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HomeMy WebLinkAbout2007-07-26 - MinutesCity Council Water & Sewer Meeting Minutes July 26, 2007 Page l of 12 Member Aldermen Mayor Dan Coady Ward 1 Position 1 — Adella Gray V10 Ward 2 Position l - Kyle rt Cook CityAttorney Kit Williams � 1 Ward 3 Position 2—Robert Ferrell Ward 4 Position 2 - Lioneld Jordan City Clerk Sondra Smith ARKANSAS City of Fayetteville Arkansas City Council Water & Sewer Committee Meeting Minutes July 26, 2007 A meeting of the Fayetteville City Council Water & Sewer Committee was held on July 26, 2007 at 4:30 p.m. in District Court Room located at 100 West Rock, Fayetteville, Arkansas. MEMBERS PRESENT: Alderman Kyle Cook, Chair; Alderwoman Adella Gray; Alderman Lioneld Jordan; Alderman Robert Ferrell STAFF PRESENT: David Jurgens; Paul Becker; Mayor Dan Coody, Gary Dumas Chairman Kyle Cook called the meeting to order and said this is a special meeting to discuss the Water & Sewer rate study. HDR is here to give a report on where we are to - date. 1. Water & Sewer Rate Studv Presentation David Jurgens said Tom Gould from HDR is present to present a draft of the rate study information and then the Committee will be looking at what decisions need to be made to proceed forward with the final document. Tom Gould of HDR gave a brief background of his involvement with the City and his experience in working with other utilities over the years. He said the purpose of the presentation today is to discuss the draft results of the study. He said they have tried to simplify the technical analysis and will talk about he policy issues and policy decisions that will be needed from the Committee in order to move the study forward. He said he is the national technical director of finance and rates for HDR and he is nationally recognized for his work in this area. He works all across the country and in Canada exclusively on the issue of rates. He said he believes he can bring to the Committee some good practices on how to establish rates and he can also bring the outside perspective on how other folks look at and deal with some of these issues. That can help the Committee in making good, sound decisions as they move forward. Mr. Gould said the three components to the rate setting process are revenue requirements, cost of service and rate design. HDR did all three of these analyses within this study. In the revenue requirements section they look at the revenues that are coming in for each utility, the expenses (both operation & maintenance costs and capital infrastructure costs) to determine the overall adequacy of our rate. From that analysis they can tell whether our rates need to go up, down or if they are just right. The second part of that is that once they have determined the need for any overall adjustments, they can look at cost of service. In cost of service they try to equitably 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 2 of 12 allocate our cost to the various customers of our system. Those include both the retail customers (the outside the city customers) and the contractual or wholesale customers. From that they can figure out what it costs to service each one of those customer groups. And finally, they design rates. In designing rates he said they want to incorporate any applicable City policies or philosophies. So if things like revenue stability and conservation are important to you, they can develop that within the rate design to help the City achieve those objectives. He said as they start going through the process of developing the revenue requirements, they use the cash basis approach methodology. He showed a slide depicting two boxes. The top box lists the components that go into the revenue requirements: operation & maintenance expenses, taxes or transfer payments; debt service (which includes both principle and interest payments) and any rates that are dedicated to capital improvement projects. When you sum these four components up, you get your total revenue requirements. You back out any miscellaneous revenues and what is left over is the balance that you need to collect from your rates. The bottom box talks about how to pay for capital infrastructure. He said there might be a number of different ways to pay for capital. One way might be through revenue bonds or long term borrowing. When they do that, it comes back into the revenue requirements as an annual debt service payment. If the City goes out and borrows $10 million, it may come back as a $1 million per year annual debt service payment. Other ways to pay for capital might be grants, customer contributions or impact fees. He said there are a number of different sources of funds and HDR looked at all of them. He said ultimately when you get to the bottom line, there has to be some component of your capital infrastructure that is paid for through your rates. He pointed out a notation on the slide which says "greater than or equal to the annual depreciation expense". He explained that there is a certain amount of infrastructure on the system that already exists and needs to be maintained. A simple financial rule they use is that on an annual basis you should be funding an amount equal to or greater than your annual depreciation expense to take care of those annual renewals and replacements of existing infrastructure. Mr. Gould said an umbrella over this entire process is how the City has established rates historically and contractually. He said