HomeMy WebLinkAbout2007-08-28 - MinutesCity Council Water & Sewer Meeting Minutes
August 28, 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
August 28, 2007
A meeting of the Fayetteville City Council Water & Sewer Committee was held on August 28,
2007 at 6:30 p.m. in Room 326 of the City Administration Building located at 113 West
Mountain Street, Fayetteville, Arkansas.
MEMBERS PRESENT: Alderman Kyle Cook, Chair; Alderwoman Adella Gray;
Alderman Lioneld Jordan
STAFF PRESENT: David Jurgens, Paul Becker; Gary Dumas
Others Present: Tom Gould, HDR Consulting
Chairman Kyle Cook called the meeting to order;
1. Water and Sewer Rate Studv Discussion
Alderman Cook said he had asked Tom Gould with HDR Consulting to be present tonight to
answer any questions the industrial customers may have. He said no decisions have been made at
this point; the Committee is still gathering information and hearing from customers. He said
ultimately this Committee will make a recommendation to the City Council. The City Council
will then review the study and there will be a public meeting at that point.
Tom Gould started off by reviewing some of the slides presented during a prior meeting. He
said he also wanted to talk about some of the key policy issues for the rate study. Those policy
issues are whether the City wants to have cost -based rates or provide certain levels of subsidies
to customers and what the basis for that might be. Also there is a need to review rate structures
and also review the issue of whether we should have rates by customer class of service.
Ultimately there are some key decisions that need to be made and policy direction to be provided
in order to finalize the study and take it to the full Council. He said he wanted to make very clear
that he has no set position in terms of what plan the City should ultimately adopt for final rates.
What he is here to do is to help everyone understand the process, answer any questions and help
the Committee make decisions about how to establish the rates.
He began the presentation by reviewing the water utility. He said there are some fairly significant
capital maintenance issues, as well as some deferred projects in this particular utility. He said
the revenue requirements indicate the need for immediate rate adjustments and a two-year phase
in is proposed for those rates. He said the cost -of -service study talks about how you take the total
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revenue needs of the utility and equitably allocate them between the various customer groups.
When that was done, it was found that there were some cost differences associated with serving
the different customer classes (residential, commercial and industrial). The rate designs that have
been proposed maintain the current rate structure but provide an option for the cost -of -service
issue, to try to get customers a little closer to what the cost is to provide the services to them.
Another issue that has come up since the last meeting is the issue of the impact fees. The
question on the table is what impact it would have on this particular study if the City adjusts our
future impact fees. He said his opinion is that given the current building climate and where the
mortgage industry is today, he's not sure raising the impact fees would significantly change the
amount expected to be collected over the short term. He said he is comfortable with the use and
projection of the impact fees used for this particular study. He said he would be glad to talk
about this in more detail if requested. He said he feels that with the building industry now, we're
not going to have as many building permits as we have historically seen and so even if the
impact fees go up, he thinks the revenue should be forecast in a conservative way. He continued
with a review of the information covered at the earlier meeting. He said an 8% adjustment in
water rates in 2008, a 6% adjustment in 2009 and an indexing of rates (inflationary adjustment)
estimated at 3% has been discussed. He said as we go forward it is important to understand that
this 8% adjustment in 2008 is for the overall water utility and it is prior to any discussions about
cost -of -service or adjustments between various customer groups. He said the rates for outside -
the -city customers and wholesale customers are the same as cost -of -service under all options. We
are charging them the cost of providing them the service. It is on the inside -the -city customers
where we have some choices and policy decisions to make. Option 1 is the option where we tried
to pass through the cost -of -service results. Option 2 is to try to levelize those adjustments across
all customer groups, with the exception of irrigation. He displayed a slide showing a declining
cost function associated with the water utility. That is, when you look at the average unit cost to
serve a residential customer versus a commercial customer versus an industrial customer, there is
a declining cost function. Our current rates are designed with a declining block rate structure —
the more you use, the cheaper it becomes. He pointed out that while the industrial customers
have one of the larger increases on the system, even at the cost -of -service it is still one of the
lowest per unit -costs on the system.
On the sewer utility, we have the new treatment plant startup with significant capital and
deferred maintenance needs. An adjustment was proposed for 2009 and none in 2008. He said,
just as with the water utility, there were some differences in costs associated with serving the
various types of customers on the retail system. The study provided three options in this case.
