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HomeMy WebLinkAbout7 Consideration for Water Rate Case Study UpdateCONSENT To: Board of Directors From: Brian Wright Date: April 15, 2020 Subject: Consideration for Approval of a Professional Services Contract to Conduct a Water Utility Rate and Cost of Service Study 1. WHY THIS MATTER IS BEFORE THE BOARD Board authorization is required for procurement in excess of $15,000. 2. HISTORY The District's water utility rates are set by the Board of Directors and are subject to the provisions of California Proposition 218. In 2015 the Board adopted Ordinance 2015-01 Setting the maximum increase in water rates for FY16-FY20. The resulting Board approved water rates schedule will expire at the end of FY2020: Fiscal Year 2016 2017 2018 2019 2020 Approved Maximum Rate Increase 6% 5% 3% 3% 3% In preparation for the new water rates, the District approved a professional services contract with HDR Engineering to update the most recently conducted 2013 Water Rate Study. The 2015 Water Rate Study included a special emphasis on the following goals: Implementing an accelerated pipeline replacement program to reduce the District's unaccounted for water; Provide and actual cost of service to pumping zones; and Fund the State mandates requiring the District to reduce consumption by 28% from consumption in 2013, including compliance and education for customers. As a result of the 2015 Water Rate Study and the subsequent water rates plan for FY16-FY20, the District was able to accomplish all three of the intended goals. 3. NEW INFORMATION With the District's current Board approved water rate schedule expiring at the end of FY2020, there is a need to conduct an updated water rate and cost of service study to better inform the Board for the approval of future water rate structures beginning in 2021. Staff will be recommending a professional services contract with HDR Engineering Inc. to conduct the 2020 Water Rate Study Update. The proposed study is intended to align revenues with the District's operating and capital needs. Some of the recent concerns to be accounted for in the 2020 Water Rate Study Update are: • Significant yet to be determined unfunded State mandates associated with water use and water loss performance requirements; • Ongoing need to harden the water system reliability with additional emergency power supply generators in preparation for potential NV Energy Public Safety Outage Management programs; and • Address the continuing rise in costs exceeding that of inflationary expectations for general repair and replacement services and materials. In December, 2019 the Board approved a professional services contract with Far West Engineering to develop an updated Water Utility 10-year Capital Improvement Plan. The updated CIP will be utilized to support the data request and be incorporated into the 2020 Water Rate Study Update. HDR Engineering, Inc. has submitted a proposal for the professional services associated with the development of the District's 2020 Water Rate Study Update, with the total estimated fees of $33,700. A copy of the proposal has been included with this Staff Report as Attachment 1 Following the completion of the 2020 Water Rate Study Update, the District will conduct a series of workshops, public notifications, and a public hearing in accordance with the requirements of California Proposition 218. Based on the current proposal and California Prop 218 requirements, the following tentative timeline will be in place: • May - August • July - August • September • September -October Hearing • January 2021 approved Water Rate Study - Data collection and analysis Draft reports and Public Workshops Board approval of proposed water rates Public notifications, advertisements and Public Proposed new water rates take affect if As an added note, the final presentations of the 2020 Water Rate Study Update and 4. FISCAL IMPACT The cost of the proposed 2020 Water Rate Study Update is $33,700. Sufficient funds for the procurement of the updated water rate study exist in the Board approved FY20 Water Utility Budget. 5. RECOMMENDATION Authorize the General Manager to execute a professional services agreement with HDR Engineering, Inc. for the 2020 Water Rate Study Update in the total amount not to exceed $33,700. Michael D. Holley General Manager / Water Utility Director Attachment 1 F)2 April 6, 2020 Mr. Brian Wright Water Utility Director Truckee Donner Public Utility District 11570 Donner Pass Road Truckee, CA 96161 Subject: 2019 Water Rate Study Update Dear Mr. Wright: Recently you contacted HDR Engineering Inc. (HDR) to request assistance in developing a water rate study update for the Truckee Donner Public Utility District (District). HDR has assisted the District with the development of water rates since 2010. The proposed study is intended to establish revenues necessary to properly fund the Districts operating and capital needs over a 10 year period, as well as design rates that are proportional and equitable for the District's customer classes of service. At the conclusion of the study the results, findings, and conclusions will be presented to the District Board and in a final written report. Scope of Services Provided below are the tasks to provide the