historically, the City has used cost of service to establish our rates. But there are also contractual requirements that we have within our wholesale contracts determining how the rates will be established. In this study HDR has used both of those components. After this brief overview of the approach used in this study, he began to discuss the analysis and where they ended up. He reminded the Committee of the three boxes discussed earlier: revenue requirements, cost of service and rate design. With regard to revenue requirements, he said that they looked at each utility on a stand-alone basis and then established what revenues are coming in to the utility, where the expenses are and where we are in terms of the appropriateness of the revenues. He commented that one of the things that he feels is very important for the Committee to think about is that the utilities are in essence multi-million dollar businesses. As such we should operate those utilities in a business -like fashion. So as we go through this process, one of the things HDR does is look at the financial planning criteria. He said they want to make sure the City is able to pay for the long term debt service, that we have adequate reserves and that we are taking care of the infrastructure on the system. Beginning with the revenue requirements for the water utility, he said they utilized the cash basis approach. They started with our existing budget, projected costs out to 2010 and then escalated costs as they went through time. He said right now in the industry, a lot of rates are driven by capital infrastructure. In this case for the water utility from 2007 to 2010 we have total capital expenditures of about $46.3 million. These are projects that are out there on the books ready to go. We also have deferred capital projects beyond 2010 and they tried to put as much as possible of those capital projects into the 2007 to 2010 time period. The rest were deferred. In terms of how we are going to pay for those capital projects, 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 3 of 12 they intend to have some bond issues. On the water side there is a $4.3 million and an $8.7 million bond issue assumed in 2007 and 2009 to fund those projects, and then because there were so many deferred capital projects in the very last year (2010), they have assumed a $21.8 million to pay for those. Whether or not that will happen is not critical at this point in time. What they are trying to do is establish rates from 2007 through 2009 and when we get out to 2010 we can take a look at those capital projects. He said out of the $46 million of total capital projects through 2010, roughly a quarter (or $11.6 million) will be funded through rates and reserves. The vast majority of capital projects will be funded through long term debt. Even with that, they show deferred capital projects beyond 2010 at roughly $12.5 million. The proposed rate adjustments they are showing through 2010 will pay for the $46.3 million of capital. But it won't pay for the $12.5 million of deferred capital beyond 2010. Alderman Ferrell asked if the study is still anticipating beyond 2010 the constant in revenue from rates and reserve funds growing. Tom Gould said they didn't project beyond 2010. But at 2010, given the rate structure that we are talking about, it should be adequate to take care of the capital projects going forward on an on-going basis. But the question is how to deal with the deferral of the $12.5 million of capital. He said he can't say what will happen with the reserves beyond 2010 because it really depends on how we deal with the $12.5 million. He said there is an excess amount of reserves. But there is going to be sufficient funding at that point for a lot of renewal and replacement projects. There will be over $2 million a year available to fund some of those things. On the sewer revenue requirements he said they took a similar approach, but the dollars are much more manageable. He said in terms of the future bond issues we only have a $7 million bond issue in 2010. This is to take care of some of those deferred items that we have had in the past. The total capital expenditures for sewer for 2007 through 2010 are roughly $22 million. The majority of that (about $15.3 million) will be funded through rates. As with water, there are some deferred capital projects beyond 2010 totaling about $10.5 million. These are projects that couldn't fit into the 2007-2010 time period. He said if they included these into the rates from 2007 through 2010, the projected rates would be higher and they were uncomfortable with that. Mayor Coody said in our street programs we defer street improvements until we can fund them. He said he believes this is the same kind of situation. Tom Gould said that is exactly right. He said one of the reasons we have the deferrals we do have is because we haven't had adequate funding in the past to do those capital projects. Continuing, he gave a quick summary of the water revenue requirements. He reviewed information presented on a slide for 2006. The rate revenues for the water utility were roughly $14.3 million from all sources of revenue. For expenses (O&M, taxes, net debt service and capital projects funded through rates) the total is roughly $14.5 million, leaving a shortage of about $100,000 in 2006. In 2007, he showed that they had begun to implement some financial policies in terms of funding of capital projects through rates. He