There was also discussion about maintaining the existing rate structure and the impact fee
situation. He said even if the impact fees go up, there could be limited opportunities for those
revenues to go up, at least in the short term. Over the tong run, if the impact fees go up and
growth eventually picks up, it will defer rate adjustments down the road. As the fees come in
they can be used to mitigate the use of long term borrowing on the system. This would
eventually lower rates over time. He displayed a slide of the proposed sewer adjustment and one
showing the results of cost -of -service for the sewer utility. As with the water utility, under all
options we are charging outside city and wholesale/contract customers their cost to be served.
There are options and policies to be considered for inside -the -city customers. Option 1 is to
simply follow the cost -of -service results and charge customers what we think it costs to serve
them. Option 2 is to follow cost -of -service results, but increase the inside -the -city customers on
an average basis (roughly 19.8%). Option 3 is an attempt to try to transition in the cost -of -service
results for the retail customers. He pointed out that the difference between the chart for the water
utility and the same chart for the sewer utility is that on the chart for the sewer utility the cost
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function between residential, commercial and industrial is relatively flat. So the declining block
rate structure in place today isn't as steep as what you might think it should be
Mr. Gould said it is easy to get hung up on numbers and we could get lost in numbers pretty
easily. He said he would like to have the Committee think about how to establish the rates from a
philosophical or policy perspective. He outlined some key decisions that need to be made in this
process in order to bring this forward to the City Council. The first key decision is concerning
the revenue requirements — do you accept the proposed overall adjustments, size and timing, for
water and sewer. The second decision is regarding cost of service. The key issue here is how we
deal with those customers that have higher than average adjustments such as the industrial
customers. Do we maintain the existing philosophy of providing a subsidy to industrial
customers to aid in economic development or do we move toward cost -based rates? Another
issue is the large adjustment on the water utility for irrigation use and the cost -of -service results.
Ultimately we need to make a determination of the final adjustments between each class of
service. If we can resolve items two and three then the adjustments by class of service will pretty
much fall out. He said we also need to talk about rate design. Right now what we have is a single
customer class of service (one rate schedule that serves all the customers on the system). He said
we have to determine if that is appropriate or if we should move to multiple rate schedules (a rate
schedule for residential, for commercial and for industrial, etc.) The final issue is whether we
want to maintain or revise the current rate schedule. Currently we have a declining block rate
structure — the more you use, the cheaper the rate. He said throughout the discussion of these
issues he will try to give some perspective from other clients he works with across the United
States. He said he has also included some information from the American Waterworks
Association, such as surveys they have done and how other people look at these issues.
He said the first issue is the overall revenue adjustments. We need to make a determination about
the overall size, percent and timing of the adjustments for water and sewer. He said last time he
presented fairly detailed information about the revenue requirements. Revenue requirements
include the operating cost of the water and sewer utilities, along with the capital costs. The
adjustments for the water utility, in his opinion, are very reasonable given the backlog of
deferred maintenance we have on our system. We still have roughly ten to eleven million dollars
of deferred maintenance on the water system, even with the adjustments we are discussing. From
that perspective, the adjustments seem reasonable. He said the 2009 sewer adjustment won't take
affect for another sixteen months so folks have a lot of time to think about the issue in terms of
how they may change their behavior or how to deal with this. He said he thinks this adjustment is
needed and prudent and justified. Beyond 2010 we have assumed inflationary adjustments. In
summary, he believes the overall adjustments for each utility appear reasonable and financially
prudent.
