HomeMy WebLinkAbout2007-09-25 - MinutesCity Council Water & Sewer Meeting Minutes
September 25, 2007
Page l of 17
Member Aldermen
Mayor Dan Coady Ward 1 Position 1 — Adella Gray
V10
Ward 2 Position l - Kyle rt Cook
City Attorney 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
September 25, 2007
A meeting of the Fayetteville City Council Water & Sewer Committee was held on September
25, 2007 at 5:30 p.m. in Room 326 of the City Administration Building located at 113 West
Mountain Street, Fayetteville, Arkansas.
MEMBERS PRESENT: Alderman Kyle Cook, Chair; Alderman Lioneld Jordan;
Alderman Robert Ferrell
MEMBERS ABSENT: Alderwoman Adella Gray
OTHER ALDERMAN PRESENT: Alderwoman Shirley Lucas, Alderwoman Nancy Allen
STAFF PRESENT: David Jurgens, Paul Becker; Gary Dumas, Susan Thomas
Alderman Cook called the meeting to order.
Water & Sewer Rate Study
Alderman Cook said he appreciates Tom Gould coming back for this meeting on short notice.
He said after the last meeting the Committee had some discussion and there were possibly some
revisions made to the options. He said he also appreciates the industrial customers being present
for this discussion. He said we will also hear a little about an Economic Impact of Manufacturing
on the City of Fayetteville draft study.
Tom Gould said the last time he was here we tried to go through some policy issues and start to
refine some ideas or concepts for the City to consider. One of the concepts laid out last time was
the idea of phasing in the cost -of -service impacts. At that time he laid out some preliminary
numbers and that got peoples' minds wrapped around what we potentially need to do. He said he
would try to now summarize the issue. He said the cost -of -service results show that there is the
need for some fairly large increases to a couple of classes of service and in particular to the
industrial customers. He said he believes the policy issue now on the table for the City to
consider is the issue of the impact that any adjustments may have to the industrial customers and
the jobs within the community. He said he wants to try to work through that issue and then
discuss some options for the final rate designs. He said the last time he was here he put up a chart
and there was a discussion around the six items on the chart. He said he would try to summarize
where he thinks we are. He said revenue requirements essentially looked at each utility on an
individual basis (looking at the revenues that are coming into the utility, the expenses of each
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utility and what needs to be done on those utilities). He said we talked about some overall rate
adjustments as well as the size and timing of those adjustments. He said he believes the
Committee agrees that we need the adjustments to adequately support the system and the
question now is the size and timing of the adjustments. On cost -of -service (where we take the
revenue requirements and equitably allocate them out to the various customer groups) there are
some questions still on the table. One is whether to maintain the existing philosophy or move
toward cost -of -service. The existing philosophy is one of subsidizing the industrial customers to
help them remain competitive in the marketplace and the world economy. He said in the last
discussion he believes we were heading toward some sort of gradual phase-in and the question is,
again, size and timing. On the irrigation use and cost -of -service results we talked about the
potential for a gradual phase-in. He said the final determination of the adjustments for each class
of service is still to be determined and that is what we will try to look at tonight. He said once we
figure out what the adjustments are for each customer group will be we can start to design rates.
He said on the water side we currently have a single rate design in place for all retail customers.
This is a declining block rate schedule. He said we talked at the last meeting about why that
might not be the best thing to have as we move forward. The question is do we want to maintain
that single rate schedule or move toward multiple rate schedules (i.e. a rate schedule for
residential, for commercial, for industrial, etc.) He said he thinks there was some indication at
that meeting that we might want to move toward multiple rate schedules. Then finally there is the
issue of maintaining or revising the current rate structure. He said he believes from a resource
perspective and from a pricing perspective there are a lot of reasons why if we move toward
classes of service we would probably want to eliminate the declining block rate structure. If we
hang on to a single -rate schedule for all retail customers we have to hang onto the declining
block rate structure. He said these are the key questions still on the table. He said he would step
through each of them and will be open to questions.
First is the issue of determining interclass adjustments. He said there has been a lot of discussion
at the staff level and also between committee members about how to deal with this issue. He said
one of the big concerns that came out of the discussion last time was the need to minimize
impacts to certain customer groups — primarily to the industrial customers and the irrigation
customers on the water side. He said he has developed some alternatives for phasing these in.