services being requested by the District. Task 1—Project Management To provide the study in a timely manner, and within the stated budget, HDR will provide a monthly progress report and invoice that includes a summary of the project and tasks completed. Deliverables as a Result of Task 1: - A monthly progress report and invoice ■ Coordination with the District's project manager Task 2— Kick -Off Meeting and Data Collection As a part of the initial project (kick-off) meeting, the overall goals and objectives for the study will be discussed with District staff. At the same time, issues or concerns that either party may have can be discussed. A written data request will be provided to the District prior to the kick-off meeting to allow for the gathering of data and discussion during the meeting. Given the past studies completed by HDR for the District, and the District's familiarity with the HDR team, it is proposed that the kick-off meting be held via conference call with the HDR project manager and task lead. FNI Truckee Donner Public Utility District Water Rate Study Update Deliverables as a Result of Task 2: • Written data request detailing the needed data and information • Two hour kick-off meeting via conference call • Identification of study objectives, issues, concerns, and data constraints Task 3—Revenue Requirement Analysis The rate model developed in prior studies will be used as a starting point for this study. Within the model, the revenue requirement (financial plan) will be updated for a 10 year period. However the focus of the study will be placed on the initial few years, and up to five years, for rate setting purposes. This analysis will take into account proper funding of the operations and maintenance and capital infrastructure funding over the next 10 years. The final step of this analysis will be to develop a rate transition plan over the 10 year period to smooth rate adjustments and preventing undue rate shock to rate payers. Typically, and based on HDR's prior works with the District, a rate study includes the following steps: 1. Selection of a Test Period 2. Method of Accumulating Costs 3. Accumulation of Revenue and Expenses 4. Financial Planning Criteria 5. Summarize the Results and Development of Rate Transition Plan The first step of a revenue requirement is selection of a test period. This involves selection of a test period, or time frame of reference. For this study a 10 year period would be recommended to correspond to the Districts long-term financial planning process. Reviewing costs and projected revenue over an extended period of time provides the ability to anticipate and plan for future changes in revenue or expenses. The method of accumulating costs used in prior studies has been the cash basis. HDR recommends the cash basis be used in this study as well. The cash basis is commonly used for public utilities and includes operations and maintenance, annual debt service, taxes or transfers, and capital funded through rates. The revenue requirement consists of two major types of costs, operational and capital expenses. The operational costs are generally projected from historical or budgeted costs, using escalation factors for future costs and adjusted for any known change in operations. These adjustments will also take into consideration any future regulatory requirements and funding needs. For capital costs, the revenue requirement will use the Districts 10-year capital plan and infrastructure replacement needs as developed in the current capital planning process. Financial planning criteria are important aspects or criteria which frame the revenue requirement analysis. Some of the criteria that are used in the development of the revenue requirement are debt service coverage requirements and reserve fund balances that are consistent with District policies and recommended utility practices. The revenue requirement analysis is designed to provide an understanding of the total costs to operate the utility from year to year. While the analysis is very detailed, an important step is to IMN I Truckee Donner Public Utility District Water Rate Study Update summarize those results and findings into an "easy to understand" format. Similar to the prior water rate study, the results of the revenue requirement analysis are summarized both numerically and graphically. HDR will develop summary tables for the revenue requirement analysis that will provide easy to understand findings and results. At the completion of the draft results, the HDR project manager and task lead will meet with the District team to review the revenue requirement analysis. At the completion of the meeting, HDR will develop the draft final revenue requirement for review by the District. Deliverables as a Result of Task 3: ■ Review revenue requirement analysis that considers prudent funding levels of operations and maintenance costs ■ A capital funding plan that which funds necessary capital improvements while minimizing impacts to rates ■ A rate transition plan that seeks to minimize, to the extent possible, the impact of customers ■ A half day project meeting at the District's office with the HDR project manager and task lead combined with the Task 4 meeting Task 4—Cost of Service Analysis A cost of service analysis is