizes the calculated biochemical oxygen demand (BOD), total suspended
solids (TSS), Phosphorous, and Nitrogen contributions associated with the Industrial user based
on sampling reports and WRF data. Table 4 also includes assumed domestic strength limits for
the remaining users and typical I/I strengths.
Table 4: Strength Concentrations by User Class
BOD
(mg/L)
TSS
(mg/L)
Phosphorous
(mg/L)
Nitrogen
(mg/L)
Domestic Strength Limit 200.0 350.0 5.0 20.0
Single Family Residential 330.0 297.0 5.2 18.4
Multi-Family Residential 330.0 297.0 5.2 18.4
Commercial 330.0 297.0 5.2 18.4
Government 330.0 297.0 5.2 18.4
MSU 330.0 297.0 5.2 18.4
Industrial (Darigold) 1,481.1 376.0 9.9 9.9
I/I (assumed) 15.0 15.0 5.0 15.0
City of Bozeman: Wastewater Cost of Service & Rate Design Study 6
EXISTING RATE STRUCTURE
The City’s wastewater rate structure distinguishes between user classes and consists of:
• Fixed Monthly Charge;
• Flat Volumetric Rate charged per one hundred cubic feet (CCF); and
• Extra Strength Surcharges for BOD, TSS, Phosphorous, and Nitrogen.
The existing fixed monthly charge is shown below in Table 5 and the volumetric rate structure in
Table 6. The City’s wastewater resolution specifies that customers that qualify under the State’s
Low Income Property Tax Assistance Program receive a credit equal to the monthly wastewater
service charge on their monthly utility bill.
Table 5: FY18 Fixed Monthly Charges
User Class Monthly Service
Charge
Single Family Residential $19.01
Multi-Family Residential $19.49
Commercial $19.49
Government $19.49
MSU $19.49
Industrial $50.82
Table 6: FY18 Volumetric Rate Structure
User Class Volumetric Rate
$/CCF Measurement Method
Single Family Residential $3.15 Average water use through winter quarter
Multi-Family Residential $3.23 Metered water usage
Commercial $3.23 Metered water usage
Government $3.23 Metered water usage
MSU $3.23 Metered water usage
Industrial $7.75 Metered water usage
In addition to a fixed charge per meter and volumetric charges per CCF of wastewater, strength
surcharges are applied to industrial users that contribute waste streams with high organic content.
These costs are assigned to and recouped directly by the user. Strength charges and thresholds
for FY18 for BOD, TSS, Phosphorus, and Nitrogen are show in Table 7. These charges are
currently assessed either based on pounds (lb) per day, or pounds in excess of an established
strength concentration limit, in milligrams per liter (mg/L), as shown in Table 7.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 7
Table 7: FY18 Strength Surcharges
Class Strength Concentration
Limit (mg/L)
FY18
Charge per Lb.
BOD ≤ 830 lb/day NA $0.31
BOD > 830 lb/day NA $0.44
Peak BOD > 830 lb/day, highest monthly peak day NA $0.39
Pounds TSS > 350 mg/L per day 350 $0.30
Pounds Phosphorus > 5 mg/L per day 5 $5.05
Pounds Nitrogen > 20 mg/L per day 20 $0.46
In October 2018, as a result of preliminary recommendations made as part of this study, the City
adopted changes to the existing rate structure. Fixed monthly charges were increased by three
percent for all user classes, and volumetric charges were increased by four percent for all classes,
with the exception of the Industrial class. To address findings of the COSA that indicated that
charges for the industrial class were not generating the appropriate amount of revenue from each
source (flow versus strength), the fixed monthly and volumetric flow rates for the industrial user
class were decreased. In addition, it was recommended that the City adopt an approach to
charging for excess BOD based on pounds of BOD discharged in excess of a domestic limit
rather than average or monthly maximum pounds per day. This approach is consistent with
industry-standard approaches to application of a BOD surcharge and reflects the approach to the
other strength components in the City’s rate schedule. Wastewater rates that became effective
October 15, 2018 for the balance of FY19 are shown in Tables 8 and 9.
Table 8: FY19 Wastewater Rates (Effective October 15, 2018)
User Class Fixed Monthly
Service Charge
Volumetric
Rate $/CCF
Single Family Residential $19.58 $3.28
Multi-Family Residential $20.07 $3.36
Commercial $20.07 $3.36
Government $20.07 $3.36
MSU $20.07 $3.36
Industrial $38.98 $5.50
Table 9: Recommended FY19 Strength Surcharges
Rate Strength Concentration
Limit (mg/L)
FY19
Charge per Lb. (in excess of Limit)
Pounds BOD > 250 mg/L 250 $0.33
Pounds TSS > 350 mg/L per day 350 $0.51
Pounds Phosphorus > 5 mg/L per day 5 $5.55
Pounds Nitrogen > 20 mg/L per day 20 $0.46
City of Bozeman: Wastewater Cost of Service & Rate Design Study 8
TEST YEAR REVENUE REQUIREMENTS & 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 based on the
FY18 budget. 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. The City’s FY18 budget and average planned rate-funded capital
expenditures through 2023 were used as the basis for development of the $9,290,381 total
revenue requirements shown in Table 10.
Table 10: Total Test Year Revenue Requirements
Wastewater FY18 Adopted
Budget Adjustments Adjusted
Test Year
Wastewater Operations $1,991,232 $1,991,232
Utility Locates $16,000 $95,000 $111,000
Wastewater Services $5,000 $5,000
Wastewater Construction $1,022,500 ($1,022,500) $0
Manholes $25,000 $25,000
Other Televising $12,100 $12,100
Main Repairs $5,000 $5,000
WRF Operations $3,265,206 ($540,000) $2,725,206
Laboratory $496,716 ($41,000) $455,716
Sludge Injection $614,630 $614,630
Pretreatment $64,750 $41,000 $105,750
WRF Construction (Existing Debt) $1,704,247 $1,704,247
WW Impact Fees – Wastewater Operations $1,440,000 ($1,440,000) $0
Rate Funded Capital (2019-2023 Avg) $1,535,500 $1,535,500
Total $10,662,381 ($1,372,000) $9,290,381
Table 11 summarizes the funding sources to be used for the Capital Improvement Plan (CIP)
through 2023. The current rate-funded CIP does not contain any projects for which debt is
expected to be utilized. Existing debt service is shown in Table 12.