Just to be clear, he said this whole discussion about phasing in doesn't really apply to the
outside -the -city or wholesale customers. Those rates are contractually set at the cost -based
levels. There is no policy decision needed. Speaking about the water utility first, he said the last
time he was here we talked about proposed rate adjustments in 2008 and 2009 of 8% and 6%
with inflationary adjustments in 2010. We were basically looking at this three-year time period
of adjustments. How that gets phased in between the various customers is a policy issue on the
part of this Committee and the City Council. He displayed a slide listing the various customer
groups coming out of the cost -of -service (residential, commercial, industrial, etc.) and the results
of the cost -of -service for these groups. He said both the industrial and irrigation (irrigation in
particular) had fairly large adjustments if we want to follow cost -of -service. So if we want to
implement an overall 8% adjustment, this is the way the adjustments would look for the various
customer groups. When he was here last time he tried to begin the discussion of how we could
start to phase this in. This adjustment was also on the slide he displayed. He said what they tried
to do is lower the industrial and irrigation to more reasonable levels. He said since that time there
have been more internal discussions and he displayed a slide with an alternative option prepared
as a result of those discussions. The information he displayed showed the proposed adjustments
for each of the customer classes of service through 2011. He said the 2008 adjustment is not 8%
in this scenario but is a 3.6% adjustment. The following year is not 6% but is 5.8%. But he said
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we make up some of that on the back end. Instead of 3% adjustments we are doing a 5.3% for
two years. He said basically we are trading off some of the increase up front for a little more on
the back end. Also, at the same time this proposal does not generate the same amount of revenue
as the other option. In essence we will use about $1.5 million in reserve funds to help phase this
in. By reducing the impacts to industrial and to irrigation, we had to trade off a little bit of the
revenue we would have generated. In this particular proposal all the adjustments are equal going
across all four years. (Outside -the -City and wholesale customers remain the same as the first
proposals). He said this is just an option being laid on the table— a way to get to where we want
to be eventually. It doesn't phase-in the full cost -of -service over the four years but would be
done more over a seven-year period. He said the chart he displayed is trying to show two
particular customer groups — the top box is the industrial customer and the bottom box is the
irrigation customer. He said the focus is obviously more on the industrial customers tonight. He
said on the chart there are two bars for each year. The left (or blue) bar is the current revenue and
the purple bar is the cost -of -service. As you go through time, costs increase but the revenues are
starting to pick up. Even in the year 2011 there will still be a subsidy to the industrial customers
in their rates, based on the analysis we have done. But in 2012, 2013 and 2014 we would
continue the trend of trying to get them closer to cost -of -service. He said both of these examples
show there is a way to get to cost -of -service if that is where the City wants to go. But ultimately
within this proposal, industrial still isn't at their full cost -of -service. There is still some subsidy
going on there.
On sewer side he said we had talked about an adjustment in 2009 of 20%. He said he was asked
today why we don't consider doing something in 2008 to help mitigate the size of the increase in
2009. The answer he would provide is that when we did the sales tax vote a while back, one of
the things the City said was "if you vote for this, we won't raise your rates until 2009". So this is
in essence the City keeping a promise they made. He said the City would be within their rights to
adjust in 2008 but he believes there are some credibility issues involved in that. He presented a
slide with the sewer rate implementation plan. He said the top box is what was shown last time.
There is no adjustment proposed in 2008, but there are adjustments in 2009. The industrial
customer is showing an adjustment in 2009 of about 27.5%. He said this compares to the cost -of -
service which shows the need for about a 50% adjustment. In the bottom box they have tried to
make an adjustment in 2009, reducing the industrial customer to about a 20% increase (which is
an overall average for the entire system) and then in 2010 and 2011 start to make up some of
those cost -of -service differences. The question that popped up when they started looking at some
of these options is if there is anything we can do in 2009 to help mitigate the size of the 20%
increase. His response is that he is concerned about meeting coverage requirements and so forth
with the sewer utility and the increased operating costs with the start up of the new plant. So he
is uncomfortable with reducing it down. He displayed a chart for the industrial customer. He said
at the end of the three-year period (particularly on sewer) there is still a subsidy occurring but if
we continue the trend and make the adjustments over time we certainly could get to a cost -based
rate by 2014.
Alderman Cook asked if anyone on the Committee has any comments up to this point. There
were none.
Tom Gould said both examples talk about allocated cost by customer groups. One of the things
shown is that there are cost differences associated with serving different customer groups. In
other words it doesn't cost us the same to serve a residential, a commercial or an industrial
customer. There are cost differences. On the water side it costs far less to serve an industrial
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customer on a per unit basis than it does to serve a residential customer. So the discussion shifts
towards customer classes of service. In other words, do we want to develop rates by individual
customer classes of service? One of the comments he made last time he was here was that the
approach we are currently using (single rate schedule that tries to be fair and equitable to all
customers) is really difficult to manage. If we move toward customer classes of service, we gain
the ability to work with individual customer groups on an individual basis and deal with them
from a policy perspective. So if we want to do something with industrial customers, we have
greater flexibility when they are an individual class of service. The same would be true with the
residential class of service. If we are interested in things like conservation, lifeline rates, etc.
there are ways to deal with those issues when you are dealing with an individual rate schedule
for an individual class of service. He said he would like to see some direction in the City to move
toward classes of services for the rate schedules. So the question becomes what those customer
classes of service would be. He displayed a slide listing classes of service for the retail water
customers. These are currently defined as residential, commercial, industrial, government and
irrigation. One alternative is to change "industrial" to "major user". He said if you define a class
of service on the basis of the end use, meaning it has to be an industrial use, there may be
customers that are fairly significant users that are not necessarily industrial. So if you change a
little of the wording it may open the door for other people to qualify for that large use rate. But
the question would be how to qualify. The concept he laid out on the table is that you have to
have a certain level of consumption on a monthly basis or some average annual basis in order to
qualify for that rate. That is in essence what we have today. The second alternative is to roll
government up into a non-residential and commercial rate so there would be a residential, a non-
residential (to include commercial and governmental customers), major users and irrigation. This
is a little simpler and keeps things clean. One of the reasons we have a government rate code
right now is because of the taxable and non-taxable issues. Otherwise, he thinks it is fairly
straightforward. He said a rate schedule would be essentially the same for commercial and
government customers. He said a building is a building and there isn't much difference between
those customers. The next slide displayed was the retail sewer classes of service. This is the same
concept with cost -of -service divided into residential, commercial, industrial and government.