On the cost -of -service results the issue is whether there should be subsidies (for example to
promote economic development) between customer groups. The cost -of -service study showed
for both water and sewer that the industrial and irrigation customers needed greater than average
adjustments. The City has a long history (going back 30 or more years) of attempting to provide
for economic development in the community and helping industry remain competitive in their
marketplace. The interesting thing is that the marketplace has expanded. The market is not just in
Arkansas or even just in the southeast United States. We've become a global economy so there
are issues associated with that and reasons why we need to think about this particular issue long
and hard. The key question is, should the rates maintain the existing philosophy of providing
subsidies for economic development or should the City move to strictly cost -based rates or
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something in between. In trying to find answers for how to resolve this issue, he mentioned the
idea of continuity of philosophy. Continuity of philosophy basically means to maintain the same
philosophy over time. That doesn't necessarily mean that you don't change your philosophy, but
that you try to transition your philosophy in a way that works for your customers. So if the City
wants to continue with its philosophy, he believes that is appropriate and fair. He talked about
the "plus or minus 5% rule" and explained what it means. He said when he does a cost of service
study, he knows it is not a precise science. He believes that if customers are within plus or minus
5% of the overall adjustment you're close enough to your cost of service to be fair. The problem
is the industrial customers are quite a ways outside of that range. That is what he typically calls
the "range of reasonableness". Now the question becomes how far you want to go outside that
range. If you want to establish subsidies for your industrial customers, you want to think about
trying to establish them somewhere outside of that particular boundary so you have some sense
of what seems fair and reasonable. In other words, we decide we are willing to do this for the
industrial customers and understand the importance of it, but we have to have some philosophy
or framework about how much of a subsidy we want to provide. The other question that will
probably pop up is whether a utility must adopt cost -based rates legally. Though he is not an
attorney, his understanding is that you can take into account things other than strictly cost of
service to establish your rates as long as you have a reasonable basis. And economic
development has always been a reasonable basis for establishing rates other than strictly cost -
based. He then covered the dangers of not adopting cost -based rates. He said the problem you get
into is the exact issue we have today — if we are going to provide a subsidy, how much of a
subsidy should we provide. If you follow cost of service, the decisions become pretty easy.
Another thing he hears as he travels around the country is what is more important to residential
customers — slightly lower water bills or jobs within the community. In essence that is the issue
here. If we increase the industrial rates to full cost of service, the impact is that the residential
customers will have slightly lower water bills. The question is what level of subsidy is
appropriate and does it really make a difference for these customers. Industrial customers are
fairly large consumers of water and large employers within the community so trying to find the
balance between what is cost based and what will help them from an economic perspective and
help keep jobs in the community is a pretty important balancing act. He said this is a policy
driven question and the committee will have to figure out the balance.
Mr. Gould said another comment he hears is regarding timing. He said one of the things he
thinks about is the "double whammy" of making cost -of -service adjustments when overall rates
are increasing at the same time. As an example, on the water utility we have rates going up 8%
followed by another 6% adjustment. If you're trying to make cost -of -service adjustments at the
same time, it is a double whammy as far as its impact on customers. What he sometimes suggests
is that you wait and make cost -of -service adjustments when you're doing the inflationary
adjustments. That way the impacts are much smaller and more manageable to work with for the
industrial customers. The last point he made is that when possible, if cost of service is desired,
gradualism or some form of transition is always preferred. It is much easier on everyone in terms
of how to deal with this issue. If you want to move toward cost of service you need to do it in a
way that works for everyone. He said there is no right or wrong answer to this issue but
ultimately the City must be able to justify its final position to its customers. With regard to
irrigation, the issue is that the cost of service indicates the need for a very large rate increase—
roughly 58% and that number scares even him. He said the large rate increase is a function of
seasonal use and high peak demands. He said these are customers who don't necessarily use
water in the winter time but they use a lot of water in the summertime that places large peak
demands on our system. From a cost perspective, we size and design a lot of our system around
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meeting those peak demands. Irrigation users have one of the highest per-unit costs in the system
because of the large demands they place on the system. He talked about indoor versus outdoor
use and efficient versus inefficient uses of water. He said it is easy to be efficient indoors with
low flow shower heads, toilets, etc. But many times outdoor use can be very inefficient. People
put a sprinkler out, walk away and come back in two hours. Or they water in the middle or
hottest time of the day when you get a lot of evaporation. People tend to over water also. So
when you look at where you can gain conservation on your system, outdoor use is typically the
place where you have the highest ability to gain. There is also something called nondiscretionary
and discretionary use. We all know that we need a certain amount of water to survive — to drink,
bathe, for food preparation, and so forth. That's nondiscretionary use. Discretionary use is things
like using water to hose down your driveway or to wash your car. He said he is not suggesting
that people stop watering their lawn or doing the other things they do outdoors. But what we
want to try to do is provide a price signal about efficient use. The other issue is availability of
water supply resources. There are competing uses for water. Economists think about something
called price elasticity. In other words, when the price is raised on something, how much will
people respond to that price by reducing consumption? If you look at outdoor use and irrigation
use, from a water perspective it is the most price elastic of all uses. It has the highest price
responsiveness. What we don't want to do is think about this from a punitive perspective.