said they are trying to strengthen the amount of capital that is funded through rates. There are a couple of reasons for this. One reason is that it helps to pay for those deferred capital projects or the renewal and replacement of existing facilities. But also, as you go out and issue debt, it strengthens what is called the debt service coverage ratio. That looks very good to the bond folks because the stronger your debt service coverage ratio is, potentially the stronger or better financial rating you will get and your interest rates will be lower. So HDR is trying to position the City such that we can help minimize the cost of borrowing as we go to the marketplace. He said these figures are 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 4 of 12 on a stand-alone yearly basis so any adjustment that is made in 2007 or 2008 would carry over into the following year and reduce that deficiency. But if we do absolutely nothing and go out through 2010, the annual deficiency would be $3.5 or $3.6 million. He pointed out that on the slide the numbers continue to go up on the rate revenue line at the top. He said that is not an assumed rate increase, it is simply a function of customer growth on the system. They have built in some assumptions about customer growth. Alderman Ferrell asked if any of the impact fees that have been received so far were captured in the sources of funding. Tom Gould said the impact fees don't show up as sources of funds. They are used to pay for the capital projects or to pay for debt service. That is the legal use of those fees. If you put them up under the rate revenues or miscellaneous revenues, they could appear to be used to pay for operations and maintenance which is not a legal use of those fees. Alderman Ferrell asked if there would be a graphic to illustrate their application. Tom Gould said he can certainly do that. He doesn't have it in the slide presentation at this point but he can put something together for the Committee. Alderman Ferrell asked if Mr. Gould has an idea of what that amount is. Alderman Jordan said he thought it was about $3.5 million. Tim Conklin said he thinks the water and sewer impact fees collected is around $4 million since inception. He said sewer is the higher fee. Tom Gould said from his information we have about $1.7 million of impact fees for water and have used about $1 million within this study to pay for growth related capital. The advantage is that is a million dollars that won't have to come out of rates or out of long term borrowing. Mr. Gould continued with his presentation. The next slide he said showed the deficiencies in any one year (assuming no rate adjustments). In 2007 in order to bring the figures into balance, we would need to adjust our rates by about 8.4%. He said the average customer bill is $19.72. With this increase the bill would be roughly $1.50 higher. In 2008 the figures show that overall there would need to be about a 14% increase. This would raise the average customer bill to $22.28. To give some perspective to these numbers, he said that he lives in Seattle and his bill is about five times that amount. He said the water rates we have in Fayetteville are exceptionally low. He said from his perspective they are very attractive and very affordable. He said this is a function of a number of things, one of which is good management. But he also said part of the reason for the low rates is that we haven't been paying for all the deferred capital in the past. He said even with these potential adjustments, if we go out to 2010 and borrow the $21 million, the rate for the average residential customer will be going from $19 to $25. Alderman Ferrell asked Mr. Gould how we compare to communities around the country which are the size of Fayetteville and have an abundance of good water where there is no agricultural related irrigation, etc. Tom Gould said our rates are exceptional. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 5 of 12 David Jurgens said he just got the report today that includes all Arkansas water systems. He said the report lists systems by rank for 5000 gallons of water usage. Out of 199 systems, we are number 69 (with 1 being the lowest rate and 199 being the highest). So we are in the top 25% of the lowest costs in the state. Alderman Ferrell asked if these proposed rates capture the increase from Beaver Water District. Tom Gould said that they do. He also pointed out that the problem with comparing ourselves to other cities is that we don't know how they manage their system. What we do know is that we've included in this rate study all the O & M expenses and a good capital program and the rate is still very affordable. He believes the citizens should know that this is a very good value for their money in terms of the product they are getting. He said they have prepared a proposal of how the rates might be adjusted to get where we need to be. In this proposal, the first water rate adjustment of 8% would occur on January 1, 2008. The second, 6%, would be in 2009. This translates to roughly $1.56 more (average monthly bill) in the first year and around $1.27 in the following year. The total combined impact is about $2.83. Alderman Ferrell asked if this is assuming nothing on inflation until 2010. Tom Gould said those are included in the rates. Paul Becker said inflation was impacted in the cost projection. Tom Gould said there is inflation already included within the projections for 2008-2009 