One alternative is to change industrial to major user and the second alternative is to roll
government and commercial together into non-residential. Either of these would work, it is just a
question of what we want to do with the rates down the road.
Alderman Ferrell asked Mr. Dumas if reducing the classifications would create any sort of
significant savings as far as billing, metering, etc.
David Jurgens said Alternative 2 (rolling government and commercial into non-residential)
would mean a lot less chance of error. He said this alternative accomplishes the mission of
separating by the basic use and by the high-volume users but the potential for error (determining
whether a user is a commercial user or a small industry, etc.) is reduced. When you make a
mistake, it costs money to fix it so it would save money.
Paul Becker said that as far as the direct costs, there would be no change in cost.
Tom Gould said you still meter, you go out and read the meter and send out a bill. Nothing
changes but we just have a different rate for a different customer group. But Mr. Jurgens is right
that there are times that establishing the initial rate can be a little complicated for the staff person
dealing with a new customer. These would be pretty straight forward and he doesn't believe
there will be a problem.
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Alderman Cook said if we decide to split these classes of service up, what would be the process
for defining what the cost -of -service is for each class.
Tom Gould said if we decide to combine commercial and government together for sewer, then
we would combine the two adjustments together and the final adjustment would be the average
of the two classes. Continuing on with his presentation, Mr. Gould said this is a decision the
Committee will have to make in order for him to be able to design final rates. He said a rate
structure will have to be selected. There are a couple of options on the table. One is to not do
classes of service and hang on to what we currently have for water (a single rate schedule with a
declining block). But if we move to classes of service, the question becomes what rate structure
should be used for those classes. He outlined his suggestion for water if we move to classes of
service. We would have a rate schedule for each class of service and there would be a fixed
meter charge (the same as we have today) which would be the same for all classes of service.
This charge would vary by size of meter so the larger your meter is the bigger the charge. But it
would be the same for residential, commercial and industrial customers. It's the volumetric rate
that would change between customer classes of service. The cost -of -service clearly shows the
residential has a higher per unit cost than commercial or industrial. For discussion purposes at
this point he would recommend a uniform or flat rate for volumetric purposes. It would be the
fixed charge plus, as an example for the residential customers it might be that all consumption is
$2.50 per thousand gallons. That's a starting point and it provides you the flexibility to
restructure these rates over time. Ultimately we may want to move towards a conservation -based
rate for residential, which would have an inverted block rate structure where the more you use
the more the charge per unit. He said his concern with going to that today is flipping 180 degrees
from the declining block rate structure we currently have to an inverted block rate structure. He
said just the sizes of adjustments we are talking about today and the adjustments between classes
of service are pretty good impacts to customers. If you try to go to an inverted block rate
structure at this point he believes that is piling on a little too much. His recommendation is to get
the classes of service in place, get uniform rates in place and then over time you can work with
the rate structure and get to where you want to be. He said the sewer utility is pretty well set
since they already have the structure with a fixed charge and a uniform rate that varies by class
of service. The beauty of doing the water thing is that it sort of links to the sewer utility side and
there is some consistency between the two. In concluding his presentation Mr. Gould said we
need to get some sense of what we want to do with interclass rate adjustments and whether we
want to move to classes of service. If so, what should those classes be (cost -of -service,
Alternative 1, Alternative 2 or something different) and what we want to do with rate structures.
If the Committee can answer these three questions, he can go ahead and design the final rates for
proposal to the Council.
Alderman Cook asked if the Committee or the staff have any questions or comments.
Gary Dumas said he thinks as Mr. Gould stated, we are at a point where we have to make some
decisions. He said the first decision that has to be made is whether to go with cost -of -service.
Tom Gould said to have a fair and balanced discussion he believes that the industrial customers
should be allowed to make their presentation.
Alderman Cook said he is going to do that. At this point he opened the floor to those present.
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Kathy Deck from the University of Arkansas (Center for Business and Economic Research) said
she would like to talk about some preliminary numbers. She said the FEDC and the Chamber of
Commerce commissioned the Center to do an economic impact study of existing manufacturing
in Fayetteville. She said manufacturing is an industry that is in decline nationally. She said about
10% of the national economy is manufacturing -based in terms of manufacturing employment.
Here in Fayetteville about 11 % of our economy is manufacturing -based. She said she thinks it
sometimes comes as a surprise to people that manufacturing still makes up that large of a
percentage of our economy in Fayetteville. She explained that to do an economic impact study,
the Center uses a model called the implant model which was designed by the US Forestry
Service many years ago. She said it basically a big grid which has all the relationships between
all the industries that exist in the area. We know that when you form a job in one sector it has an
impact in all the other sectors in the economy. This is popularly known as the multiplier affect:
when you create one job, you actually create more than one job and when you destroy one job
you actually destroy more than one job. She said the Center's job was to take the information
that they have and plug it into that economic impact model in order to determine the overall
economic impact of manufacturing in Fayetteville. She said they collected information from five
manufacturers here in Fayetteville which represents about 41 % of all manufacturing employment
in Fayetteville. She said they felt pretty good that with 41 % they could take those numbers and
extrapolate them to the rest of the economy. She said the kinds of impacts that we see from that
41 % are likely to be representative within the rest of the manufacturing sector. She said in 2006
there were 4,013 manufacturing jobs within the City of Fayetteville. That is slightly less than
Educational and Health Services and Retail Trades as the third highest number of employees.