Table 11: Wastewater Fund Capital Improvement Plan
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Rate Revenue $1,812,500 $1,912,500 $1,682,500 $1,697,500 $1,202,500 $1,182,500
State Revolving
Fund (SRF) Loan $ - $ - $ - $ - $ - $ -
Revenue Bonds $ - $ - $ - $ - $ - $ -
R&R Reserve Fund $ - $ - $ - $ - $ - $ -
Grant $ - $1,500,000 $ - $ - $ - $ -
Total $1,812,500 $3,412,500 $1,682,500 $1,697,500 $1,202,500 $1,182,500
2019-2023 Average
Rate-Funded
Capital
$1,535,500
City of Bozeman: Wastewater Cost of Service & Rate Design Study 9
Table 12: Wastewater Fund Existing Debt Service
Existing Debt Service 2018 2019 2020 2021 2022 2023
WW SRF Series 2010B $18,000 $18,519 $19,071 $19,656 $20,272 $22,249
WWRF Revenue Bond 2010D $446,000 $458,869 $472,543 $487,021 $502,303 $551,287
WWRF Revenue Bond 2010F $38,000 $39,096 $40.261 $41,495 $42,797 $46,971
WWRF Revenue Bond ARRA 2010E $0 $0 $0 $0 $0 $0
WWRF Revenue Bond 2010C $44,000 $45,270 $46,619 $48,047 $49,555 $54,387
WWRF Revenue Bond 2010G $130,000 $133,751 $137,737 $141,957 $146,411 $160,689
WWRF Revenue Bond 2010H $433,000 $445,494 $458,769 $472,825 $487,662 $535,218
Annual Interest $358,184 $335,059 $311,224 $286,669 $261,354 $235,229
Total Annual Debt Payment $1,467,184 $1,474,059 $1,486,224 $1,497,669 $1,510,354 $1,522,239
Revenues
Table 13 summarizes the Test Year rate revenues, based on FY18 rates and projected FY18
accounts and water sales.
Table 13: Summary of Test Year Revenues
User Class Test Year Revenue
Single Family Residential $3,597,620
Multi-Family Residential $2,029,669
Commercial $1,944,194
Government $99,053
MSU $715,715
Industrial $239,510
Total $8,625,761
City of Bozeman: Wastewater Cost of Service & Rate Design Study 10
COST OF SERVICE ANALYSIS
Once the Test Year Revenue Requirements were developed, the COSA process followed
standard industry methodology. The methodology used in this analysis is based on that outlined
in the Water Environment Federation’s Financing and Charges for Wastewater Systems Manual
of Practice No. 27. 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 Wastewater budget contains the subdivisions shown in
Table 10. 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 administrative tasks. Examples of
administrative costs include personnel, fringe, materials and supplies, and contract
services associated with the administration of the Wastewater division, such as preparing
monthly bills for each meter.
• Collection: Includes a portion of costs under Wastewater Operations, Utility Locates,
Manholes, Other Televising, and Main Repairs.
• Treatment – Fixed: Includes the majority of costs under WRF Operations, and
Wastewater Services.
• Treatment – Variable: Includes chemicals and electricity associated with the WRF.
• Pumping Electricity: Includes all electrical costs associated with pumping.
• Environmental: Includes all costs under the Laboratory subdivision.
• Sludge Management: Includes the majority of costs under the Sludge Injection
subdivision.
• Debt: Includes the principal and interest payments associated with the WRF
Construction.
• Capital: Includes costs for infrastructure, improvements, and rate-funded capital.
Functionalization is based on the breakdown of planned projects for 2019 through 2023.
• Industrial Pretreatment Program: Staff identified $105,750 in revenue requirements
directly attributed to the IPP. Those costs include labor, supplies, and postage fees.
The resulting functionalization percentages are provided in Table 14 and the total resulting
functionalized revenue requirements are shown in Table 15.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 11
Table 14: COSA Functionalized Percentages
Function
Ad
m
i
n
i
s
t
r
a
t
i
v
e
Co
l
l
e
c
t
i
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Pu
m
p
i
n
g
–
Va
r
i
a
b
l
e
Tr
e
a
t
m
e
n
t
–
Fi
x
e
d
Tr
e
a
t
m
e
n
t
–
Va
r
i
a
b
l
e
En
v
i
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o
n
m
e
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t
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l
Sl
u
d
g
e
Ma
n
a
g
e
m
e
nt
IP
P
To
t
a
l
Administrative 100% 100%
Collection 100% 100%
Treatment – Fixed 100% 100%
Treatment – Variable 100% 100%
Pumping Electricity 100% 100%
Environmental 100% 100%
Sludge Management 100% 100%
Debt 100% 100%
Capital 57% 43% 100%
IPP 100% 100%
Table 15: Functionalized Test Year Revenue Requirements
Function Functionalized
Revenue Requirements
Administrative $3,346
Collection $2,999,289
Pumping – Variable $20,500
Treatment – Fixed $4,648,000
Treatment – Variable $897,150
Environmental $455,716
Sludge Management $160,630
IPP $105,750
Total $9,290,381
Cost Classification
Classification of the functionalized costs was performed based on whether the costs were
associated with number of customers served, amount of wastewater pumped or treated, actual
concentration of strength components in the wastewater, or design parameters for flow and
strength components.
For some of the classification, reference is made to “Actual” versus “Design”. Actual values are
equated to average day flows and design values are associated with future average day capacities
for the 8.5 MGD system. Classifications of each cost function are described below.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 12
Classification percentages are presented in Table 16 with the total classified costs presented in
Table 17.
