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HomeMy WebLinkAbout36-86 RESOLUTIONRESOLUTION NO. 16-R6 A RESOLUTION AUTHORIZING THE MAYOR AND CITY CTFRK TO EXECUTE A CONTRACT WITH BLACK & VEATCH FOR THE PREPARATION OF AN OPERATIONS REPORT ON THE CITY'S WATER AND SEWER SYSTEMS. BE IT RESOLVED BY THE BOARD OF DIRECTORS OF THE CITY OF FAYEITEVILLE, ARKANSAS: Section 1. That the Mayor and City Clerk are hereby authorized and directed to execute a contract with Black & Veatch for the performance of an operations report on the City's water and sewer systems. A copy of the contract authorized for execution hereby is attached hereto marked Exhibit "A" and made a part hereof. Section 2. To appropriate funds for the aforesaid contract the following adjustments in the 1986 Water and Sewer Fund Budget are hereby approved: Account No. 40-43702-051 40-43701-001 40-43702-001 40-43703-001 40-45700-054 Change Increase Decrease Decrease Decrease Decrease $16,500.00 4,687.00 1,563.00 1,000.00 9,250.00 PASSED AND APPROVED this 18th day of March , 1986. CONTRACT FOR ENGINEERING SERVICES THIS CONTRACT is madeby and between the City of Fayetteville, Arkansas, hereinafter called the City, and Black & Veatch Engineers -Architects of Kansas City, Missouri, hereinafter called the Engineers. WITNESSETH: That in consideration of the mutual covenants herein contained, the City hereby agrees to employ the Engineers to perform the services here- inafter outlined in connection with development of revenue and revenue requirements, allocation of costs of service, and rate design for the water utility. SECTION I. The services the -Engineers agree to perform are as set forth in Attachment A. SECTION II. For the services set forth in Section I, the City agrees to pay the Engineers on the following basis Project Manager, Project Engineer, and all other engineers, technical and clerical personnel. All direct expense, including in part, travel and subsistence away from the Engineers' Office, computer time, long distance telephone, and reproduction. 2.6 times Direct Salary Cost Out-of-pocket cost. Engineers will render itemized monthly statements t� the City for work per- formed and costs incurred during the preceding month. EXHIBIT'A The total amount of this contract is $16,500 and the City shall not be liable for total fees under this contract in excess of that amount unless additional sums are authorized by the City. SECTION III. It is mutually understood and agreed that the City shall pro- vide the following data and perform the following services at its own expense: 1. Copies of all maps, plans, records, statistical and finan- cial data, annual audits, annual budgets, reports by others, explanations, sales records, or other data as may be avail- able. Schedules of major improvements of the water and sewer systems anticipated during the next five year period. The major improvements schedule will include estimated construc- tion costs. 3. Ordinances, statements of policy, and statements of adminis- trative procedures which together formulate the present basis of providing, operating, and financingthe utilities. 4. Policy direction on such matters as the City considers appropriate, and expeditious review of preliminary findings and draft reports. SECTION IV. It is also mutually understood and agreed: 1. Any additional work requested by the City which is not spe- cifically covered in the scope of services as defined under Section I, such as more indepth study of operations, finan- cial and management practices, and capital project require ments, will be performed by the Engineers at a reasonable fee or compensation to be agreed upon between the City and the Engineers at the time any such services may be required. 2. The Engineers shall not be liable for delays resulting from causes beyond the reasonable control of the Engineers; that the Engineers have made no warranties, expressed or implied, which are not expressly set forth in this contract; and that under no circumstances will the Engineer be liable for in- direct or consequential damages. 3. If the City's responsibilities are kept in a timely and expeditious manner, the preliminary reports can be furnished by the Engineers within 3 months following receipt from the City of notice to proceed. 4. Final reports will be delivered to the City within 15 work- ing days following the Engineers' receipt of the City's comments pertaining to their review of the preliminary reports, assuming no major revisions to the study are required as a result of the City's review. 5. The Engineer will indemnify, defend, and save harmless the City from any and all losses or claims frominjuries or death to persons or damage to property and from any suit or judgment or other thing whatsoever that may occur in the performance of this contract resulting from any negligent act, error, or omission of the Engineer. IN WITNESS WHEREOQOF, the parties hereto have executedu/this contract in duplicate this ///day of add,- , 198�p CITY OF FAYETTEVILLE ir7) By V`.,' Title 277 4)04,"/ BLACK & VEATCH, ENGINEERS -ARCHITECTS By J. R. Brown Title Project Manager ft -t-,• Y. x ATTACHMENT A REPORT ON OPERATIONS FOR THE WATER AND SEWER SYSTEMS CITY OF FAYETTEVILLE, ARKANSAS The following scope of work is designed to provide information to meet the needs of various report users. The report would include an engineering evaluation section indicating how well each system is operated and main- tained, followed by a financial section showing five years of historical data and a five year projection of revenues and costs which would indicate the future financial position of each system. A combined water and sewer section would include comments on compliance with the bond ordinance requirements. ENGINEERING EVALUATION 1. Conduct an on-site survey of existing water and sewer treat- ment facilities and a representative sample. -of other above ground system facilities. Conduct interviews with appro- priate personnel on operation and maintenance problem areas. 