Again she said this accounts for 11 % of the employees in Fayetteville. She said you get two
different kinds of multipliers when you do an economic impact study. You get a multiplier on
employment (that is how many jobs the creation of one job creates) and then you get a multiplier
on dollars of output or economic activity (if you spend a certain amount of dollars, how many
dollars will be spent in the entire economy). She said they came out with some pretty reasonable
multipliers. She said the employment multiplier was 2.03. That means that when one job is
directly created in the manufacturing sector, another total of 1.03 jobs are created elsewhere in
the economy. And this is created through two different kinds of impacts: indirect impacts and
induced impacts. Indirect impacts are supply -chain related. That is, manufacturers are buying
goods and services from other companies that exist in Fayetteville so there are jobs created in the
sectors from the suppliers they use. Induced impacts are personnel related. That means when
manufacturers hire an employee, that employee goes out and buys groceries, goes to the movies,
etc. So when you take that one job that is created in the manufacturing sector, it actually
accounts for another whole job plus a little bit more in all the different industries out there.
Similarly when one dollar is spent in the manufacturing sector in terms of output in Fayetteville
that equals another 46 cents that is spent somewhere else in the economy. She said she wants to
be very clear that when she says the economy she means within Washington County. The model
they use will not allow them to get all the way down to the City level. She said the inputs are all
City -based and the outputs we are getting are County based. She said they used the information
received from respondents and got the multipliers and then they went back and applied these to
the overall numbers. She said the original 4,013 jobs we spoke of equated to 8,158 total jobs in
the City of Fayetteville. This is roughly equivalent to about 23% of all employment in
Fayetteville. That is, manufacturing in Fayetteville represents almost a quarter of all the
employment within the City. She said the reason the report distributed to the Committee is
labeled as a draft is not because she is unsure about the numbers. The numbers are not going to
change. But she was hoping to add a little bit more information such as what this means in terms
of sales tax revenues. When you look at the average wage within the manufacturing industry you
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would need to go through and figure out what percentage people actually use to pay for goods
and services that are subject to the sales tax. You can then make calculations to get the estimated
sales tax revenue. She said she just did not have time to get those into a believable format at this
time.
Alderman Cook asked if Ms. Deck is at liberty to say which five manufacturers this report was
based on.
Kathy Deck said the University has very strict regulations regarding disclosing our respondents.
That way they are able to be an impartial judge and able to collect this kind of data without
causing competitive harm.
Alderman Ferrell asked if Ms. Deck was surprised by these numbers or if they were about
where she thought they would be.
Kathy Deck said in general she thinks everyone should be very cautious when presented with a
kind of multiplier number. She said with a lot of economists you will see wild claims such as the
dollar will turn over 8 to 10 times. Whenever you see a number that big, you first want to ask
what is the time frame we are looking at. Usually with a multiplier that big we're talking about
five to ten years. The multipliers between 1.5 and 2 are around what she expects to see. She said
it is not terribly surprising that manufacturing is at the high end of this because they use goods
and services from within the community and it stays within the model. She said the model does
allow for leakages. The model understands that all the manufacturers aren't buying everything
from Washington County and that is taken under consideration when these numbers are being
created.
Steve Rust, FEDC, added that there is one number in the report provided by the University
which lists the total effect (Table 3: Economic Impact of Respondent Companies, Employment
and Output, 2006 (in 2007 dollars)) as $622,741.182. So there is a really huge impact that
industry makes here.
Kathy Deck said she is available at any time if there are any more questions.
Alderman Cook opened thefloor for further public comment.
Butch Scruggs, Plant Manager with Superior Industries spoke as the chairman of the Chamber
of Commerce Manufacturers Committee and said he represented manufacturers as a whole. He
said Kathy mentioned that manufacturing in the nation is on the decline. He said we don't have
to look at the nation to see that, we can look immediately around us. Superior shut down part of
the plant that he is in charge of about a year ago. Tyson/Mexican Original also shut down a plant
recently and we saw Pinnacle make some adjustments in their manufacturing and production a
few years ago. Levi's building is empty. He said he is sure that Fayetteville wants to retain the
manufacturers it has and even attract new ones. Whatever increases may be under consideration
to be passed on, pennies can mean gaining or losing a contract with a customer in manufacturing.
This could be the difference between gaining or not gaining a contract. He said he believes most
people when given the choice of job security or a small increase on their bill they would
probably go the route of an increase. He said he would ask that all this be taken into
consideration when this is taken to the Council.