• Administration: Administrative costs are classified 100 percent into the Customer
classification.
• Collection: Collection system costs are driven by flow through the system. For the
purpose of this analysis, collection costs are allocated 100 percent to the Collection
classification.
• Pumping – Variable: Electricity costs associated with the collection system were
allocated 100 percent to Pumping.
• Treatment – Fixed: Costs identified as fixed treatment are associated with maximum or
design values for flow and strength. As a result, classification is spread across flow,
BOD, TSS, Phosphorous, and Nitrogen parameters. For this analysis, it was assumed that
50 percent of treatment fixed costs could be correlated with design flow, with the
remaining 50 percent allocated 18 percent to design BOD, 21 percent to design TSS, six
(6) percent to design Phosphorous, and five (5) percent to design Nitrogen. Design flow
values refer to anticipated future flow demand associated with an 8.5 MGD facility, and
design BOD, TSS, Phosphorous, and Nitrogen strength demands are those projected
based on future flows at existing strength concentrations.
• Treatment – Variable: Chemical costs equated to seven (7) percent of the costs with this
function and were classified as Flow – Actual since they vary directly according to flow
through the WRF. Remaining Treatment – Variable costs were associated with electricity
at the WRF. These were classified 33 percent BOD – Actual, 39 percent TSS – Actual,
11 percent Phosphorous – Actual, and 10 percent Nitrogen – Actual.
• Environmental: Costs identified as Environmental were allocated according to actual
strength demands among BOD, TSS, Phosphorous, and Nitrogen. These were classified
35 percent BOD – Actual, 42 percent TSS – Actual, 12 percent Phosphorous – Actual, 11
percent Nitrogen – Actual.
• Sludge Management: Costs related to Sludge Management were classified as TSS -
Actual costs to enable direct allocation to high strength users.
• IPP: Costs related to the IPP were classified as Assigned IPP costs to enable direct
allocation to the Industrial user class.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 13
Table 16: Classification Percentages
Function
Classification - %
Ad
m
i
n
Fl
o
w
– De
s
i
g
n
Fl
o
w
– Ac
t
u
a
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BO
D
– De
s
i
g
n
BO
D
– Ac
t
u
a
l
TS
S
– De
s
i
g
n
TS
S
– Ac
t
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a
l
Ph
o
s
p
h
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r
o
u
s
–
De
s
i
g
n
Ph
o
s
p
h
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o
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s
–
Ac
t
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a
l
Ni
t
r
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n
–
De
s
i
g
n
Ni
t
r
o
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n
–
Ac
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a
l
Co
l
l
e
c
t
i
o
n
Pu
m
p
i
n
g
IP
P
Administration 100%
Collection 100%
Pumping – Variable 100%
Treatment – Fixed 50% 18% 21% 6% 5%
Treatment – Variable 7% 33% 39% 11% 10%
Environmental 35% 42% 12% 11%
Sludge Management 100%
IPP 100%
City of Bozeman: Wastewater Cost of Service & Rate Design Study 14
Table 17: Total Classified Cost
Function
Classification - $
Ad
m
i
n
Fl
o
w
– De
s
i
g
n
Fl
o
w
– Ac
t
u
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l
BO
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– De
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BO
D
– Ac
t
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a
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TS
S
– De
s
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TS
S
– Ac
t
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a
l
Ph
o
s
p
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r
o
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s
–
De
s
i
g
n
Ph
o
s
p
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s
–
Ac
t
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l
Ni
t
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n
–
De
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n
Ni
t
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n
–
Ac
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a
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Co
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i
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n
Pu
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p
i
n
g
IP
P
Administration $3,346
Collection $2,999,289
Pumping – Fixed
Pumping – Variable $20,500
Treatment – Fixed $2,324,000 $817,308 $979,057 $284,781 $242,854
Treatment – Variable $62,315 $293,596 $351,700 $102,300 $87,239
Environmental $160,267 $191,984 $55,843 $47,622
Sludge Management $160,630
IPP $105,750
Total $3,346 $2,324,000 $62,315 $817,308 $453,863 $979,057 $704,314 $284,781 $158,143 $242,854 $134,861 $2,999,289 $20,500 $105,750
Total $9,290,381
City of Bozeman: Wastewater Cost of Service & Rate Design Study 15
Cost Allocation
The final step in the COSA was to allocate the classified costs to the user types identified below:
• Single Family Residential;
• Multi-Family Residential;
• Commercial;
• Government;
• MSU;
• Industrial; and
• I/I.
It is important to note that cost allocated to I/I will be allocated back to all user classes. Potential
approaches to the allocation of I/I are discussed further below, along with the recommended
approach.
The allocation basis for each classification of cost is outlined below, with detailed cost allocation
presented in Tables 18 through 31. It should be noted that due to rounding, the sum of values or
direct multiplication of values in the tables may vary slightly from reported values.
• Customer: The allocation of classified customer costs was based on the total number of
accounts for all user classes.
• Flow – Design and Collection: Allocated based on proportionate share of allocated 8.5
MGD capacity of the system represented as design average day flows in MGD to all user
classes.
• Flow – Actual and Pumping - Actual: Allocated based on proportionate share of actual
average day flow to all user classes.
• BOD – Design, TSS – Design, Phosphorous – Design and Nitrogen – Design:
Allocated to all users based on proportionate share of allocated capacity of the system
represented as design average day pounds per day (ppd) for respective strength
parameter. To calculate strength attributable to each user class, data related to total
pounds contributed from high strength Industrial users and total strength into the plant
was evaluated. For all but the high strength user, the domestic strength concentrations
from Table 9 were assumed. The balance of strength into the WRF and not contributed by
high strength users was allocated to the remaining customers and I/I. For the I/I
contribution, a textbook concentration of 15 mg/L was assumed for BOD, TSS, and
Nitrogen, with 5 mg/L assumed for Phosphorous as recommended in the WEF MOP 27.