2. Based on a review of existing records, analyze operating and maintenance techniques and the effect on facility perfor- mance, maintenance and reliability. 3. Review the proposed major capital improvement programs to evaluate the extent to which proposed improvements will eliminate identified problem areas. FINANCIAL ANALYSIS 1. Analyze service area growth and water use, taking into account climatic and other local conditions. Project future customers served, water sales volumes, treated wastewater volumes, and revenues which may be reasonably expected for a 5 year study period based on past records of numbers and types of customers served, historical water use by customer class, and revenues received under existing rates. Deter- mine the degree to which historical revenues have been abnormally high or low so that future projections may reflect normal conditions. 2. Project future operating costs recognizing increases in the number of customers served, operational changes, and the effects of continuing. inflation on cost levels. Fa 3. Project debt service requirements for principal and interest payments on existing and any proposed bond issues, and pro- ject the cost of routine annual capital expenditures, and any other requirements for revenue. 4. Prepare a projected cash flow for the study period utilizing projected revenue requirements and projected revenue under existing rates. Identify any revenue deficiencies, show the timing and magnitude of required revenue increases, and de- termine the optimum combination of cash and debt financing required to meet total revenue requirements. COMPLIANCE WITH BOND ORDINANCE 1. Evaluate the adequacy of projected revenues to satisfy the annual coverage test, and if required, the coverage test for issuance of additional bonds. 2. Verify that all funds required by the ordinance have been established and that fund balances are-,tin_.compliance with requirements. Review insurance coverage on system facilities. 4. Review the system of charges and the services provided to verify that no services are being provided without charge. D. Review records and books of accounts for compliance with bond ordinance. I�1 1 REPORT ON REVENUE REQUIREMENTS, COSTS OF SERVICE, AND RATES FOR WATER SERVICE FOR FAYETTEVILLE, ARKANSAS 1 B L A C K• & VEATCH ENGINEERS -ARCHITECTS - - TEL. (9131 339-2000 1500 MEADOW LAKE PARKWAY MAILING ADDRESS P.O. BOX NO. 8405 KANSAS CITY. MISSOURI 64114 June 24, 1986 Mr. Scott Linebaugh Administrative Services Director' City of Fayetteville 113 W. Mountain Fayetteville, Arkansas 72701 Dear Mr. Linebaugh: In accordance with our agreement, we are submitting our "Report on Revenue Requirements, Costs of, Service, and Rates for Water Service" for the City of Fayetteville, Arkansas. The study includes a brief analysis of the financial condition of the sewer utility for purposes of conducting the coverage test required by Ordinance No. 3134 which authorized issuance of the Water and Sewer Refunding Bonds, Series 1985. We appreciate the opportunity to be of service to the City of Fayetteville, and will be available at your convenience to discuss this report. lkm Very truly yours, BLIN & VAyTC \/ • ' d J. R. Brown 1 1 1 1� 1 1 1 1 1 1 1 INTRODUCTION The City of Fayetteville, Arkansas engaged Black & Veatch to perform a cost of service study and design rates for water service. The study includes projection of revenues and revenue requirements, development of a financing plan, allocation of costs to customer classes, and design of a schedule of rates to equitably recover total costs of service from the various classes of customers. This report presents the results of the comprehensive water rate study. Revenue requirements are projected for the study period 1986 through,1990, recognizing anticipated growth in number of customers and water use throughout the service area. Revenue requirements include pro- jected operation and maintenance expenses, capital improvement expenditure, and debt service requirements. An analysis of. projected revenues under existing rates and total revenue requirements provides the basis for deriving the level of revenue adjustments needed to meet future annual obligations. Tables referred to in the report text are included at the end of the report, following page 14. 