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Alderman Cook said that we do take this into consideration. He said it is a difficult position to
be in. He said he didn't enjoy it three years ago and he isn't enjoying it now. He said the
Committee really just wants to find the best solution. He said he would like to back up to the
revised Option 2 table for water, spreading out the increase and slowing approaching cost -of -
service by 2014. He said what we are looking at now is trying to get to cost -of -service. And we
are trying to do is slowly as opposed to jumping in and getting it implemented within the next
three years. As he said before, cost -of -service is what he would like to see us get to. But at the
same time he doesn't want to hammer people right up front. He said we have to keep in mind
that residential customers have been paying their fair share for quite awhile and he still believes
cost -of -service is the most equitable way to spread the cost out among all the different classes. It
can be measured; it can be defended; and seems to him to be the best route we can go. He said
his hope in this process is to try to end this discussion we have every three years and try to get to
something where it just runs itself so we don't have to go through these policy discussions over
and over again. He said he would like to get to cost -of -service and then use the inflationary
adjustment every year after that.
Alderman Ferrell said we've received and digested a lot of data and been presented with
several different options. He said he thinks Fayetteville is well served by the
industrial/manufacturing/commercial community. He said he thinks we have a good fit and he
hasn't read anything about bad corporate partners or business in this community. He said in
moving toward cost -of -service we are changing the paradigm in a sense from what it has been
before. But we have to find some common ground somewhere. He asked if Mr. Steve Rust has
any comments about spreading the adjustments out over several years.
Steve Rust said having a huge cost increase in any given year right up front is not going to be
acceptable to industry. They are competing with people overseas all the time and that is not the
way to go. If we have to go to cost -of -service, phasing it in is certainly the way to do it and he
appreciates the Committee looking at this. He said he is concerned however that the Committee
would be changing paradigm. Based on the fact that industry provides so much to the community
— in almost all cases more than the other categories — he thinks it warrants consideration that they
maybe don't quite pay their fair share in water and sewer because they give so much more in
other places. So he is concerned about changing the paradigm but that is a decision the City
Council has to make. If we do make that switch, which he would advise to do very cautiously
because we are sending a negative message to industry, he would advise that it be done gradually
so that we don't run people off right up front.
Alderman Ferrell said he is a realist and he knows that this has been coming. He said he thinks
HDR has tried to do a fair job with what they are charged with doing. He asked if there is
anything Mr. Rust sees that can be done that is not obvious to the Committee.
Steve Rust said if you make the assumption that we are going to go to cost -of -service, other than
spreading the adjustments over a longer period of time, he doesn't see anything else to do. He
referred to the representatives of industries who are present and said they are the ones who are
paying the bills and competing in the world market every day.
Alderman Ferrell said with 4,013 jobs here and considering the multiplier affect, he doesn't
want to run anyone out of town.
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Butch Scruggs said as he mentioned a few minutes ago, another option would be to increase the
residential a little bit more to help subsidize the industrial sector. He said the presenter at an
earlier meeting mentioned that people are fairly receptive to that, favoring a little higher bill over
not having a job.
Tom Gould said he was the one who made that comment saying that given the choice of a
slightly higher water bill or a job, people will always take the job.
Steve Rust said the other observation he would make is that industry's use over the last ten years
has not really increased. In other words, he said he doesn't believe industry is causing the
requirement for the new water & sewer plant. All the growth in the residential areas is what is
causing that. He believes that is something to be considered.
Alderman Jordan said he does prefer the flat rate because he thinks that helps the residents the
most. He said he brought this forward to the Committee before and doesn't feel he gained a
tremendous amount of support. But he does appreciate the facts and figures that Mr. Gould
brought up about the fact that approximately 75% of cities across the United States either work
with an increased block or uniform rate. He said he thinks what we are probably coming to here
is like a uniform rate. He said if we do cost -of -service, he does want to see that there is some sort
of study done for the elderly or lifeline rates and possibly low income people. He said he wants
to see that study done and wants commitments that we will start that study. He said he thinks we
owe this to the people who are on fixed incomes to help them out wherever we can. He said he
believes there are folks in this City who are trying to decide whether they are going to buy their
medications to keep them alive or whether they can pay the water bill and food costs. He thinks
we need to take that into consideration when we do these sorts of things. He said he understands
we will probably have to do cost -of -service since the rest of the Committee is in favor of that and
he will go along with that but he wants us to be mindful of these people.
Alderman Cook said he is in favor of the lifeline idea. He said he doesn't have an issue with
that. He asked if other cities do that.
Tom Gould said not all cities do, but probably about half of the cities he works with have some
kind of assistance program. But he said you have to keep in mind there's some administrative
issues associated with something like that. If you're willing to undertake those administration
issues, then that certainly is feasible.
Alderman Jordan said he understands that and thinks we need to go in that direction if the
Committee supports that. He said the next issue for him is how we are going to adjust the rates.
Are we going to go with the rates presented here or work with these figures a little bit more? He
thinks there needs to be more discussion on this. He said he knows we are looking at adjustments
on Option 2 but he doesn't know if he is totally in agreement with all of those. He said he is
ready to start talking and negotiating.
Alderman Ferrell asked if we are assuming the common ground is on getting to cost -of -service
as proposed by the modified table presented by HDR.
Alderman Jordan said maybe.
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Alderman Cook asked if Alderman Jordan feels that the newly proposed Option 2 is getting
closer.
Alderman Jordan said it is getting closer.
Alderman Ferrell asked if we are just talking about the water utility at this point.