The result of this analysis yielded estimated actual domestic strength concentrations of
approximately 330 mg/L BOD, 297 mg/L TSS, 5 mg/L Phosphorous, and 20 mg/L
Nitrogen.
• BOD – Actual, TSS – Actual and TKN – Actual: Allocated based proportionate share
of average pounds per day for respective strength parameter.
• Assigned IPP: IPP program costs were directly allocated to the Industrial class.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 16
Table 18: Customer Cost Allocation
# of Accounts % Share Total
Single Family 9,172 73.1% $2,447
Multi-Family 2,193 17.5% $585
Commercial 1,108 8.8% $295
Government 51 0.4% $14
MSU 20 0.2% $5
Industrial 1 0.01% $0
Total 12,545 100.0% $3,346
Table 19: Flow – Design Allocation
Flow Design (MGD) % Share Total
Single Family 1.66 19.5% $453,239
Multi-Family 1.60 18.9% $438,467
Commercial 1.78 21.0% $487,833
Government 0.09 1.1% $24,727
MSU 0.72 8.5% $196,551
Industrial 0.08 0.9% $21,907
I/I 2.57 30.1% $701,276
Total 8.50 100.0% $2,324,000
While current average day operations of the system handle an estimated 5.23 MGD of
wastewater, the existing plant has been sized to meet future average day requirements of 8.50
MGD as the community continues to grow. The majority of costs to be allocated on the Design
Flow basis are those that generally linked to the ability of the system to perform at the 8.50
MGD level. To develop Design basis allocation factors, the share of future average day flow
was estimated based on current maximum month operations for the Industrial user, with the
balance allocated equally to all other user classes. This assumes that growth within the
community will correspond to wastewater discharge volumes and will be approximately equal
for all user classes, with the exception of Industrial.
Table 20: Flow - Actual Allocation
Billed Flow (CCF) MGD % Share Total
Single Family 495,854 1.02 19.5% $12,118
Multi-Family 479,693 0.98 18.8% $11,723
Commercial 533,700 1.09 20.9% $13,043
Government 27,052 0.06 1.1% $661
MSU 215,032 0.44 8.4% $5,255
Industrial 28,950 0.06 1.1% $707
I/I 1.58 30.2% $18,808
Total 1,780,281 5.23 100.0% $62,315
City of Bozeman: Wastewater Cost of Service & Rate Design Study 17
Table 21: BOD – Design Allocation
BOD - Design (PPD) % Share Total
Single Family 4,582 26.2% $214,065
Multi-Family 4,433 25.3% $207,088
Commercial 4,932 28.2% $230,403
Government 250 1.4% $11,679
MSU 1,987 11.4% $92,831
Industrial 990 5.7% $46,248
I/I 321 1.8% $14,994
Total 17,495 100.0% $817,308
Table 22: BOD – Actual Allocation
BOD- Actual (PPD) % Share Total
Single Family 2,808 25.9% $117,484
Multi-Family 2,717 25.0% $113,655
Commercial 3,022 27.9% $126,451
Government 153 1.4% $6,410
MSU 1,218 11.2% $50,948
Industrial 733 6.8% $30,660
I/I 197 1.8% $8,255
Total 10,848 100.0% $453,863
Table 23: TSS – Design Allocation
TSS - Design (PPD) % Share Total
Single Family 4,128 27.2% $266,731
Multi-Family 3,994 26.4% $258,038
Commercial 4,443 29.3% $287,089
Government 225 1.5% $14,552
MSU 1,790 11.8% $115,670
Industrial 251 1.7% $16,239
I/I 321 2.1% $20,738
Total 15,152 100.0% $979,057
City of Bozeman: Wastewater Cost of Service & Rate Design Study 18
Table 24: TSS – Actual Allocation
TSS - Actual (PPD) % Share Total
Single Family 2,530 27.1% $191,209
Multi-Family 2,447 26.3% $184,977
Commercial 2,723 29.2% $205,802
Government 138 1.5% $10,432
MSU 1,097 11.8% $82,919
Industrial 186 2.0% $14,062
I/I 197 2.1% $14,913
Total 9,318 100.0% $704,314
Table 25: Phosphorous – Design Allocation
P - Design (PPD) % Share Total
Single Family 69 19.0% $54,011
Multi-Family 67 18.4% $52,250
Commercial 74 20.4% $58,133
Government 3 1.0% $2,946
MSU 30 8.2% $23,422
Industrial 13 3.7% $10,451
I/I 107 29.3% $83,568
Total 365 100.0% $284,781
Table 26: Phosphorous – Actual Allocation
P - Actual (PPD) % Share Total
Single Family 42 18.8% $29,738
Multi-Family 41 18.2% $28,769
Commercial 46 20.2% $32,008
Government 2 1.0% $1,623
MSU 18 8.2% $12,896
Industrial 10 4.4% $6,951
I/I 66 29.2% $46,158
Total 225 100.0% $158,143
City of Bozeman: Wastewater Cost of Service & Rate Design Study 19
Table 27: Nitrogen - Design Allocation
N - Design (PPD) % Share Total
Single Family 277 21.1% $51,227
Multi-Family 267 20.4% $49,558
Commercial 298 22.7% $55,137
Government 15 1.2% $2,795
MSU 120 9.1% $22,215
Industrial 13 1.0% $2,476
I/I 321 24.5% $59,446
Total 1,311 100.0% $242,854
Table 28: Nitrogen – Actual Allocation
N - Actual (PPD) % Share Total
Single Family 169 21.0% $28,365
Multi-Family 164 20.4% $27,441
Commercial 182 22.6% $30,530
Government 9 1.2% $1,547
MSU 74 9.1% $12,301
Industrial 10 1.2% $1,656
I/I 198 24.5% $33,020
Total 806 100.0% $134,860
Table 29: Collection Allocation
Flow Design (MGD) % Share Total
Single Family 1.66 19.5% $584,938
Multi-Family 1.60 18.9% $565,873
Commercial 1.78 21.0% $629,583
Government 0.09 1.1% $31,912
MSU 0.72 8.5% $253,663
Industrial 0.08 0.9% $28,272
I/I 2.57 30.1% $905,046
Total 8.50 100.0% $2,999,289
City of Bozeman: Wastewater Cost of Service & Rate Design Study 20
Table 30: IPP Allocation
SIUs % Total
Single Family 0.00 0.00% $ -
Multi-Family 0.00 0.00% $ -
Commercial 1.00 33.33% $35,250
Government 0.00 0.00% $ -
MSU 1.00 33.33% $35,250
Industrial 1.00 33.33% $35,250
I/I 0.00 0.00% $ -
Total 3.00 100.0% $105,750
Table 31: Pumping - Actual Allocation
Average (MGD) % Total
Single Family 1.02 19.5% $3,986
Multi-Family 0.98 18.8% $3,857
Commercial 1.09 20.9% $4,291
Government 0.06 1.1% $217
MSU 0.44 8.4% $1,729
Industrial 0.06 1.1% $233
I/I 1.58 30.2% $6,187
Total 5.23 100.0% $20,500
I/I Cost Allocation