Ultimately he believes the 58% adjustment is way too high at this point in time. We need to think
about how to transition that in and he said he has some ideas about that.
Darrell Froud asked if the irrigation rates are for people who have a second meter.
Tom Gould said that they are.
Darrell Froud asked how many people have second meters.
David Jurgens said he believes about 1200 to 1300 people have them.
Darrell Froud said so everybody else uses their regular meters. He asked if that price per gallon
will be even more than this rate.
Tom Gould said we are going to get to the issue of rate design and conservation for those people
with a single meter.
Darrell Froud asked how many total customers we have.
Paul Becker said about 16,000 residential customers are on the system.
Tom Gould said that while cost of service is a noble position and a good philosophy, the 58.2%
is too much for one adjustment for any class of service. He said he believes that the proposed
increase to irrigation may be reduced to a more reasonable level with no negative impact to other
retail classes of service. In summary, he thinks the City should consider reducing the irrigation
rate increase to a more reasonable level, maybe about 20% for the first adjustment and continue
to adjust toward cost of service over time. Or, more importantly, think about working with some
of these customers through conservation audits for outdoor use of water to reduce usage. The
next question is what we do with the other classes of service. We need to determine the final
inter -class rate adjustments. Again, the outside -the -city and wholesale customer rates have
already been determined. They are based upon the cost of service and we are charging the
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maximum we can charge. The inter -class adjustments for retail will be determined based upon
what the Committee's decision is about the City's philosophy on Issue 2 — the industrial
customer and on Issue 3 — irrigation. The determination on these issues may help to resolve the
remaining couple of issues, which is whether to have a single customer class of service or
multiple rate schedules. And also, do we maintain or review the current rate schedules.
Mr. Gould said the issues are these: should the City have a single rate structure for all retail
customers or individual rates or rate schedules for different types of customers served. He said
when you have the adjustments by class of service, it implies that you may end up establishing
individual rate schedules for each customer class of service. If one class is going up a certain
percentage and another class is going up another percentage it is difficult to resolve in a single
rate design. The City currently does have a single rate schedule which applies to all retail
customers. It is a declining block rate structure, the more you consume the cheaper it gets. Some
people see that as anti -conservation. But when you think about the average unit costs, as you
consume more it becomes cheaper. He said the City of Fayetteville's current water and sewer
rates are composed of a meter charge (based upon the capacity of the meter) and then there is a
usage charge. On the water utility side there are certain blocks of consumption: 0 to 10,000
gallons; 10,000 to 300,000 gallons; 300,000 to 5 million gallons and over 5 million gallons. He
said the 0 to 10,000 gallons is sort of a residential customer. The 10,000 to 300,000 gallons is
more like a commercial customer. As you get into large usages, you get into the industrial
customers. He pointed out that the cost declines with the higher usages. He said what this rate
design has done is try to take one rate design and make it fair and equitable for all the customers
that we serve. Sometimes that is a tough thing to do. He said with our rate schedule the
consumption charge goes from $2.81 per thousand gallons down to $1.60 per thousand gallons.
His perception is that the last two blocks ($1.76 and $1.60 per thousand gallons) are essentially
set too low and that is why the industrial customers are seeing the large increases. The customers
in the first couple of blocks are closer to their cost of service so those two blocks are set pretty
appropriately. So the challenge is if we want to try to get customers back to cost of service, how
do we do that? On the sewer side it is a little more straightforward. You have the meter charge
and a consumption rate. He said this is a fairly flat function and not as big of an issue.
