HomeMy WebLinkAboutItem 11 - Utility Rate Study ���I�'� � ..���_.-.!
MEMO TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
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FROM: BRUNO RUMBELOW, CITY MANAGER �
MEETING DATE: JUNE 23, 2008
SUBJECT: UTILITY RATE STUDY CONTRACT
RECOMMENDATION:
City Council consider approving a contract with J. Stowe and Company in the amount of
$53,000.00 to develop a Water and Wastewater Cost of Service and Rate Design
Model, authorize the City Manager to execute said contract, and take any necessary
action.
FUNDING:
Funds are currently programmed and available in the following accounts:
Water Distribution Professional Services 200-44540-530-1 $17,500.00
Water Treatment Professional Services 200-44540-530-2 $ 8,000.00
Wastewater Collection Professional Services 200-44540-531-1 $17,500.00
Wastewater Treatment Professional Services 200-44540-531-2 $10,000.00
BACKGROUND:
The last financial analysis on utility rates was conducted by Freese & Nichols in 2004.
At the time, the study recommended an increase in utility rates for 2005. Utility rates
were not changed and have remained the same since 1999. Two developments
affected the fund balance and allowed rate adjustments to be postponed.
A large capital investment (�$13 million) was anticipated to build a booster pump station.
The booster pump station was required to provide treated water from the Trinity River
Authority (TRA) at an adequate pressure as our flow needs increased to meet our
growth. Recent studies have indicated that this investment was not needed. We also
had an exceptionally dry (drought) year in 2006 that boosted our operating revenues.
However, we are currently facing a significant capital investment arising out of utility
relocations from the DFW Connector (Funnel) project. Although exact costs are not
available yet, preliminary estimates place the relocation cost in the range of $15 million.
Operational costs have also steadily increased over the past few years and continue to
trend upward, e.g., power costs have doubled since 2006 and the cost of chemicals has
increased more than 15% this year.
June 18, 2008 (11:24AM)
The Cost of Service and Utility Rate Design model wiil allow us to more accurately
assess the impact of such developments on our financial condition. The Study will
° accurately determine the current cost of providing water and wastewater services to the
residents of Grapevine and the model will allow us to predict if our current utility rates will
be adequate to provide these services. In addition, the mode� will allow us to track and
compare actual costs and revenues with projections. Typical rate studies predict costs
and revenue for a three to five year horizon. A new rate study has to be done after this
period. The model approach altows staff to make these projections on a continuous
basis year after year by updating the model. As part of the proposal, the consultant wi�l
provide training to Staff on using and updating the model.
J. Stowe & Company has conducted numerous such studies and has the qualifications
and expertise to conduct the study and prepare the model.
Staff recommends approval.
MS/rc
0:lagenda\06232008\agmemo.utility rate study.doc
June 10,2008 (1:06PM)
J . STOw E & Co.
May 1, 2008
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i�ia U.S. Mail
Mr. Ramana Chinnakotla
Transportation and Utilities Manager
City of Grapevine
Municipal Service Center �
501 Shady Brook
Grapevine, Texas 760�1
RE: City of Grapevine,Texas
2008 Water and Wastewater Cost of Service and Rate Design Model
Dear Mr. Chinnakotla:
J. Stowe & Co. is pleased to have this opportunity to propose our assistance to the City of Grapevine
("The City") to develop a Water and Wastewater Cost of Service and Rate Design Model. J. Stowe
& Co. believes it is uniquely qualified to provide this assistance inasmuch as Mr. Stowe, firm
founder and President, has in excess of thirty (30) years experience in conducting such studies and
developing supportive models for the Texas Water and Wastewater industry. This includes assisting
such cities as Arlington, Waco, Lewisville, North Richland Hills, Haltom City, Brenham, Terrell,
and Paris,just to name a few. Mr. Stowe has also performed cost of service engagements for many
of the largest wholesale providers in the state including, Tarrant Regional Water District, North
Texas Municipal Water District, Sabine River Authority, Lower Colorado River Authority, and `'�"*
Dallas Water Utilities. Mr. Stowe's professional Resume is attached for your review and
consideration.