Costs related to I/I can be allocated to users in a variety of ways: Allocation on an average day
flow basis, on an inch-diameter-mile of pipeline utilized basis, on a sewer shed area as a percent
of total service area acreage-basis, on a per-account basis, or on a combination of these
approaches. For the purpose of this analysis, MSU was allocated I/I based on sewer shed area in
acres, while the remainder of I/I cost was allocated to all user classes based on number of
accounts in each class. The I/I allocation utilized in this analysis is summarized in Table 32.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 21
Table 32: I/I Allocation
Accounts % Total
Area (square acres) % Cost
MSU 0.54 2.8% $53,927
City of Bozeman 19.15 97.2% $1,858,484
# Accounts % Cost
Single Family Residential 9,172 73.2% $1,360,959
Multi-Family Residential 2,193 17.5% $325,402
Commercial 1,108 8.8% $164,407
Government 51 0.4% $7,568
MSU 0 0.0% $ -
Industrial 1 0.01% $148
Total City of Bozeman 12,525 100.0% $1,858,484
Total $1,912,411
City of Bozeman: Wastewater Cost of Service & Rate Design Study 22
COSA RESULTS SUMMARY
Table 33 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 determine sufficiency of existing rates for each user class. A comparison of cost versus
revenue share percentages for each user class is shown in Table 34.
The percent difference is calculated as the cost percentage minus the revenue percentage, divided
by the cost percentage. A percent difference with +/- five to ten percent is generally considered
to be within an acceptable range. Where the percent difference is greater than +/- five to ten
percent, revision to the rates and/or structure are deemed appropriate to improve the cost-revenue
relationship between user classes.
Table 33: COSA Results Summary
Total Allocated Cost Percent of Cost
Single Family Residential $3,370,517 36.3%
Multi-Family Residential $2,267,682 24.4%
Commercial $2,360,255 25.4%
Government $117,083 1.3%
MSU $959,583 10.3%
Industrial $215,261 2.3%
Total $9,290,381 100.0%
Table 34: Cost versus Revenue Percentage Comparison
Percent of Cost Percent 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 100.0% 100.0%
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 in excess of its associated
cost;
• The Commercial class is paying less than its associated cost;
• The MSU class appears to be paying significantly less than its associated cost of service;
and
• The Industrial class appears to be paying significantly more than its associated cost.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 23
RATE DESIGN
The results of the COSA, as previously discussed, indicated that revenue generated from the
existing rates was higher than the cost of service estimated for the Single Family Residential and
Industrial user classes, and lower than the cost of service for the Commercial and MSU user
classes. These inequities can be corrected by making user class-specific adjustments to the
volumetric rates. For the Industrial class, however, correcting the cost of service also involves
consideration of how the rate structure generates revenue for flow-based revenue requirements
versus strength-based revenue requirements.
Fixed Monthly Service Charges
It is generally recommended that a utility recover the revenue requirements associated with
General Administrative and Customer costs, as well as a portion of debt or Capital, through the
fixed charge. The fixed charge was found to sufficiently cover the administrative portion of
Capital, Collection O&M, WRF Operation O&M, the Laboratory, and Debt. For the Test Year,
these Administrative Revenue Requirements are shown in Table 35. Table 36 summarizes
expected Test Year fixed charge revenues, which are shown to exceed the revenue requirements
listed in Table 35, thereby verifying the appropriateness of the existing fixed service charge
configuration.
Table 35: Calculated Customer-Related Revenue Requirements
Costs Adjusted Test Year
Revenue Requirements
Administrative Portion of:
Admin $3,346
Collection O&M $623,955
WRF Operations O&M $122,177
Laboratory $900
Debt $1,704,247
Total $2,454,625
Table 36 illustrates an approach to a revenue-neutral rate design incorporating fixed monthly
charges based on the existing user classes. A one-time correction was made to the Industrial
rates as shown in Table 36 to partially correct the cost of service inequity for that user class.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 24
Table 36: Revenue Neutral Fixed Service Charges
#
Bills/Yr
2018 Rate
$/Month/
Meter
2018 $
Alternate Rate
Design
$/Month/Meter
Alternate $ %
Change
Single Family Residential 110,064 $19.01 $2,092,317 $19.01 $2,092,317 0%
Multi-Family Residential 26,316 $19.49 $512,899 $19.49 $512,899 0%
Commercial 13,296 $19.49 $259,139 $19.49 $259,139 0%
Government 612 $19.49 $11,928 $19.49 $11,928 0%
MSU 240 $19.49 $4,678 $19.49 $4,678 0%
Industrial 12 $50.82 $610 $38.98 $468 -23.3%
Total 150,540 $2,881,569 $2,881,429
Volumetric Charges
Table 37 summarizes current volumetric rates for each user class and alternate COSA-based
rates. As the City looks to establish rates for future budgets, it is recommended that gradual
implementation of COSA-based rates be developed over a three- to five-year period. This
recommendation is in light of the fact the COSA is a one-year evaluation of the cost basis of the
utility. It is expected that as costs increase in the future, the City will be able to step into the
changes to align with allocated cost percentages from the COSA analysis.