used to equitably and proportionally distribute the District's water revenue requirement between the various customer classes of service (e.g., residential, commercial). For purposes of this study, HDR will utilize the analytical framework and cost of service methodology established in the most recent comprehensive water rate study completed for the District. The cost of service analysis segregates costs into various cost components and provides average unit costs which are used to develop the proposed rates. A typical cost of service includes the following steps: Selection of a Test Period 2. Determination of Classes of Service 3. Functionalization and allocation of expenses 4. Development of Distribution Factors 5. Distribution of Plant and Expenses 6. Summary of the Cost of Service A cost of service analysis typically reviews a one year time period over which rates will be established, generally referred to as the test period. The test period in a cost of service is a single year of expenses taken from the revenue requirement. For purposes of this study it is assumed that the 2021 revenue requirement will be allocated within the cost of service. Classes of service refers to the grouping of customers for purposes of allocating costs. The District's prior water cost of service analysis established the various customer classes of service. HDR does not anticipate the need for any modifications to the cost of service methodology to either consolidate or expand the customer classes of service. HDR will review with the District the classes of services for cost allocation purposes and discuss any changes based on customer consumption or facility requirements that have changed since the last study. Functionalization refers to the arrangement of cost data into its basic cost categories (e.g., source FNI Truckee Donner Public Utility District Water Rate Study Update of supply/production, treatment, transmission, distribution). The District's existing system of accounts accomplishes the functionalization of plant in service and expenses (i.e., revenue requirement). Allocation involves determining whether each specific cost or account item was incurred to meet a consumer's commodity (average day), capacity (peak day), fire protection, or customer -related need. In the District's prior cost of service study, HDR allocated both plant and expenses, and will use those prior allocations as the starting point for the update of the rate study. To distribute the allocated expenses, distribution factors will be developed for each customer class of service. For each allocated cost, an equitable and proportional method will be developed to distribute each specific cost to the various customer classes of service. Given the allocation of plant and expenses (revenue requirement), along with the development of distribution factors, the costs for the test year can be distributed to the various customer classes of service. The previous step allocated and distributed plant and expenses to each customer class of service. From this process, a summary page can be developed that compares the difference between the current level of rate revenue received from each class of service, and the distributed cost of service for each class of service. The summary page provides an important measure of the proportionality and equity of the current rates. In addition to the summary page, average unit costs (i.e., cost -based rates) are also developed for each customer class of service. These unit costs are important to the development of final rate designs and provide the relationship between fixed and variable charges At the completion of draft cost of service analysis a half day project meeting will be held at the District's office with the HDR project manager and task lead. At the completion of the meeting, HDR will develop the final cost of service analysis for the District's review. Deliverables as a Result of Task 4: ■ A proportional and equitable distribution of the test period revenue requirement to the various classes of service for the District's water utility • Cost of service average unit costs (cost -based) for each customer class and utility • A half day project meeting at the District's office with the HDR project manager and task lead combined with the Task 3 meeting Task 5—Rate Design Analysis In developing the proposed rates, the average unit cost information from the cost of service will be utilized for the proposed rates. For each customer class of service, HDR will provide up to two rate alternatives that are designed to meet the District's rate design goals and objectives and industry generally accepted rate -setting practices. For each rate alternative developed, a bill comparison and graph will be provided that shows a comparison between the present bill and the proposed bill at various levels of usage. Bill comparisons are useful in assessing the potential impacts to a wide variety of customers. Deliverables as a Result of Task 5: ■ Recommended rate structures and proposed rate designs ■ Bill comparison and graphs showing the impact to the District's customers FNI Truckee Donner Public Utility District 4 Water Rate Study Update Task 6—Written Documentation Upon completion of the rate analysis, HDR will develop a draft written