costs. David Jurgens said that what this demonstrates is that we would be proposing specific set total rate adjustments for 2008 and 2009 and after that we would start the inflationary number of 2% to 3% per year as a built-in. We would identify that now so we wouldn't be going through the 8% increases again. Mayor Coody said our rates were flat from 1997 until 2003. We had a rate increase in 2003/2004. The rates have stayed flat since then. He said he asked the staff to look into how our rate adjustments compare to inflation. He called attention to a slide that showed if we had simply adjusted for inflation each year we would still have fallen behind every year. The rate increase in 2004 just matched inflation. If the Council adopts the rates being proposed now, all we would do is come up to within 13 cents per bill of matching inflation. He said staff will recommend to the Council that we do what we have been doing in the Solid Waste Division which is adjust for inflation every year. Tom Gould pointed out that when you have inflation outpacing your rates, you are paying for operation and maintenance costs and those dollars are not available to pay for renewals and replacements (capital projects) during that time period. Mayor Coody added that this makes the "deferred" number out in the future bigger than if we were simply keeping up with inflation. Tom Gould said he believes there is wisdom in these small adjustments. Returning to his presentation, he talked about the sewer utility. He said there is roughly $12.7 million coming into this utility on an annual basis with total overall sources of funds at about $13.2 million. Expenses 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 6 of 12 are currently at about $13.3 million (made up of the four components of O&M, taxes, debt service and capital projects funded from rates). He pointed out that the debt service presented at this time is only that portion that is paid for through rates. The sales tax funded debt is totally separate. He discussed the difference between the 2007 O&M and the 2008 and 2009 O&M. He said there is an assumption in these figures that we will increase our O&M costs for the treatment plant by $1.5 million as it starts to come on-line and then when it is fully on line. It will ultimately be an incremental $3 million of O&M costs. Another item that stands out is the debt service cost. This is that deferred capital that we are funding at the very end of the period. Translating that into what this means to an average customer, we are fine in 2007 but in 2008 we do have a deficiency and in 2009 the deficiency is roughly 20%. He said when the City had the sales tax vote, HDR did an analysis that basically said even with the approval of the sales tax, the overall adjustments would need to be about 20%. Once all the calculations were complete on this study, that number proved to be accurate. Also as part of that process, we said that we would not increase rates through 2008. So while we are showing a deficiency in 2008, we aren't proposing any changes at this point for the sewer rates. We will wait until 2009 to make those adjustments. He said that with the adjustment in 2009, the average residential customer would see an increase of about $4 per month. He said the numbers presented are the pure deficiencies on an annual basis. Ultimately, if you go out to 2010 and fund all those projects you would have roughly a 25% deficiency and the average residential rate would be at about $27. He said in his experience as he works around the country wastewater rates are much higher than water rates. He stressed that the estimated increase of $4 per month for the average residential customer is an overall adjustment and not necessarily how it will fall out for all residential customers. In response to a question from Mayor Coody, Tom Gould said HDR sent a letter to the City a year or so ago talking about the 20% estimated rate increase. He said he could provide that letter to the Committee. Tom Gould said that the revenue requirement analysis told us that overall we need an 8% and a 6% adjustment for water and for sewer we need a 20% adjustment. Now the question becomes cost of service. With cost of service we are trying to equitably allocate those costs to the various customers on our system. He said HDR has taken great care to do this in a way that the customers feel comfortable and understand how the costs are being allocated. He said there are some contractual considerations in cost allocation. Contracts specifically talk about methodologies to be used, the facilities to be allocated to the wholesale customers and the fair rate of return you can earn on those customers. That has all been incorporated into this cost allocation process. He presented a slide showing a summary of the water cost of service analysis. He talked about the revenues at present rates and said they had broken out the inside the City or retail customers of Fayetteville (between residential, commercial, industrial, government and irrigation), then outside Fayetteville customers and the wholesale customers. He said when you look at the total revenues on the system, there is roughly $12.8 million split between the various customers. He pointed out a line called allocated costs ($13.8 million including the 8% adjustment previously discussed for water). He said they tried to equitably allocate that cost between the various customers the City serves. In addressing