Alderman Cook said that is what we are discussing right now.
Garnet Wise, resident and employee of one of the industries asked Mr. Gould a question about
the water utility and cost -of -service. He said his perception is that the adjustments are meant to
get us to cost -of -service. He wondered about the positive numbers to get there.
Tom Gould said if you look at industrial, it should have gone up 27.1 % and instead we are
raising it 6.6%. So to make up that revenue difference, we have to collect it somewhere else. So
those differences are spread across residential, commercial and other customers. He said the sum
of all these parts does not come up to an 8% adjustment. So even with those adjustments we're
going to be slightly under collecting what we had originally targeted. That's the balancing act we
are talking about. If you don't raise industrial or irrigation to the levels of cost -of -service, then
somebody else has to make up the difference. The question is who makes up that difference and
how much.
In response to a question from a member of the audience, Tom Gould said in essence we use a
slightly different approach for out -the -city customers than we do for inside retail. We are
charging the full cost -based rate. In essence at the current time we are over -collecting for those
customers so we need to charge the cost -based rate. He agreed that we do not have any choice
with this rate or with the wholesale rate.
In response to a second question from this audience member, Tom Gould said there are a
couple of things that have gone on to bring us to the point of overcharging. He said when the
rates were established in the past the City Council sometimes ignored what the cost -of -service
was for outside -Fayetteville and tended to increase the rates for outside -the -City customers as
opposed to inside the City. But the other part of the discussion at this point is that the overall rate
of return that you can earn from that customer is slightly less than what it was three or four years
ago when the last study was done. It was kind of a combination of those two things which led to
that result. But the idea of this study is to get folks back towards cost -of -service and we wouldn't
expect to see that result the next time.
Alderman Ferrell asked if someone from one of the large industries present would have an idea
of an approximate affect this would have on a monthly water bill.
Gary Dumas said he has some information and he distributed this to members of the Committee.
He said it is a summary of some bills broken down by water, sewer, fire, solid waste, etc. He said
this information is based on Option 2 for both water and sewer and it takes it out of the same
time frame Mr. Gould has outlined.
Paul Becker said as a disclaimer, these are estimates only.
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Gary Dumas said because there has not yet been a rate established, this information is based on
the percentage increases shown for 2008 and 2009. What this Committee's decision will be in
the future is to establish what that rate will be on a per -thousand -gallon basis. This information
estimates that the average residential customer in 2008 is looking at a $1.45 increase.
Alderman Cook said for the sake of discussion he would like to move on. He said he would like
to leave the revised Option 2 for water as it is right now and move on to sewer.
Alderman Jordan said he has a little trouble with having raised the rates 29% and then raising
them another 19% in 2009. That's a 48% increase in four years.
Alderman Ferrell asked if Alderman Jordan can see any way around it.
Alderman Jordan said he doesn't know. He just wondered if we could work the figures a little
bit.
Alderman Cook said basically we need the 20% increase because the plant is going on line.
Alderman Jordan said we've got residential at 19%, commercial at 26%, and 20% & 21% for
the others. If you bring the residential rate down to 10%, then you have to adjust it on out
through the rest of the customers. So we have to decide whether we want to do that.
Alderman Ferrell asked if anyone know what kind of difference it would make if we do
something in maybe the 7th month of 2008 instead of waiting until 2009. He wondered if it
would make any less of an impact on the rate payers.
Alderman Jordan said that was not what was promised.
Alderman Ferrell said he understands that and he isn't advocating it. He was just wondering
what kind of affect it would have.
Tom Gould said if you went to an adjustment in 2008 it certainly would have an impact and you
could lower the adjustment in 2009 — essentially split the difference. But the key issue that is on
the table is this: if you don't do residential at some level that is approaching the overall average,
and if you want to do a 10% adjustment you have limited ability to adjust other groups. You
can't adjust Farmington. You can't adjust Elkins or outside Fayetteville customers so what you
are left with are the commercial, industrial and government customers. That means that industrial
will go up close to the 40 or 50% level. What we are trading off is the slow phase-in for the
industrial cost -of -service with an adjustment to the residential customers. Again, this is the
question of what customers would prefer: a slightly higher rate or jobs in the community. Not an
easy question to answer.
Alderman Jordan said we also have to understand we're looking at customers that have been
hit with a 50% increase in three years.
Tom Gould agreed and said those are not just residential adjustments. Those are for all
customers.
Alderman Ferrell said he doesn't think any of the aldermen like raising any of these rates.
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Tom Gould said to help translate the percentages into dollars, a roughly 19% adjustment for
sewer would be a slightly over $4 per month adjustment for residential. So the discussion is
centering around roughly $2 per month for a residential customer.
Scott Turley with the University of Arkansas asked if both models Mr. Gould has shown include
inflationary increases of 3% in 2010 and 2011.
Tom Gould said they do.
Scott Turley asked if he is correct in the assumption that we would redo the cost -of -service
study at that point and "true up" plus or minus to that 3% in 2012.
Tom Gould said that would be his assumption.
Scott Turley asked if the 20% increase was essentially for operating funds to run the new west
plant.
Tom Gould said that is an oversimplification but that is a good portion of it.
Scott Turley asked if that was the cost to operate a fully loaded plant and if those costs variable.