In addressing the question of what other cities do, Mr. Gould said the American Water Works
Association (AWWA) conducts a survey of water and sewer rates every two years. He reviewed
a chart from the 2004 survey, which shows the entities surveyed are divided pretty evenly
between a declining block rate structure, a uniform (everybody pays the same rate per unit) rate
structure and an increasing block structure. It is hard to say that there is one right or wrong way
of looking at things. However, there is a trend of moving away from the declining block rate
structures and moving a little more toward uniform and increasing block structures. There are a
couple of reasons for that. One is that declining block structures (right or wrong) are viewed as
anti -conservation by a lot of folks. On the sewer side, most folks (roughly about 60%) use what
we use (a uniform rate) so the rate structure issue really isn't on the sewer side. It is more on the
water side.
Alderman Jordan said if he understands the chart being presented, there is a trend to move
away from the decreasing block rate schedule.
Tom Gould said that is his opinion. Right now only about 25% of people use a declining block
rate structure. About 40% use a uniform rate structure. He said you can have a uniform rate
structure for each individual class of service. He this could be discussed a little later. He
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continued that the question becomes why we might want to move toward multiple rate schedules.
He said one of the issues is about conservation, irrigation use and customers with single meters.
He said you may have differing objectives for different customer classes of service. As an
example, for a residential customer you may assume that conservation is a very important item
and there is a rate structure that encourages conservation. It is typically thought of as an
increasing block rate structure. As you consume more, it gets more expensive. But that doesn't
necessarily translate well for commercial or industrial customers. So you may end up using a
different rate structure for commercial and industrial customers. It gives you much more
flexibility when you develop rates with individual customer classes of service. He said you may
also find it is difficult to develop a single rate structure that is equitable when you have a system
with a diverse set of customers. That is the exact problem we have with our existing rate
structure. Though we can certainly maintain our existing rate structure and start to work with it
and tweak the blocks, ultimately we will always have a hard time working with that particular
rate structure with a system this diverse. He said individual rate structures provide greater
flexibility in the rate setting process. If you need to do a five percent rate adjustment for
commercial customers, with a commercial rate structure, it is very easy to produce that rate
adjustment and not impact other customers. Mr. Gould explained that a uniform rate structure is
much like going to the gas station. You pay three dollars to buy a gallon of gas and the first
gallon costs the same as the last gallon. That seems fair and equitable but the problem when you
apply that same principle to the water utility is that you have different average unit costs to serve
a residential customer versus a commercial customer versus an industrial customer. If you go to a
single water rate schedule, get rid of the declining block schedule and have a uniform rate for all
customers, his contention is that it would be largely inequitable for the industrial customers.
There would be huge impacts to those customers — probably greater than the proposal on the
table today. He said establishing different levels of adjustments for industrial and irrigation
customers would likely require rate schedules for each customer class of service. If we increase
everybody by 11.1 % but increase irrigation at 58.2%, that almost by definition creates the need
for a separate class of service at least for irrigation customers. He said he would like the
committee to think about the rate structure from the perspective of how to deal with these issues
over the long term, how important conservation is to us, how much flexibility we need in the rate
structure and what other people are doing. He said most systems the size of the City have rate
schedules by class of service. He said he realizes that almost everyone in Northwest Arkansas
has a single rate schedule but he thinks this is a concept left over from years past. He said the
City could develop a uniform rate structure for each class of service. So we could use the concept
of a uniform rate, much like we do on the sewer side. We would have the same meter charge for
all customer classes of service but the uniform rate would be slightly different for each class.
That uses the uniform rate, we would have individual customer classes of service and the rate
schedule would be specific to each customer group. In summary, on this particular issue the
proposal within the study is to establish classes of service. But you can also maintain the existing
rate structure for each class of service if you still like the declining block rate structure.
However, he thinks we still should go to individual customer classes of service. Alternatively we
can maintain the current structure or we can move to something like a uniform rate structure for
each class of service. On the sewer side he believes we should maintain the existing structure but
if there are different adjustments for each class of service we will probably need to go to
individual rates. He said before we can finalize this study, we need to work through some of
these issues.
Alderman Cook opened the floor for public comment.
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Darrell Froud, Tyson Foods, said from his perspective he would like to be able to ensure that
they (Tyson's) can maintain a competitive reason to stay in Fayetteville. He said they have
surveyed several Tyson divisions and Fayetteville is not the most equitable. He said our rate
structure is in the top 15% of all the plants surveyed. That is as we are today. So if we are
looking at another large increase that will really penalize or take away their competitive
advantage.