1 1 1 1 1 1 1 1 �I 1 1 1 1 1 1 1 1 1 1 1 REVENUE The principal source of revenue for the water utility to meet annual costs of water service isfrom charges for service to water customers. Additional revenue is derived from fire protection charges, rental income, interest income, and other miscellaneous sources. WATER SALES REVENUE UNDER EXISTING RATES Historical and projected water `sales revenues under the existing schedule of water rates is shown in Table 1. Projected water sales revenue is based on the estimated number of accounts and the estimated water sales volumes, which are also presented in Table 1. Customer numbers are pro- jected to increase by approximately 3 percent per year through the study period. It is assumed Chat water sales per customer will remain constant at the level experienced in recent years. The projected increase in water sales revenue is therefore due to the estimated increase in customer numbers and the associated increase in water usage. OTHER REVENUE Revenues from fire protection charges are estimated at $50,500 per year, while miscellaneous operating revenues are estimated to total $53,900 per year. Interest income., calculated at 8 percent of the balances avail- able for investment, is estimated to average approximately $44,400 per year during the study period. Other nonoperating income is estimated at $32,700 per year throughout the study period. 2 1 1 '1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 REVENUE REQUIREMENTS Revenue requirements, consisting of operation and maintenance expenses and capital costs, are the cash obligations of the water utility. Opera— tion and maintenance expenses include the cost of purchased water, person— nel andmaterials required to operate and maintain the water utility system, plus the costs of metering, billing, collecting, and administrative services. In estimating future costs, historical costs by utility function are projected for the study period recognizing requirements for service and estimated inflationary increases. Capital costs consist of debt service requirements, cash financing of capital improvements, and operating reserves. OPERATION AND MAINTENANCE EXPENSES Historical and projected operation and maintenance expenses are shown in Table 2. Projected operation and maintenance expenses are based on an analysis of historical expense trends and anticipated future conditions. Estimated increases in operating costs are due to anticipated inflationary increases in the costs of purchased water, labor, power and materials and supplies, plus the estimated growth in customer numbers. It is estimated for this study that labor and power costs will increase at 8 percent per year, and all other costs at 6 percent per year. Customer accounting and collection expenses reflect 60 percent of the total (40.percent is allo— cated to the sewer utility) and administrative costs reflect 35 percent of the total (65 percent is allocated to the sewer utility). - 3 MAJOR CAPITAL IMPROVEMENTS The proposed mayorcapital improvement program, as furnished by the City, is shown in Table 3: The proposed expenditures are primarily asso- ciated with extension of the transmission and distribution system. ROUTINE CAPITAL IMPROVEMENTS Routine capital improvements include equipment, system replacements, and system extensions which occur on a recurring basis each year. Pro- jected expenditures for routine capital improvements represent an allowance based on historical expenditures. DEBT SERVICE REQUIREMENTS Existing debt service requirements consist of principal and -interest on the Water and Sewer Revenue Refunding Bonds, Series 1985, as shown in Table 4. Based on the facilities constructed with the original bond funds, 48.5 percent of the annual principal and interest on the refunding issue is allocated to the water utility. The balance of the debt service is allo- cated to the sewer utility. No additional debt is proposed during the study period. RECOMMENDED REVENUE ADJUSTMENTS The adequacy of revenues under existing rates to meet projected reve- nue requirements is summarized in the flow of funds analysis shown in Table 5. The indicated revenue increases are assumed to become effective September 1 of the year specified. It is further assumed that there will be a one month lag between the effective date of the increase and receipt of the additional revenue. The transfer to the debt service reserve fund (Line 20) represents 48.5 percent of the total required annual deposit, and is based on the 1 1 1 1 1 1 1 1 1 1 1� allocation of existing debt service between the water and sewer utilities. An amount equal to the proposed major capital improvements (Line 31) is transferred from the operating fund (Line 21) to the capital fund (Line 27). It is assumed the proposed capital improvements will be financed from annual revenues since the level of expenditure does not warrant issuance of additional bonds. The indicated revenue increases are designed to provide an ending balance in the operating fund (Line 25) equal to approximately 45 days operation and maintenance expenses. capital balance (Line 26) in 1986 or higher revenue increases in those years. is built up to the recommended level by smaller, equal revenue increases. of Meeting the recommended working 1987 would require significantly Therefore, the cumulative balance the year 1988 through a series of 1 1 1 1 1 1 1 1 1 1 COST ALLOCATIONS The primary function of the water utility is to supply water. when and where customers want it and in sufficient amounts to meet the needs of the customers. In providing 'this service, the utility experiences costs in relation to the operating and capital