the question of why costs would vary between the various customers served by the City he gave this example. He said capacity use is a huge issue on a water system. You size facilities around meeting peak use requirements, particularly in the summer time. Those customers that create larger peaks on the system in the summer time should have a greater proportion of the capacity related costs. Those that are more flat, like industrial customers that use the same amount of water on a daily basis, should have lower rates on a per unit basis because they don't use as much of the peaking system as other 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 7 of 12 customers do. He said overall we have a deficiency of 8% but by class of service, it varies, meaning that it looks like if you want to have cost based rates, residential rates would need to go up 4.3%, commercial could go down a little bit, government and industrial would go up quite a bit, and irrigation would need to go up a lot. Outside City customer rates can go down and wholesale rates would be up a little. He said these results are fairly similar to what we saw last time when the cost of service study was done. He said cost of service is really the starting point of trying to make some decisions about how we want to deal with our rates. We don't necessarily have to follow cost of service for these inside City customers, but for the outside City customers he believes you need to because there are contracts in place and we can earn a fair return on our investment to serve them. He said to get an overall 8% adjustment, inside customers would need to go up 11.1 %, outside the City customers would need to go 6.4% and wholesale customers would go up about 1.9%. He displayed a chart showing these relationships. He said percentages don't tell the whole story. He explained that currently the system average is about $3 per 1000 gallons. He reviewed the chart and explained some of the numbers and the reasons the numbers came out as they did. One of the things he mentioned is that the wholesale rate is lower than other rates because they have their own distribution system and don't use ours. They are paying only supply and transmission costs associated with their usage. He then spoke of two different options for what the City can do with this information to make the adjustments. The first option is to follow cost of service. The second option is to follow the average for retail with the exception of irrigation. If we did that it would be roughly 11.1 % for the retail customers, 58% for irrigation and for the outside City customers we would follow the cost of service. David Jurgens said we have not billed irrigation as a separate rate before. The water supply has been more than adequate for many years but now that folks are putting in irrigation systems, it has increased the demand to the point that we've received complaints that the water supply doesn't provide enough for their irrigation system. That's an example of the peak demand. If you go to any of the higher areas in town and you watch the irrigation systems, they don't spray as far as in low areas. He said irrigation meters have become much more prolific than they were ten or fifteen years ago and the demand to supply the capacity needed for irrigation has required both replacement of existing pipes as well as significant increases in the size of new pipes. Of all of the uses of water, irrigation is absolutely the least essential use. But we are sizing our water system to meet that peak demand for irrigation. That is costing us a lot of money and it is why we wanted to break irrigation out as a separate item. He said it is the "top layer of the cake" that stresses the system the most at the worst possible time. Tom Gould talked about the issue of the industrial customers. He said we were showing in the cost of service the need for a larger than average adjustment. He said if we can reconcile in our minds that there is a trade off between cost of service and providing affordable water to the industrial community, then option two will fit the bill. If we can't reconcile those two things, then option one is where we are. He said the staff recommendation is option two in this case. Regarding outside City and wholesale customers, he said there may be a leaning toward raising those rates to the overall average but he said that would be the worst thing that we could do. He believes that we need to follow cost of service because for the outside City and wholesale customers we have allocated the costs and we've earned a fair return on our investment to serve those customers. The reason the outside City customers show a decrease in rates is that we are charging them the highest amount on the system. He feels it is appropriate and fair that we get their rates back to where they need to be. The same thing is true on the wholesale customers. We have contractual requirements that limit what we can do in terms of changing their rates so what 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 8 of 12 they (HDR) have done is try to provide a fair assessment of what they believe the adjustments should be. Mr. Gould then began to review a chart giving the breakdown of the sewer customers. In 2009 we are looking at a 19.9% adjustment. He said the industrial customers have the largest adjustment for retail customers. He said this follows what was seen in the previous study. He said the outside the