Nick Coger, Plant Manager of Pinnacle Foods said he agrees with Mr. Froud from a competitive
cost advantage. He said they spend over $2.3 million paying their employees. They have 700
employees in the area that all use water at this time. He said he appreciates the detailed
presentation. There is so much involved that it is hard to digest it all in a short period of time.
But he said if you look at the large -volume users and you start to dial in the cost and look at the
surcharge the City is wanting to pass on to them, the City forces them to do what Mr. Froud
mentioned, which is looking at where they can move where it is more conducive to a good
working environment. He said they have to look at alternatives of what they can do with their
water. He said they have to consider if they can take the amount of money to be spent and invest
it and do things differently in their operation to decrease their usage. So is the City really getting
the gain in the end from the large users that you think you're going to get?
Mitch Scruggs of Superior Industries said he respectfully requests that the Committee take into
consideration the manufacturing sector. He said Mr. Bill Ramsey (Chamber of Commerce) has
some figures that they would like to present. He said as a plant manager he comes in every day
and has to look at ways to cut costs to remain competitive. He said he has to compete globally.
He said with the three (industries) speaking tonight, you're looking at millions of dollars of
increases to their facilities. He said these industries bring a huge economic benefit to the
community.
Bill Ramsey, President and CEO of the Chamber of Commerce said his figures date back to
2002. He said it was about that time that we initiated a manufacturing industry appreciation night
and a survey was done of the total number of people employed in manufacturing in Fayetteville
alone. That number was 5,172. The annual payroll in 2002 dollars was almost $160 million.
Sales taxes were almost $4 million and payroll taxes were $11,991,000. The average annual
salary was about $31,000 and the hourly salary at that time was $14.81. He said the total
economic contribution to this community from the industrial sector was over $175 million. He
said a figure from the County Assessor on the amount of growth since 2002 is a little over 10%.
He said if you add 10% to that last number, you're looking at a total economic impact of over
$200 million. He said he just returned from an Arkansas Economic Developers Conference last
week and traditional manufacturing as is represented by some of the folks in this room is having
a hard time competing. We are in a global economy. Statistics will show that a lot of our
manufacturing jobs are going to Mexico, China and other places. He said he has been reading
that the City of Fayetteville has a long history of attempting to provide economic development
within the community and to keep industry competitive in their marketplace. He said if we do
not keep them competitive in the marketplace in Fayetteville, we're going to lose some of them.
He said he doesn't think any of us want to see that.
Alderman Cook asked if Mr. Ramsey could provide him with those numbers.
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Bill Ramsey said he could. He said they are 2002 numbers. He said they didn't have time to
update them but they are in the process of doing that. He said they would get the committee the
updated numbers before this process is complete.
There being no further public comment, Alderman Cook brought the discussion back to the
Committee.
Alderman Jordan said the presentation was very informative. He said he understands it a little
better now. He said he understands you can structure the rates according to the different classes
and put a money value on each class. He said you can throw in incentives for water conservation
and things like that. So there's lots of ways to tweak this.
Tom Gould said that is correct. Getting back to the irrigation issue and customers with single
meters, he said if you go to an inverted block rate structure for residential you can tie the last
block to the same rate you use for your irrigation rate. He said he would like to see us get to the
point where we have flexibility with our rate structure to achieve our long term goals. What we
had as goals 10 or 20 years ago are fine but there are a lot of different issues on the table today
than there were then.
Alderman Cook said one of the things on our list for discussion is tying our water and sewer
rate increases to an inflationary scale. He said three years ago we talked about this with this
group. He asked, as an industrial class, if those present were interested in the inflationary tie-in
(something that could be programmed into the industry's budgets) rather than seeing this every-
three-yearjump.
Mitch Scruggs said that might be more palatable than the huge spikes.
Nick Coger said he thinks what has to be done is for the City to put a number up there and allow
the industrial users to go back and calculate to see what impact it will have on them over a period
of time so they can look at their alternatives. He said a comment was made earlier about
significant capital projects and deferred maintenance issues. He said he looks at this from a
manufacturing perspective and wondered if there are more details about what the maintenance
issues are or if these are what are projected to occur in the future.