This Letter of Transmittal provides our understanding of the Project and Scope of Services desired
by the City of Grapevine. In addition, we have provided our cost proposal to successfully complete
the project, as outlined on Attachment A, at a price NOT TO EXCEED $�3,000.00. After you have
had the opportunity to review this letter should you, your staff, and/or Council have any questions or
require additional information, please do not hesitate to contact me at 469.467.7799 or by email at
jstowen�j sfoweeo.com �
Again, thank you for this opportunity and we look forward to working with you on this important
engagement.
f,
Very.truly yours, � �`�
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__._��^ j �, --�
� � ` i ;
ack E. Stowe, Jr.
President and Founder
J. Stowe & Co.
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t560 J.Place,Suite 379 515 Congress Avenue,Suite 1515
Plano,TX 75074 Austin,TX 78701
469.467.7799 512.472.0719
Scope of Services and Price Proposal
Project Understanding
Based upon the requested Scope of Services and conversations with the City, it is our understanding that
tlie City desires a qualified consultant to perform a water and wastewater retail cost of service and rate
design study and provide a computerized rate model for City Staff use. Specifically, the City is
interested in the selected consultant to address the following issues:
■ Evaluation of the current rate structure to determine its appropriateness in recovering the
City's revenue requirement while also encouraging water conservation.
■ Comparison of the rates, usa�e, and consumption of surrounding cities to that of the City of
Grapevine and identification of rate-making best management practices and recommended
rate structures.
As part of the requested Scope of Services, the City is specifically seeking a consultant who can develop
a Microsoft Excel based utility rate model which is tailored to the City's cost, revenue, and contract
structure. Features of the rate model will include, but not be limited to:
■ Ability to forecast a five-year revenue requirement;
■ Functionality and ability to perform and determine the impact of"what-if' scenarios through
the input and alteration of City-identified key variables;
• Functionality and ability to conduct sensitivity analysis to see the impact of a change in key
variables and include such analysis in management reports;
■ Ability to compare actual financial and operational performance to model projections;
■ Ability to produce useful manabement reports at both a summary and detailed reporting
level;
■ Inclusion of built-in instructions for each model worksheet or form.
In developing the model, the Consultant is expected to provide an electronic users manual which fully
explains the methodology of the model along with key inputs, outputs, data entry, and reporting features.
The consultant shall also provide a training session to key City staff inembers on the operation and
function of the rate model.
Based on our understandin� of the City's goals and objectives for this project, we have developed the
following Work Plan.
Scope of Services and Price Proposal
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Work Plan
To perform the requested study, J. Stowe &Co. proposes the following Work Plan.
Task 1 —Initiation of Data Request
Upon notification of award, the Project Team will develop an initial data request that we will need to
adequately begin the review and evaluation of the City's water and wastewater expenses, rates, and
financial position. This data will include, but is not limited to, operating, financial, management, policy,
and ordinance data. We will issue the initial data request approximately two to three days after receiving
notice to proceed on the project. A brief sample of the types of data we would expect to request in our
initial Request for Information(RFI)will include, but will not be limited to:
• Prior rate studies by outside consultants
• Audited annual financial reports
• Budget vs. actual line item revenues and expenses
■ Rate Ordinances
■ Current water and/or wastewater contracts
■ Bond covenants and payment schedules for all outstanding water and wastewater bonds
■ Historical water consumption by customer class
■ Historical wastewater billing volumes by customer class
• Any projections made by City staff as to future water/wastewater volume demands
■ Wastewater treatment plant volumes and loading data(BOD, TSS,NH3)
■ Water Treatment Plant volumes
■ Purchased water volumes
• Purchased wastewater treatment volumes
As stated, this list represents a preliminary sample of the types of information which will be required to
complete this study. Additional RFIs will be developed as the initial analysis of the data received is
completed.
Task 2—Data and Information Assessment
Once the City has submitted the requested data, we will review it and be prepared to discuss the supplied
information during the project kick-off ineeting. Data received by the Project Team will be sampled and
tested for accuracy. We will conduct informal interviews with City staff during our review of the
historical data to ensure that the Project Team understands the information provided.
With regard to the required billing data, we will work closely with the City's billing personnel to extract
the appropriate information from the billing system database in the most cost-effective manner. This
volumetric information is critical to the development of rates by customer class, and every effort will be
undertaken to ensure its accuracy and relevance.
Task 3—Project Kick-off Meeting
After receiving the information requested, we will work with the City to schedule a kick-off ineeting.