David Jurgens said we are starting up a whole new process so what we are working with is just
an estimate. We don't know how the cost of running the Noland Plant is going to change when it
goes to mostly industrial flow. That's a big wild card. We don't know what the cost of the new
plant will be. It is designed to be more efficient than a plant build 40 years ago. We are trying to
estimate off a very efficient operation. For example we are only going to have one night operator
covering both plants. It's based off a realistic estimate and not a grossly conservative estimate.
We didn't low -ball by any means. We're going to have to see how both of the plants run. We
didn't just do the estimates in-house. We also asked Mr. Gould to look at some numbers and we
talked to some other plants to see how they operate. We're going to have to run it for a year to
see how it really goes.
Scott Turley said part of his question is whether the new system has some growth capacity in it.
David Jurgens said the capacity estimate by population for the plants combined is about
115,000. That's not the estimate that the engineers gave us with the master plan. That's an
estimate taking our actual population and extrapolating out what we are treating for today and we
think we can treat for in the future. That's the plant capacity. The pipelines should have capacity
for 30 to 50 years or more.
Scott Turley asked if there is a sense of what are fixed costs versus variable costs.
David Jurgens said he really doesn't know. Since it is a biological process, he is guessing that a
lot less of it is variable than we would think. Of course the electricity is certainly a variable cost
and any chemical that you have to use is variable.
Alderman Cook said he noticed on the schedule for capital improvements in 2010 there are
quite a few projects scheduled to occur.
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Tom Gould said as the committee might recall, 2010 was where we put a lot of the deferred
projects. We did that for both water and sewer.
Alderman Cook said there is still another $10 million deferred after 2011. He asked if the
information being discussed takes into account the potential change in water & sewer impact
fees.
Tom Gould said that question was asked the last time and the study doesn't assume an increase
in the impact fees. But given the slow down in the housing market what is assumed in the study
for impact fees is probably reasonable.
Alderman Jordan added that we're doing it this way because it is more of a conservative
approach. You don't want to promise something that may not be there.
Tom Gould said impact fees have limited uses. You can't apply them against O & M expenses
and operation of the plant is an O & M expense.
Alderman Cook said with sewer the bottom line is that there is no phase-in. We have to have
20% over a certain period.
Tom Gould said he believes that is a correct statement.
Alderman Ferrell asked if we have to make a recommendation tonight.
Alderman Jordan said we have another meeting on Thursday at which Alderwoman Gray will
be.
Alderman Cook said he would like to get to that stage Thursday morning. He said he isn't
trying to push it but he would like to get to a decision by then.
Scott Turley asked what the context of the promise of "no increase in sewer until 2009" was.
Alderman Cook said when the City went to the voters to reauthorize the sales tax we discussed
not raising any rates until 2009.
Scott Turley asked if the sales tax was to pay for the sewer plant.
Alderman Cook said it was. That was the combined street bond and the sewer plant sales tax
extension.
Scott Turley asked if it was for capital only rather than operation and maintenance.
Alderman Cook said yes.
Alderman Ferrell said we had already been told up front that it was going to be a 20% increase
in 2008 or 2009 and it was deferred until 2009.
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Alderman Cook said when Tom Gould did his initial re -look at what Black & Veatch had said,
that is when the statement was made that we would potentially need a 20% increase
Alderman Jordan said we raised rates 29% in 2003 if he remembers right.
Susan Thomas said it was 2003, 2004 and 2005.
Alderman Jordan asked if the rate would be the same today if we hadn't had the overrun on the
wastewater treatment plant.
Tom Gould said he hasn't.gone there.
David Jurgens said he hasn't either.
Alderman Cook told Mr. Gould we will make the decision before too long.
Tom Gould brought the discussion to classes of service.
Alderman Cook asked the Committee members if they agree with redefining classes of service.
Alderman Jordan said he doesn't see a tremendous down side to that.
Alderman Ferrell said he doesn't see that there is either. He said he would like hear anything
the audience might say about it.
Steve Rust asked if there are any draft numbers on what the flow rate per month is on these
different categories. He wondered what the cut off is to go from non-residential to major user.
Are there any actual numbers to figure this out?
Tom Gould said the answer is no. We have not come down to a final conclusion on how to
define the major user. But that is one of the tasks we will need to complete if we go this route.
Alderman Jordan said we are basically putting government and commercial into the non-
residential category.
Tom Gould said that is one alternative to look at.
Alderman Cook said he likes Alternative 2.
Alderman Jordan said he does also.
Scott Turley asked if outside Fayetteville & wholesale customers would fall into one of these
categories.
Tom Gould said they would be on a separate schedule. This is strictly retail customers on the
water system.
Scott Turley asked if patterns of usage will play a big factor in cost. He said he assumes
industrial customers are fairly flat loads all year long.
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Tom Gould said is does play a part. That is the reason major users are broken out as a separate
group, to reflect the actual cost to serve those customers.
It was the consensus among the committee members that they like Alternative 2.
Tom Gould asked if they like Alternative 2 for sewer also.
Everyone agreed that it also looks good.