David Jurgens said these projects are identified within the study on a line -by-line basis. They
were taken out of the 2006 CIP program. As an example he said one of the first projects he was
assigned when he began work at the City in 1992 was replacement of a water line on Hwy. 16
from near College to Van Hoose Drive near Elkins. He said that project still has not been done.
He said we have done a lot of projects but the majority of the capital dollars spent (he mentioned
some exceptions) on the water system have been associated with State Highway relocations. He
said we have upsized some pipes at the same time but a lot of the maintenance business was
deferrable because we can put a clamp on a pipe and repair it. He said there is a leak right now
on North College off Sycamore. Last night the crews spent 14 hours out on a 24" water line
break. Much of the system is 117 years old and many of those old pipes are still in service. So
maintenance that is absolutely critical has been done but that which wasn't critical we have
continued to repair. We are now getting to the point on some of the lines that we can't repair
them. Another aspect that relates to this is that in subdivisions that were built in 1930 we had a
6" backbone of pipes with 2" lines serving all the homes. Now we have a 12" backbone of pipes
with 8" lines serving the homes. In 1930 we had no irrigation or pumps for washing machines or
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dishwashers. The demands were different then. We had small nozzle hydrants for fire protection
instead of large -nozzle hydrants. If we provided 500 gallons a minute, that was a lot of water at
the time. So the rules we operate by have changed. When we now replace a line in a subdivision
that is 40, 50 or 70 years old we have to have a significantly larger pipe to accomplish the
mission. In fact some of the subdivisions in the middle of town are ruled inadequate for having a
sprinkler system because there is not enough pressure to pop the heads. They also don't have
adequate fire protection simply because of the volume demand that is required by modern fire-
fighting standards and equipment.
Nick Coger said he isn't sure what the City's maintenance budget is for its facilities but one of
the things he has been thinking is the possibility of being able to partnership with some of the
industries and use some of their purchasing power for some of our pump needs, etc. He isn't sure
if they can buy them cheaper than the City and that may be insignificant money but he is just
trying to think outside the box.
David Jurgens said we'd have to determine the legality of that since the City has to follow
public policy for procurement. He said our hands are tied more than private business.
Scott Turley with the University of Arkansas said in talking about the different types of rates
(declining block, uniform, etc.) a graph was shown depicting the change over time. He asked if
this is regionally driven or if it is urban versus rural.
Tom Gould said it is regional. If you look at where more folks are moving toward increasing
block rate structures it is typically in the west where resources are far more constrained.
Declining block rate structures are more in the Midwest and southeast. The Uniform rate is
something you will see across the country. He said he tends to lean toward the uniform rate
structure for a couple reasons. He likes the simplicity of it and it is easy for customers to look at
and understand how they are being charged. But when you come down to conservation for
residential customers, the increasing block rate is where folks are today.
Scott Turley asked if the rate study put any kind of cost for capital or return on investment on
the outside city customers.
Tom Gould said it does. He said the contracts with those customers specify the approach that is
used for the rate of return on those customers. It is a positive rate of return.
David Jurgens said they are all paying their cost of service plus that rate of return — or more
accurately their rate includes that rate of return.
Scott Turley said on some of the revenue projects looking out to 2010 we are showing a
shortfall. He asked if this is true.
Tom Gould said we are showing a continued deficiency out even in 2010 with these
adjustments. But it is an inflationary adjustment of about 3%. He said the figures shown are
cumulative adjustments so any adjustment made in prior years carries forward. So if you make
an 8% adjustment in one year, that reduces the need for the 10% adjustment later.
Mr. Gould then spoke to the Committee regarding some thoughts he has had on potential rate
designs and displayed a slide with some suggested rates. He said though a 58% rate increase to
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irrigation customers probably isn't something we want to do we do need to move them toward a
more cost -based level for this service. When you look at the unit costs, the revenues for this
service are among the lowest. He thinks a roughly 20% increase would be a fair adjustment and
it moves these customers toward a cost -based rate while balancing the impact. The other big
issue on the table is the industrial rate. He suggested the idea of developing a policy or
philosophy that says that we are willing to provide a subsidy of a certain level (maybe 10% to
15%) to the industrial customers over their cost of service. He pointed out that the slide shows
that this class of customers needs a 27% adjustment and his suggestion is to reduce that to 16%.