City customers have been split between Farmington, Elkins and other outside customers. The reason is that we have a contract with Farmington which has some different provisions than the other customers. Elkins also has a contract and the provisions are slightly different than Farmington's provisions. He said when you look at combining the customer groups, inside the City is almost right at the system average, Farmington would be slightly above average, outside -other would be about the system average and Elkins would be slightly below the average. In essence this confirms those adjustments that were made recently and the rebates that were given. It says that everyone's average is pretty close to the overall system average. Mayor Coody said that one reason staff recommends option two is that it follows current City policy. He said a couple of years ago there was a debate between the industrial, commercial and residential users and the City Council came up with a balance of what the charges would be. This option maintains that balance. Alderman Cook said he thinks there were some comments at the time that they begrudgingly agreed to that but that the next rate study would not necessarily follow that same policy. Mayor Coody said the Council certainly has that option but he wanted to bring out that aspect of the situation. Tom Gould reviewed the figures for the sewer rates. He explained that the difference between these outside City customer rates and the inside City customer rates is the rate of return. He said we earn a fair rate of return on the outside City customers which is significantly higher than the inside City customers. He said the reason the Elkins numbers are so low is because they are not allocated a portion of our collections system. Given all this information, Mr. Gould said they have come up with three options. Option one suggests following cost of service. Option two is averaging the inside City customers and following cost of service for outside City customers. Option three is trying to phase in the industrial customer without going all the way to cost of service. This would say that residential would be not as high; commercial would be a little bit higher and industrial would be about 30%. Outside the City customers will follow the cost of services because that is what the contractual requirements state. At a staff level, they are recommending option two but if the Committee wishes to look at other options, that information is available. Mr. Gould continued that as we start designing rates, there are things that we need to think about. He reviewed a list of all the things that go in to designing rates. He said one thing to understand from the list is that the City can't do all these things at the same time. As an example he spoke about conservation oriented rates. He said sometimes you need a fairly complicated rate to achieve this. That might violate the first principle which is rates that are easy to understand. That's the kind of difficulty you get into when you start to design rates. One of the things the Committee will want to think about is what items on this list are important to the City. These items should go to the top of this list. A couple of things that typically go to the top are rates that yield their total revenue requirements and rates that are cost -based because people want to just 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 9 of 12 pay for what they use. But also people want rates that are fairly easy to understand and administer. Also, if it is important, we might want to think about conservation and how to deal with that. He said the City currently only has one rate schedule for retail customers for water and for sewer. He showed a slide of what that rate looks like. There is a meter charge, based on the meter size, and then you have consumption charges. All customers have the same consumption charge of $2.81 per thousand gallons for 0 to 10,000 gallons; $2.42 per thousand gallons for 10,000 to 300,000 gallons; $1.76 per thousand gallons for 300,000 to 5,000,000 gallons and $1.60 per thousand gallons for over 5,000,000. He suspects not many residential customers consume 300,000 gallons of water a month so most residential customers probably fall within the first two brackets. Commercial customers will mostly fit within the second bracket and industrial customers will fit more into the last bracket. This schedule is okay but there is a problem. One of the things they have seen in this rate study is that the reason the industrial customers need a large increase is because this last portion of the current rate structure is set too low for the industrial customers. The price is too low in relationship to the cost. He said some utilities design their rates to have separate rates for individual customer classes of service. In other words you will have a rate schedule for residential, a rate schedule for commercial and a rate schedule for industrial. This is probably the most generally accepted way that rates are established today. He said we do know that cost differences occur between the various types of customers. So if we can design rates with separate schedules, we can then do a better job of matching up the price to the cost of serving those customers. At the same time, we may think about using different types of rate structures (such as declining block where the price goes down as you consume more; a uniform block where we all pay the say