Tom Gould said since the decision seems to be to move to classes of service, the last decision to
be made is a rate design for residential, one for non-residential and one for the major user. His
recommendation on water is to start off with a fixed charge that is the same for all customers (the
meter charge approach) and then the volumetric rate would be developed for each class of
service. This rate would be based upon the specific characteristics of that group of customers. So
residential would have a volumetric rate, non-residential would have a volumetric rate and the
major users or industrial customers would have a rate. His assumption is that they would have
the lowest rate on the system for that usage because of their pattern of use.
Alderman Ferrell said it is cheaper to serve them, is that right?
Tom Gould said that is true because they don't put big peaks on your system so the cost to
provide capacity to them is less on a per-unit basis. You haven't overbuilt your system a lot to
serve strictly industrial customers. Whereas you have a lot of over sizing of your facilities to
serve residential customers, particularly for irrigation loads or summer lawn watering.
Alderman Ferrell said he wants to be sure he understands the volumetric thing with the meters.
Are we saying we're going to have a residential meter and all residential people will pay the
same charge for their meter and then a charge for what they use based on amount.
Tom Gould said it will be like the gas station. In essence the cost per unit is the same for the
first gallon you buy as it is for the last gallon. This is not a declining block rate structure. It i;
strictly a uniform rate.
Alderman Jordan said the other rate payers will get a break.
Tom Gould asked which rate payers.
Alderman Jordan said commercial, industrial, etc.
Tom Gould said they will have a different rate that will reflect their cost to be served. Last time
he was here he provided a chart of what the cost of service per unit looks like. He said it was a
declining cost function. He told the group then that this matches up to what we are currently
doing with the declining block rate structure. The point was that when you get down to that
bottom block of the declining block rate structure, it didn't match up very well on a cost -of -
service basis. So this is going to look the same to a certain extent, but now we will have greater
flexibility on how we deal with individual customers in each of these groups.
Alderman Ferrell asked if Mr. Gould can recall what the residential per unit cost is.
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Tom Gould said the average cost for residential was about $3.50 per thousand gallons. For a
commercial customer it was probably about $2.90 per thousand gallons and for the industrial
customer about $2.10 per thousand gallons. So when we develop this rate, there will be a flat
meter charge based upon the size of the meter and then there will be a uniform rate for the
volume of use of the customer. There would be a rate for residential, a rate for non-residential
and a rate for the major users. On the sewer, we have maintained the existing structure in place
today but used the classes of service defined above.
Alderman Cook said he would like to see what that looks like. He said he may have some
reservations but that is the direction he thinks we should head.
Tom Gould said he thinks he has the same reservations. The reservations he has may be with the
industrial rate and where we define who an industrial customer is versus a non-residential
customer. Also what the break point is and what the bill comparisons look like. Because what we
are going to do is develop bill comparisons that show for the customers (we'll do it for all the
industrial customers) what their bills look like under the present and the proposed rates. Then we
will determine if this uniform rate approach looks fair to those customers. He said the impacts
shown to certain customers on the handout discussed earlier were estimated impacts. It's only
when you finally get down to the actual final rate of a fixed charge and a variable charge that you
understand what the full impacts to that customer will be. When he comes back again he will
have that information
Alderman Cook asked if Mr. Gould has enough information to proceed.
Tom Gould said he does not. The Committee still has to go back to the two tables and tell him
what to do for residential, commercial and industrial. Once he has that he is good.
Alderman Cook said Thursday morning a meeting of this Committee is scheduled and he thinks
the discussion will center on the sewer table. Once a decision is made there we will cut Mr.
Gould loose and see what he brings back. There will still be some decisions to be made at that
point.
Tom Gould said we will look at the proposed rates and how they look across customer groups.
Alderman Cook asked about the time frame for Mr. Gould to come back if the Committee gives
him direction on Thursday morning.
Tom Gould said he thinks it will take a couple of weeks to do the rate design. He would come
back after that at some point — he estimated 30 days at the most.
Alderman Cook asked if staff is comfortable with that schedule.
Gary Dumas said they are.
Alderman Cook said we are ending up changing a lot more than he thought we were going to in
our rate structure but he thinks it is for the better.
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Paul Becker said he thinks it is good the committee is making a policy decision. As far as he can
ascertain this has been in place since the 70's. They are at the point now of making a policy
decision and that is certainly in the best interests of the City.
Gary Dumas agreed. Putting this policy into ordinance form will keep it in place so we don't
have to go through this process again.
In response to a question from Alderman Ferrell, David Jurgens said the Council passed a
resolution to do a rate study every three years. The Council can change that and that may be a
part of this, but per the last resolution passed, another rate study would be done in 2010.
Alderman Jordan said that is too soon.
David Jurgens said the bond ordinance requires an operations study every three years. That is a
legal obligation. We generally do an operations study immediately preceding the rate study
because the operations study evaluates a lot of the same information so it is very efficient and
cost effective to do the two together.
Alderman Jordan said he wanted to make sure he understands where we stand right now. We
are saying that for residential we will have a certain rate and it will basically a flat rate. But on
the industrial, commercial and other what are we proposing?
Tom Gould said those are also being proposed as a flat rate but it would be a different rate that
would reflect the cost to serve those customers. It could potentially a lower rate.
Alderman Cook said when we give Mr. Gould direction on the sewer side, he will bring those
rates back to us and we'll know.
There being no further business, the meeting was adjourned.
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