investments needed to meet the service expectations of all customer classes. Allocation of these require- ments to customer classes should take into account the volume of water used, peak rates of demand, number of accounts, and other relevant factors. The cost of service to be allocated to the various customer classes consists of the 1988 test year revenue requirements, which total $3,340,900. Under the utility basis of cost allocation used in this report, costs are classified as operation and maintenance expense, depreci- ation, and return. In test year 1988, estimated operation and maintenance expenses are $2,356,200, depreciation is $482,300, and return is $502,400. Operation and maintenance expenses include the cost of purchased water, personnel and materials required to operate and maintain the water system, plus the costs of metering, billing, collecting, and administrative services. Depreciation is a loss in value of the original plant investment, not restored by current maintenance, due to wear, decay, inadequacy, and obso- lescence. Annual depreciation is determined as .a percentage of original investment based on expected service lives of the various facilities. Unless funds are provided for normal annual replacement of original plant items, operating reliability of the system, as well as the value, will decrease. Depreciation funds are used to finance principal payments on bond issues and provide normal annual capital expenditures. 6 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Total return on thesystem investment provides funds for bond interest payments and any other costs that may be incurred. In developing the level of return on net plant serving the requirements of outside City customers, provisions for a reasonable margin should be made to meet interest on bor- rowed funds, and to recognize the business risk assumed by the City in pro- viding reliable facilities to serve nonresident customers. COST ALLOCATION TO FUNCTIONAL COST COMPONENTS The cost elements of water service are first allocated to functional cost components to facilitate the allocation of costs to customers accord- ing to their requirements for average or base water use, extra capacity demand, and the number and size of services. Allocation of Net Plant Investment The estimated 1988 test year net plant investment in water facilities consists of net plant in service as of December 31, 1985, and the estimated cost of proposed capital improvements through the test year. Allocation of this investment to functional cost components is shown in Table 6 for test year 1988. Plant investment is .allocated to cost components on a design basis recognizing the principalfunction governing the design of the facility. The allocation of net plant investment provides the basis for allocation of depreciation expense. Allocation of Depreciation Depreciation is a real part of the cost of operating a utility. In utility accounting, it is generally accepted practice to use depreciation funds to finance system replacements, improvements, and extensions. While such action does not restore the value lost in each property unit every 7 1 1 1 1 1 1 i 1 1 1 1 1 1 1 1 1 1 1 year, the total value lost through depreciation is restored to the system as a whole. Depreciation funds can be reinvested in the system either by direct payment of routine capital additions and replacements or by princi- pal payments on bonded debt. The allocation of depreciation, shown in Table 7 is based on the allocation of net plant investment. Allocation of Operating Expenses Projected operating expenses for the test year are allocated to cost components as shown in Table 8. Operating expenses are allocated to func- tional cost components in generally the same manner as plant investment. Distribution of Costs to Customer Classes The total cost responsibility of each class of customer may be esti- mated by the distribution of the cost of service for each cost component among the classes based on the respective service requirements of each class. Customer classes consist of residential, commercial, industrial, Campbell Soup, University of Arkansas, Growth Area, Farmington, Greenland, wholesale, wholesale peaking, and public and private fire protection. The commercial class includes combination/commercial, multi unit, nonprofit, yard irrigation and construction meters. Wholesale includes the RDA's, Elkins, and Mt. Olive; while the wholesale peaking customer is West Fork. These classes group together customers with similar service requirement characteristics and provide a means for allocating costs to customers. Estimated units of service for the customer classifications are summa- rized in Table 9. Service requirements for each class are based on the average daily water use projections and estimates of each class maximum day and maximum hour demands and metering and billing requirements. 