Table 37: Revenue-Neutral Volumetric Rate Recommendations
CCF
Billed/Yr
2018
Rate
$/CCF
2018 $
Alternate
Rate Design
$/CCF
Alternate
$
%
Change
Single Family Residential 495,854 $3.15 $1,561,940 $3.15 $1,561,940 0%
Multi-Family Residential 479,693 $3.23 $1,549,409 $3.23 $1,549,409 0%
Commercial 533,700 $3.23 $1,723,851 $3.36 $1,793,231 4.0%
Government 27,052 $3.23 $87,379 $3.36 $90,896 4.0%
MSU 215,032 $3.23 $694,551 $3.42 $735,407 5.9%
Industrial 28,950 $7.75 $224,363 $3.89 $112,616 -49.8%
Total 1,780,281 $5,841,493 $5,843,499
Strength Surcharges
The existing strength surcharges were compared with the unit surcharges costs calculated as part
of the cost analysis. The BOD rate was restructured to simplify and mirror industry standard rate
structures for surcharge strength discharges. Rate structures for TSS, Phosphorous, and Nitrogen
were unchanged, with COSA-based corrections adopted with 2019 rates. Table 38 summarizes
the results of the strength surcharge rate analysis.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 25
Table 38: Calculated Strength Charges
BOD TSS Phosphorous Nitrogen
Total Allocated High Strength Cost ($) $1,271,171 $1,683,371 $442,924 $377,714
Total Pounds High Strength to the WRF 3,959,600 3,401,192 82,248 294,138
Calculated Cost ($/Pound) $0.33 $0.50 $5.39 $1.28
Current Charge ($/Pound) $0.33 $0.51 $5.55 $0.46
Wastewater Rate Benchmarking
Every year, AE2S completes a rate survey for communities in the Upper Midwest. Figure 2
compares the wastewater utility billing from all Montana participants serving greater than 5,000
people in 2018. The typical bills shown below are using a 6,000 gallon per month metered flow.
Figure 2: Typical Monthly Residential Wastewater Utility Bill (2019)
City of Bozeman: Wastewater Cost of Service & Rate Design Study 26
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 FY20 through FY23 for the City’s Wastewater 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 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 inflation rate for General Inflation, Heat, and the Construction
Index.
• Five (5) percent annual inflation rate for Chemicals and Power.
• Labor has an annual inflation rate of five (5) percent through 2023.
Capital Assumptions
• Annual capital expenditure projections based on the provided CIP for 2019-2023. Annual
cash-funded amounts include:
o 2019: $1,912,500
o 2020: $1,682,500
o 2021: $1,697,500
o 2022: $1,202,500
o 2023: $1,182,500
Debt Assumptions
• Existing Debt: Approximately $290,000 outstanding principal on a State Revolving
Fund (SRF) Loan and $17.6 million outstanding principal for Revenue Bonds.
• Coverage: All existing debt carries with it the requirement to meet 110 percent coverage
annually.
Reserve Assumptions
• Operating Reserve: Funded to a targeted level of 90 days O&M expense based on
existing reserve policies (FY19 Target is $1,567,000). Revenue sources include rate
City of Bozeman: Wastewater Cost of Service & Rate Design Study 27
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.
• Bond Reserve: Funded to a target level of one-year total debt service payment based
upon bond covenants (FY19 Target is $1,789,000). Contributions include transfers in
from the Operating Reserve. Reserve fund usage is limited to debt service payments only.
• 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 facilities depreciation for above ground infrastructure. The sum of these
two values yields the 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 contributions to capital reserves is required. Table 39 summarizes the
estimation of annual contributions to capital renewal/replacement reserves. Figure 3
shows the projected annual reinvestment from 2019 to 2023.
• Rate Stabilization Reserve: Funded to 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.
Table 39: Renewal/Replacement Reserve Contributions
2019 2020 2021 2022 2023
Adjusted Depreciation (Facilities) $3,041,025 $3,132,255 $3,226,223 $3,323,010 $3,422,700
Forecasted Pipeline Renewal and
Replacement (Weibull Analysis) $639,210 $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
Rate-Funded CIP $1,969,875 $1,784,964 $1,854,904 $1,353,424 $1,370,842
Debt Service Principal $1,576,770 $1,612,880 $1,916,759 $1,954,759 $1,992,759
Additional Capital Contribution $133,480 $627,270 $347,419 $907,685 $951,958
City of Bozeman: Wastewater Cost of Service & Rate Design Study 28
Figure 3: Projected Annual Reinvestment
Revenue Assumptions
• Fixed Rate Revenue: Revenue generated from the fixed rates was based on number of
meter connections by size in 2017. Beginning in 2018 and for future years, Single Family
Residential meters were increased by 3.8 percent annually, Multi-Family by 3.1 percent
annually, and Commercial by 1.7 percent annually. Similar to the water analysis,
Government, MSU, and Industrial account numbers were held constant.
• Volumetric Rate Revenue: Revenue generated from volumetric rates was based on
projected year-end wastewater flow for 2017. Beginning in 2019, Single Family
Residential, Multi-Family Residential, and Commercial wastewater flows were indexed
annually by 2.5, 3.0, and 1.7 percent, respectively. Wastewater flows from MSU were
also projected to increase by 2.5 percent annually. No growth in flow was assumed for
the Government and Industrial user classes.
• All Miscellaneous Income was held constant through the study period.
Utility Cash Balance Assumptions
• The Operating Reserve balance at the end of FY17 was $3,657,953.
• The Bond Covenant Reserve balance at the end of FY17 was $1,788,592.