price; or an increasing block where the more you use, the more expensive it is). So you can use these different structures for different classes of service if you have different objectives. As an example, he said he has clients that are really interested in conservation for residential customers and they may use an increasing block rate. For commercial and industrial customers, they may use a declining or uniform block rate. You have greater flexibility in how you design your rates. He said ultimately what is needed now is some kind of policy decision from the Committee as to whether we want to maintain that one single rate structure and continue forward with that or think about establishing rates for individual customer classes of service. It can start off with everybody having the same rate, but from an ordinance perspective it would look like individual rate schedules and it would ultimately give the City greater flexibility down the road. Alderman Ferrell summarized his understanding of the process. He asked what period of time HDR usually looks at in establishing rates. Tom Gould said typically HDR suggests that rates be established for a two to three year period at the most. He said he is uncomfortable when clients say they are going to try to project costs out five years and establish rates that far in advance. Nobody can forecast that accurately to know what the interest rates or other factors might be in five years. He said he feels a City should take a look at their rates every year to make sure they are adequate and that they are staying on plan and then do a more comprehensive study every two or three years. He said that now there has been a model established and it should be fairly easy to update this process. He also said if we follow the recommendations that come out of this study, we will find that the customers will be back closer to cost of service and we won't see all these big swings. He said the short answer is that we should look at the rates on a comprehensive basis every two or three years and maybe use HDR (or an outside firm) every five years. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 10 of 12 David Jurgens said he thinks there is a legal obligation for sewer to do the rate study every five years. Our bonds require an every three year operations analysis which is different from this but somewhat related. Also the Council has passed a resolution for doing a rate study every three years. Mayor Coody added that if the Council does add the kicker for inflation every year that is going to guarantee that we don't fall behind and need the big jumps. Tom Gould continued with slides of residential, commercial, industrial, government and irrigation water rate designs and reviewed the options. He also showed the same information for outside the City and wholesale rates and options. He then reviewed the sewer rate designs and options. He said that closes off the discussion of revenue requirements, cost of service and rate designs. He said another item that came up during the rate study process was fire hydrant rates. He said they are proposing the elimination of these rates. It is a very minor level of miscellaneous revenue (about $25,000 a year) and really isn't worth the effort of trying to bill and track them. Within the study these rates have been eliminated and those costs have been rolled into the rates. He believes this will administratively save money in the end. He also emphasized that there will be no indexing until 2010 if the Committee agrees to that and they would use the same approach at that time that the City currently uses for the solid waste utility. David Jurgens said the one caveat to that is that it is possible (based off the law) that for the sewer we would have to set a fixed number and would not be able to use a variable number from a CPI index. He said they have not yet had a chance to speak to the City Attorney about what the code says. Tom Gould said we would also have to take a look at the contractual customers to see what their contracts say as to whether we could do something like that. But we could probably get an amendment to those contracts if it is needed. In conclusion he said that the options have been presented and the rates are in a draft form. Nothing is final. He said if the Committee has any ideas or concepts they want him to take a look at, he will gladly do that. He said all the options we have looked at are designed to collect the overall 8% for water and 20% for the sewer side. In order to move ahead, they will need some policy direction from the Committee. He outlined five policy questions for the Committee: 1) need a policy decision on staff recommendation to adjust the overall water rates by 8% in 2008 and 6% in 2009 and by 20% in 2009 on the sewer side; 2) need policy decision on staff recommendation to follow option two for both water and sewer to deal with the adjustments between classes of service for cost of service; 3) need a policy decision on staff recommendation to examine retail rates by individual customer class of service to establish customer classes of service for rate design; 4) policy decision on elimination of fire hydrant charges and 5) recommendation regarding indexing of rates. Alderman Cook asked if there are any other changes in fixed fee charges that a customer will see on their bill other than what has been discussed here. David Jurgens said the State Clean Water Act charges are going up 5 cents. This hasn't been established by law but it has been agreed upon. No date has yet been established for this change to take affect as far as he knows. Alderman Cook asked about what a residential bill would look like after these changes. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 11 of 12 David Jurgens said he had printed out each of the Committee member's average bills to put this into perspective and extended it out for a five, ten and fifteen percent increase. He distributed copies of a table that he said had been broken down by five percent increments all the way out to 50%, which obviously we are not going to do. He said that is what each of their bills would look like, including solid waste, sewer and water but it does not reflect the 5 cents for the Safe Water Act. He said with average monthly water consumption of 5300 gallons from 2006 and average sewer consumption of 4400 gallons, the bill would be $57.71 (also including solid waste). A 5% increase would make that $60.14 and a 10% increase takes it up to $62.59. He said he will get the information for the Committee showing the proposed changes of 8%, etc. He said we are looking at about a $2.40 increase for the average customer. Alderman Cook said he appreciated all the information. He said since this is the first time the Committee has seen all this information he isn't sure they are prepared to dive into a real discussion. He recommended that the Committee take some time to digest all the information, talk to the people they need to talk to and get back together for a working session fairly soon. In the meantime, if anyone needs any more information from Mr. Gould or staff, he would like to get it out on the table now. Alderman Jordan said he totally agrees with that. David Jurgens said there is a regular Water & Sewer Committee meeting scheduled for August 2 and this could be put on that agenda for discussion if the Committee wishes that. He said he will be going on military leave from August 9 through 25. He said they did not expect any answers tonight but believes all the information has been presented. Alderman Cook said the last time we went through this process we did meet with industrial customers a few times. He said we will be meeting with the Chamber and the industrial customers at least once if not more, whatever it takes. He also said we will take public comments and all meetings will be open. David Jurgens said staff figures that this will go to the full Council in September for the public hearing and meetings. That gives enough time get it ready to maybe pass something in October and have it take affect in January 2008. Alderman Cook said he would like to hammer it out as much as possible at the Committee level. Alderman Jordan said he would like to do some careful study of the information and talk to some other people. Alderman Ferrell said he thinks it was a good presentation. Alderwoman Gray agreed. Mayor Coody said this seems like all good news. He said we knew the rate changes were coming and everything has fallen into place exactly as predicted so there are no surprises. He said he believes this shows good work on the part of the staff and on the part of HDR. He thanks them for their hard work. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org City Council Water & Sewer Meeting Minutes July 26, 2007 Page 12 of 12 Alderman Cook said if the Committee needs more information or has any questions for Mr. Gould he assumes they can go through staff David Jurgens said either Paul or himself can help with any questions. He said if there are specific questions on how much average bills are, staff has gone through and analyzed the top twenty users. Alderman Cook said he is curious about user classes and what our users are at this point. David Jurgens ran through the top twenty water users: Pinnacle Foods (industrial), University of Arkansas, Tysons, Superior, West Fork, City of Fayetteville, Elkins, Washington Regional, Mt. Olive, and Highland. This group includes three user groups: industrial, government and wholesale. He said there are several commercial users in the top 20. He said he would provide this list to the Committee. Alderman Cook said he is also curious on the number in each classification and their volumes. Tom Gould said that is in the detail of the material given to the Committee. Alderman Ferrell asked if we have a number for what the average citizen uses for sewer and water in a month in the residential class. David Jurgens said from 2006 the average water usage is 5,300 gallons. The average wastewater is 4,400 gallons. Paul Becker said there are a lot of variables in that but that is the best they can come up with. Tom Gould said one of the things we will find is that when the bill is only $20, there is not a lot of financial incentive to get people to conserve. He said the City might want to think about other ways to achieve conservation, particularly for outdoor use for residential customers. He said there are ways to provide rebates for various lawn irrigation systems, etc. But price isn't going to be a major issue in terms of how you achieve conservation for residential when the average bill is only $20 a month. 2. The Next Water/Sewer Committee Meeting The next Water/Sewer Committee meeting is scheduled for Thursday, August 2, 2007 at 4:30 p.m. There being no further business, the meeting was adjourned. 113 West Mountain 72701 (479) 521-7700 (479) 575-8257 (Fax) accessfayetteville.org