8 1 1 i 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1� The unit costs of service, shown costs divided by the applicable units in Table 10, are based on the total of service. Application of the total unit cost of service to the respective service requirements for each cus- tomer class results in the total allocated cost of service for each cus- tomer class. The costs of service allocated to customer classes are summarized in Table 11. It is noted that the ordinance for the 1985 Water and Sewer Refunding Bonds requires that no services be provided without charge. This require- ment may be interpreted to include public fire protection. The City' has not paidfor public fire protection service in the past, and it is assumed in this analysis that any such charges to the City would be offset by an equal charge to the water utility in the form of a payment in Lieu of taxes or a charge for administrative services. Therefore, the allocated cost of providing public fire protection has been reallocated to the customer classes benefitting from such service in relation to their respective allo- cated costs of service. 1 1 1 � 1 1 1 1 1 1 1 1 1 1 1 1 WATER RATE ADJUSTMENT The principal consideration in establishing water rate schedules is to obtain rates to customers reasonably commensurate with the cost of provid- ing water service. Theoretically, the only method of assessing entirely equitable rates for water service would be the determination of each cus- tomer's bill based upon his particular service requirements. Since this is impractical, schedules of rates are normally designed to meet average con- ditions for groups of customers having similar service requirements. Practicality also dictates the use of a rate schedule which is subject to as few misinterpretations as possible. The revenue requirements and cost of service allocations described in this report provide the basis for adjusting water rates. The revenue requirements section shows the need for adjustment and the level of revenue required. The allocations section provides the unit costs of service used in the rate design process and gives a basis for determining whether resultant rates will develop revenues which recover costs of service from customer classes in proportion to service required and provide the total level of revenue required. EXISTING RATES The existing schedule of water rates is shown in Table 12. All cus- tomers are billed a service charge which varies by meter size, plus a volume charge. The volume charge for wholesale customers is a flat charge regardless of water usage, while the volume charge to all other customers declines as usage increases. 10 1 1 1 1 1 1 1 1 1 PROPOSED RATES Table 13 shows the proposed water rates designed to meet adjusted costs of service. The proposed rate structure is similar to the existing structure. .The analysis indicates that service charges for meter sizes of 2 inches and larger should be lower than .existing charges. It is recom- mended that service charges for meters 2 inches and larger be maintained at the existing level, and the service charge revenuegenerated from these meters in excess of the actual cost of service be utilized to reduce the indicated service charges for meters less than 2 inches in size. Simi- larly,it is recommended that no volume charges be reduced from their cur- rent levels. Adoption of these recommendations will benefit smaller customers and reduce the impact of the proposed rates on all customers while moving toward cost of service rates. A comparison of allocated costs of service for the test year with water sales revenue under the proposed rates is shown in Table 14. As indicated, revenues under the proposed rates will adequately recover the total cost of service. To better reflect the total effect the proposed increases in the total level of water sales revenue have on customer bills, a comparison of typical bills under existing rates and the rates proposed to become effec- tive October 1, 1986, is shown in Table 15. 11 SEWER UTILITY In conjunction with the Operations Report, and because the bond cover- age test is based on the combined revenues of the water and sewer systems, we have prepared a projected cash flow statement for .the sewer utility. Based on the most recent comprehensive sewer rate study, a schedule of increases was adopted which included a 10 percent increase effective August 1, 1987. The timing of that increase was to coincide with the completion of the new wastewater treatment plant. The magnitude of the increase was based on estimated operating costs furnished by CH2M Hill. Since adoption of that rate schedule, the completion date of the treatment plant has been moved ahead to January 1, 1987, and the initial year's operating expense for the new plant has been revised upward by approximately $495,000 by CH2M Hill. In addition, when the current schedule of sewer rates was approved in 1984, it was anticipated that the outstanding water and sewer revenue bonds would be refunded through the issuance of sales tax revenue bonds. There- fore, sewer rates were developed assuming no debt service would be paid from water and sewer system revenues. However, a decision by the State Supreme Court held that sales tax revenues could not be used to refund the outstanding revenue bonds. Partially offsetting these factors, the growth in sewer revenues has exceeded previous estimates, and lower than anticipated inflation rates have resulted in operating expenses which are lower than estimated in the 1984 sewer rate study. However, it is currently estimated that the sewer utility would operate at a deficit of approximately $488,000 in 1987, which would more than offset the projected beginning 1987 balance of approxi- mately $410,000. 12