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
$5,000,000
2019 2020 2021 2022 2023
Projected Rate Funded Capital Expenditures Projected Annual Debt Service Principal
Minimum Contribution to Repair & Replacement Reserve Projected Adjusted Depreciation
City of Bozeman: Wastewater Cost of Service & Rate Design Study 29
Revenue Adequacy Model Projections
The evaluation of the Wastewater 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 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,
wastewater 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 adjust the rate plan for the coming year, as appropriate.
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. This would eventually lead to the
depletion of all cash. The results of the Baseline Scenario are summarized in Table 40 and
Figure 4. Under this scenario, the objective of funding a self-sufficient Wastewater Utility is not
met. This approach is not recommended.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 30
Table 40: Baseline Revenue Adequacy Results
2019 2020 2021 2022 2023
O&M $6,353,166 $6,670,824 $7,004,365 $7,354,583 $7,722,313
Rate-Funded Capital $1,912,500 $1,682,500 $1,697,500 $1,202,500 $1,182,500
Debt Repayment $1,474,059 $1,486,224 $1,497,669 $1,510,354 $1,522,239
Additional Capital
Repair/Replacement Reinvestment $133,480 $627,270 $347,419 $907,685 $951,958
Total Revenue Requirements $9,873,205 $10,466,818 $10,546,953 $10,975,123 $11,379,010
Fixed Rate Revenue $3,082,855 $3,188,901 $3,298,723 $3,412,457 $3,530,246
Volumetric Rate Revenue $5,972,798 $6,109,608 $6,249,656 $6,393,012 $6,539,745
Strength Surcharge Revenue $19,182 $19,182 $19,182 $19,182 $19,182
Miscellaneous Revenue $106,500 $106,500 $106,500 $106,500 $106,500
Total Revenue $9,257,655 $9,500,510 $9,750,380 $10,007,470 $10,271,993
Operating Surplus/(Deficiency) ($615,550) ($966,308) ($796,573) ($967,653) ($1,107,018)
Operating Reserve Balance $1,566,534 $1,644,861 $1,727,104 $1,813,459 $1,819,143
Repair/Replace Reserve $133,480 $760,750 $307,067 $160,744 $0
Bond Reserve Fund $1,788,592 $1,788,592 $1,788,592 $1,788,592 $1,788,592
Rate Stabilization Reserve $1,122,348 $77,713 $0 $0 $0
Total Utility Cash and
Investments $4,610,954 $4,271,916 $3,822,762 $3,762,795 $3,607,735
City of Bozeman: Wastewater Cost of Service & Rate Design Study 31
Figure 4: Baseline Revenue Adequacy Results
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 41 were
developed. Based on the implementation of the rate recommendations in Table 41, Table 42
summarizes the overall projected revenue adequacy, including the coverage requirement to be
achieved. Note that the FY19 rates in Table 41 were implemented while the study was in
progress, in October 2018. Figure 5 illustrates the projected revenues and expenses through
2023, and Figure 6 depicts projected reserve fund cash balances through the same period.
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
2019 2020 2021 2022 2023
Projected Wastewater Fund Balances
Bond Covenant Reserve Cash Balance O&M Reserve Cash Balance
Renewal/Replacement Reserve Cash Balance Rate Stabilization Reserve Balance
Bond Reserve Target Operating and Bond Reserve Target
Stacked Capital Reserve Target
City of Bozeman: Wastewater Cost of Service & Rate Design Study 32
Table 41: Rate Adjustment Scenario Rate Structure Projections
2019 2020 2021 2022 2023
Monthly Service Charge
Single Family Residential $19.58 $19.58 $19.58 $19.58 $19.58
Multi-Family Residential $20.07 $20.07 $20.07 $20.07 $20.07
Commercial $20.07 $20.07 $20.07 $20.07 $20.07
Government $20.07 $20.07 $20.07 $20.07 $20.07
MSU $20.07 $20.07 $20.07 $20.07 $20.07
Industrial $38.98 $38.98 $38.98 $38.98 $38.98
Flow Charge
Single Family Residential $3.28 $3.28 $3.28 $3.28 $3.28
Multi-Family Residential $3.36 $3.43 $3.49 $3.56 $3.64
Commercial $3.36 $3.56 $3.77 $3.93 $4.08
Government $3.36 $3.56 $3.77 $4.00 $4.24
MSU $3.36 $3.63 $3.92 $4.23 $4.57
Industrial $5.50 $5.67 $5.83 $6.01 $6.19
Strength Surcharge
BOD > 250 mg/L $0.33 $0.34 $0.35 $0.36 $0.37
TSS > 350 mg/L per day $0.51 $0.53 $0.54 $0.56 $0.57
P > 5.0 mg/L per day $5.55 $5.72 $5.89 $6.06 $6.25
N > 20 mg/L per day $0.46 $0.47 $0.49 $0.50 $0.52
Table 42: Rate Adjustment Scenario Revenue Adequacy Results
2019 2020 2021 2022 2023
O&M $6,353,166 $6,670,824 $7,004,365 $7,354,583 $7,722,313
Rate-Funded Capital $1,912,500 $1,682,500 $1,697,500 $1,202,500 $1,182,500
Debt Repayment $1,474,059 $1,486,224 $1,497,669 $1,510,354 $1,522,239
Additional Capital
Repair/Replacement Reinvestment $133,480 $627,270 $347,419 $907,685 $951,958
Total Revenue Requirements $9,873,205 $10,466,818 $10,546,953 $10,975,123 $11,379,010
Fixed Rate Revenue $3,175,181 $3,284,408 $3,397,524 $3,514,671 $3,635,993
Volumetric Rate Revenue $6,145,445 $6,502,066 $6,883,706 $7,250,223 $7,640,260
Strength Surcharge Revenue $85,166 $87,721 $90,353 $93,063 $95,855
Miscellaneous Revenue $106,500 $106,500 $106,500 $106,500 $106,500
Total Revenue $9,512,292 $9,980,694 $10,478,083 $10,964,457 $11,478,609
Operating Surplus/(Deficiency) ($360,913) ($486,124) ($68,871) ($10,666) $99,599