That would be approximately an 11 % subsidy the City would be providing for these customers
from their cost of service. He said these numbers and suggestions are simply for discussion
purposes and to move the discussion forward. He said this is not a formal proposal, nor is it
coming from staff. He went through the remaining numbers on the slide: a roughly 10%
adjustment for government customers and 9.5% for residential and commercial. He explained his
logic for developing these numbers and said for these purposes you have to do one class of
services at a time and the others will fall into place. This will produce an overall 8% adjustment
for the first year and a 6% increase the following year. At that time his recommendation would
be that all classes of service be adjusted by 6%.
Gary Dumas asked if it would be possible to implement the increasing block for residential
customers to encourage conservation.
Tom Gould said it would. He said we can use any of the rate structures discussed because what
we are doing is designing the rate to collect the $6.8 million of revenue we need to derive from
that customer. You could do an inverted block rate structure for residential and you could do a
uniform rate for industrial and commercial. That's the flexibility he has mentioned.
Alderman Jordan asked if Mr. Gould is suggesting an increasing block on residential customers
and a declining block on everybody else.
Tom Gould said he is not proposing that. That is simply the question that was asked. He said he
thinks if he were looking at this he would say do a uniform volume rate for customers to get this
thing in place and then at that point as you move forward you can start thinking about modifying
the structure. He said it is hard to go from a declining block rate structure to an inverted block
rate structure in one fell swoop. Continuing on to talk about sewer rates Mr. Gould said this is a
little more challenging. He said we have an overall 20% but the industrial customer's rate
indicates the need for a 51% adjustment. That basically means that at this point in time we are
giving them about a 30% discount from what their cost -of -service shows. He said he started at
that point and thought about cutting that rate in half — resulting in a 27.5% adjustment. (He
emphasized again that these are just his thoughts and his numbers and he is just laying them on
the table). He said for government rates he just passed it through as cost of service and
residential/commercial came out to about an 18% to 19% adjustment. Again, he said you have
great flexibility on how to deal with this issue. He said the final question that is going to decide a
lot of this is how to deal with industrial and what level of subsidy you want to provide.
Ultimately what he would like to have come out of this process from a policy perspective is
some level of subsidy that the City wants to provide on a consistent basis over time. Then you
have a basis or reasoning around why you establish those rates the way you do.
Alderman Jordan suggested some sort of program where if the industrial and irrigation
customers can conserve so much water they get so much discount for the next year.
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Tom Gould agreed. He said he wanted to lay these numbers out on the table to give everybody
something to think about. He said the question is how you tie it all back together. Ultimately this
is where we need to be before we can go to the Council and before we can design rates. He said
he needs to know philosophically what the City wants to do. Do we want to maintain the single
rate structure or go to rate structures by class of service? If we go to class of service, what are the
adjustments that we should do between classes of service.
Mitch Scruggs referred back to the chart on suggested rates and asked about the logic in
decreasing the outside Fayetteville rates.
Tom Gould said the logic is that on the outside City of Fayetteville customers we earn a fair
return on our investment to serve those customers. We can charge up to that amount. In essence,
his opinion of what has happened in the past is that those rates have been set too high for the
outside City customers and we have received an excess rate of return from those customers. He
said when you look at the inside City customers, the rate of return we earn is actually fairly low
in comparison to what we earn from outside City customers. He said he would love to reduce the
commercial customer rates (this is an option if you want to follow cost of service) but in his
mind he wanted to try and set the residential and commercial rates roughly equal because these
customers have fairly similar usage characteristics.
Mitch Scruggs suggested taking the $133,000 (outside City customers) and keeping it as income
and reducing the industrial rates by that amount.
Tom Gould said in his opinion you can't do that to the outside City customers because in
essence that would be charging them in an excess rate of return.
Alderman Cook said we've already been down that road.
Paul Becker said that is a contractual issue. As part of the contract we're supposed to be
charging them pursuant to the cost of service.
Alderman Cook asked Mr. Gould if he is available for the Committee to contact if they have
questions.
Tom Gould said he is available.
David Jurgens said before the next Water & Sewer Committee meeting he will have a schedule
for what the firm timeline is on when we need to have decisions in order to enact rates by
January 1, 2008.
There being no further business, the meeting was adjourned.
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