report of the water rate study. The written report is intended to be comprehensive in nature and document the activities undertaken as a part of the project, along with our findings, conclusions, and recommendations. HDR will provide a PDF copy of the draft final report to the District for its review and comment. Comments, suggestions, or corrections from the District concerning the draft final report will be incorporated into the final report. Three (3) bound copies of the final report will be provided to the District, along with a PDF version. Deliverables as a Result of Task 6: ■ An electronic version (i.e., PDF) of the draft, and final, written documentation • Three (3) bound copies of the final report Task 7—Onsite Meetings or Public Presentations The scope of service includes two public meetings/presentations. Based on the prior studies with the District, it is anticipated that the first meeting will present the study results and recommendations to the Board for policy direction and set the public hearing. The second meeting will be to present the proposed rates at the Proposition 218 public hearing. Public meetings beyond the two included in the scope can be provided on a time and material basis with written agreement between HDR and the District. Deliverables as a Result of Task 7: ■ Two public presentations by the HDR project Manager ■ Handout material for the HDR public presentations Project Time Schedule District staff has requested the study update be completed by December of 2020 so that any rate adjustments are in place for the start of the fiscal year. This appears to be a reasonable schedule, assuming data is provided in a timely manner and meetings with staff can be scheduled in a timely fashion. Provided below is an estimated time schedule to illustrate the timing of the study. Month 1 Month 2 Month 3 i Month 4 Month 5 Month 6 Task 1 Project Management Task 2 Kick -Off Meeting and Data Collection i Task 3 Revenue Requirement Analysis Task 4 Cost of Service Analysis Task 5 Rate Design Analysis I I Task 6 Written Reports , Task 7 Public Meetings/Presentations (2) I Kick -Off Meeting • Project Meetings Public Presentations During the initial kick-off meeting, HDR and District staff will confirm the study schedule and timing necessary to meet the District's goals and objectives for the study. Project Team Members Provided below is a summary of the qualifications of the project team members. FYZI Truckee Donner Public Utility District Water Rate Study Update Shawn Koorn — Project Manager Shawn will be the project manager and provide quality control (QC) for the development of the rate study update. Shawn has been the project manager for the previous rate analyses completed by HDR for the District. Shawn has more than 20 years of experience developing utility rate studies across the U.S. and Canada. He is a co -instructor of the American Water Works Association (AWWA) Financial Management Seminar and is a contributing author to the AWWA M54 Manual, Developing Rates for Small Systems. Kevin Lorentzen — Task Lead Kevin will lead the technical analysis for the revenue requirement, cost of service and rate design. He has worked previously on both water and most recently the electric rate study for the District. Kevin has more than 15 years of experience in developing rate and fee studies. Josiah Close — Financial Analyst Josiah will develop the technical analysis for the District's study. He has seven years of experience developing rate and fee studies and has assisted in the development of the District's prior rate studies. Hourly Billing Rates and Fee Estimate Provided below is a summary of proposed hourly billing rate for each individual project team member. These hourly billing rates will be in effect through December 31, 2020. Individual Project Role $/Hour Rate Shawn Koorn Project Manager $280.00/hour Kevin Lorentzen Task Lead $215.00/hour Josiah Close Financial Analyst $150.00/hour Support Staff Project Assistance $125.00/hour The above noted individuals will provide the required efforts for this project. Table 1 shows a summary of estimated project fees for the update of the water capacity reserve fee. 01 i Truckee Donner Public Utility District Water Rate Study Update Task Description Total Labor: Task 1 Project Management $2,620 Task 2 Kick -Off Meeting and Data Collection 2,020 Task 3 Revenue Requirement Analysis 5,070 Task 4 Cost of Service Analysis 6,660 Task 5 Rate Design Analysis 4,470 Task 6 Written Reports 4,900 Task 7 Public Meetings/Presentations (2) 4,820 Total Labor Costs $30,560 Expenses 3,140 Total Estimated Fees $33,700 HDR proposes that fees will be billed on a time -and -materials basis in accordance with the unit prices described above. HDR is willing to enter into an agreement for $33,700.00 for the water rate study update and the previously discussed scope of services. Please review the above scope of services and let us know if you have any questions or concerns. If acceptable and agreeable, please contact Shawn Koorn to discuss and determine the approach for contracting these services. Sincerely, HDR Engineering, Inc. Holly L.L. Kennedy, P.E. Senior Vice President Shawn W. Koorn Associate Vice President FNI Truckee Donner Public Utility District 7 Water Rate Study Update