Debt Service Coverage 214% 189% 182% 186% 191%
Operating Reserve Balance $1,566,534 $1,644,861 $1,727,104 $1,813,459 $1,904,132
Repair/Replace Reserve $133,480 $760,750 $1,108,169 $2,015,855 $2,967,813
Bond Reserve Fund $1,788,592 $1,788,592 $1,788,592 $1,788,592 $1,788,592
Rate Stabilization Reserve $1,376,985 $812,534 $661,420 $564,399 $573,325
City of Bozeman: Wastewater Cost of Service & Rate Design Study 33
Figure 4: Projected Revenues and Revenue Requirements – Rate Adjustment Scenario
Figure 5: Rate Adjustment Scenario Cash Balance Projections
3.6%
2.3%2.4%2.0%2.1%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
2019 2020 2021 2022 2023
Total Revenues vs. Total Expenses
Total Revenues Total Revenue Requirements Aggregate Rate Increase
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
2019 2020 2021 2022 2023
Projected Wastewater Fund Balances
Bond Covenant Reserve Cash Balance O&M Reserve Cash Balance
Renewal/Replacement Reserve Cash Balance Rate Stabilization Reserve Balance
Bond Reserve Target Operating and Bond Reserve Target
Stacked Capital Reserve Target
City of Bozeman: Wastewater Cost of Service & Rate Design Study 34
FY20 Wastewater Bill Impacts
To provide perspective on the magnitude of the rate projections in Table 41, bill impacts based
on FY20 rate recommendations have been estimated for average water use values specific to
each type of user. Table 43 presents the projected FY19 bills as compared to similar bills for
FY18, as well as FY20 monthly bills for the amount of wastewater listed compared to the
monthly charge at existing FY19 rates. The dollar and percentage value of the monthly increase
is also presented.
Table 43: Projected FY20 Monthly Bills
Monthly
Bill at FY18
Rates
Monthly
Bill at
FY19 Rates
FY19
Monthly
Increase $
FY19 %
Increase
Monthly
Bill at FY20
Rates
FY20
Monthly
Increase $
FY20 %
Increase
Single Family Residential
3 CCF $28.46 $29.41 $0.95 +3.3% $29.41 $0 0%
6 CCF $37.91 $39.24 $1.33 +3.5% $39.24 $0 0%
8 CCF $44.21 $45.79 $1.58 +3.6% $45.79 $0 0%
Multi-Family Residential
24 CCF $97.01 $100.70 $3.69 +3.8% $102.31 $1.61 +1.6%
Commercial
24 CCF $97.01 $100.70 $3.69 +3.8% $105.53 $4.83 +4.8%
Government
24 CCF $97.01 $100.70 $3.69 +3.8% $105.53 $4.83 +4.8%
MSU $58,395 $62,269 $3,874 +6.6% $68,955 $6,686 +10.7%
Industrial $18,349 $13,672 $4,677 -25.6% $14,082 $410 +3.0%
Cost of Service Alignment
Table 44 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.
City of Bozeman: Wastewater Cost of Service & Rate Design Study 35
Table 44: Projected COSA Differences
Target 2019 2020 2021 2022 2023
Percent of Revenue:
Single Family Residential 36.3% 42.8% 42.1% 41.4% 40.8% 40.2%
Multi-Family Residential 24.4% 23.7% 23.7% 23.5% 23.5% 23.5%
Commercial 25.4% 21.9% 22.3% 22.7% 22.9% 23.0%
Government 1.3% 1.1% 1.1% 1.1% 1.1% 1.1%
MSU 10.3% 8.0% 8.4% 8.9% 9.4% 9.9%
Industrial 2.3% 2.4% 2.4% 2.3% 2.3% 2.3%
Total 100% 100% 100% 100% 100% 100%
Percent Difference from Target
Single Family 18.0% 16.1% 14.1% 12.5% 10.9%
Multi-Family -2.7% -3.1% -3.5% -3.6% -3.7%
Commercial -13.8% -12.1% -10.5% -10.0% -9.5%
Government -13.0% -12.7% -12.5% -11.9% -11.4%
MSU -22.6% -18.4% -14.0% -9.1% -3.9%
Industrial 4.6% 2.6% 0.6% -1.0% -2.6%
City of Bozeman: Wastewater Cost of Service & Rate Design Study 36
RECOMMENDATIONS
The following general recommendations were developed in conjunction with completion of the
Wastewater Rate Design:
• Review Wastewater Revenue Adequacy annually. The City has undertaken this
project to obtain a financial tool to assist in managing financial health of the Wastewater
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 wastewater rates over time will allow a gradual cost of service correction. The
spreadsheet model calculates COSA percentages for each year, and the City should
monitor those results and include consideration of COSA when making changes to the
future rates.
• Strength Charges: Adoption of the recommended approach to BOD charges will bring
the treatment of BOD strength in line with the approach for other high strength charges in
Bozeman and around the region. In addition, it is recommended the City note a BOD
domestic limit of 250 mg/L in the rate resolution as well as City Ordinance.
• 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 Reserve funds were capped at the
recommended level to push excess reserves into the Repair/Replacement Reserve. 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 ($1,567,000 in
FY19).
o Renewal & Replacement: 10-Year Target based on Projected Renewal Deficiency
($2,968,000 by FY23).
o Debt Service Reserve: Target = 1-Year Total Payment per Bond Covenants
($1,789,000 in FY19).
o Rate Stabilization Fund: Target = Floating Target based on Cash-Funded Capital
Needs
• Monitor Near-Term Revenue Stability: Recommended increases to wastewater rates
may result in changes to wastewater usage. Conservative wastewater growth has been
assumed in the analysis, but it will be important to adjust the assumptions as actual usage
information becomes available. Therefore, the City should closely monitor revenue
stability.