The primary reason for the kick-off ineeting is to allow the key Project Team consultants and
participants from the City to be introduced and lay the general framework for how the study will be ri��`'
conducted. This meeting will allow for the finalization of the proposed wark approach, as well as
discuss and clarify the information analyzed in Task 2.
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Scope of Services and Price Proposai
:�E'C'l1/l�, U�JfE'CIItiC',S:
■ Introduce J. Stowe&Co. team to City staff
■ Outline roles, duties,and responsibilities of Project Team members
■ Match Project Team members with appropriate City designee(s)
■ Establish lines of communication
■ Document the City's expectations
■ Finalize the project approach to meet the City's expectations
• Discuss the status of outstanding data requests
It is our experience that the project kick-off ineeting is critical in achieving successful results in any
project. These meetings not only assist J. Stowe & Co. in accurate(y assessing procedures, processes,
politics, and policies, but also provide an opportunity to attain"buy-in"and input from City personnel.
Task 4—Determination of Test-Year Revenue Requirements
A test-year is a common term in rate studies that refers to adjusted fiscal year costs that will be used as a
basis for setting rates. Revenue requirements are typically determined using one of two generally
accepted methodologies: cash basis or utility basis. Project Team members will utilize the cash basis to
develop the City's revenue requirement, and the enclosed price proposal is based upon this assumption.
However, should the City desire revenue requirements developed upon the utility basis, this will be
provided at a mutually agreed upon price. Once developed, the members of the Project Team will
conduct an on-site meeting with City Staff to review and finalize the water and wastewater revenue
requirements.
Task 5—Determination of Realizable Revenue at Current Rates
The results of this task will provide the data to properly evaluate the cost of service, the magnitude of
overall increases, if any, and the probability of redistribution of revenue responsibility between customer
classes. This task will also provide a"check"of the data provided by the City.
Task 6—Functionatization of Revenue Requirements
Functionalization of revenue requirements is the homogenous grouping of expense and capital related
costs by the service function provided. The Project Team will determine those costs that are specific to
the water and wastewater systems, as well as common costs incurred by both systems (e.g.,
administration).
Task 7—Classification of Revenue Requirements
Water Reve�zue Requirentents
J. Stowe & Co. recommends that clients conduct a revenue classification using a methodology that is in
compliance with American Water Works Association (AWWA) standards. Therefore, with the approval
of the City, J. Stowe & Co. will utilize the base-extra capacity methodology. This base-extra capacity
method typically separates costs of service into three primary cost components: (1) base costs; (2)eYtra-
capacity costs; (3) customer costs. These three components are defined within the American Water
Works Association "M1"manual as follows:
■ Base Costs—costs that tend to vary with the total quantity of water used plus those operation
and maintenance expenses and capital costs associated with service to customers imder
average load canditions
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Scope of Services and Price Proposal
• Extra-Capacity Costs — costs associated with meeting rate of use requirements in excess of
average and include operation and maintenance expense and capital costs for system
capacity beyond that required for average rate of use.
■ Customer Costs — those costs associated with serving customers, irrespective of the amount
or rate of water use.
In applying the base-extra capacity method, it is imperative that the demand factors that form the basis of
the base costs and extra-capacity costs be appropriately identified. This identification requires a
thorough understanding of the influencing conditions controlling the design of a system.
Members of J. Sto�ve & Co.'s team have utilized base-extra capacity methodology in the majority of
water cost of service and rate design studies conducted to-date. We will thoroughly analyze the demand
factors in this task in order to properly al(ocate costs utilizing the base-extra capacity methodology.
Wastewater Revent�e Requirements
The Project Team proposes, under the supposition that the City has an eYisting wastewater monitoring
and surcharge program, that the volume/strength (i.e., TSS, BOD, and NH3) cost classification
methodology be employed for cost allocations for the City's wastewater service for the wastewater
treatment plant. Additionally,the Project Team will recognize strength loading requirements included in
the City's wastewater treatment contract with TRA. Other ancillary costs associated with monitoring
wastewater collection and transmission costs will be classified as volume related. Wastewater treatment
and related operation-and-maintenance costs plus capital costs are segregated as to vo(ume and strength
as endorsed by the Water Environment Federation (WEF). As in the water cost determination, a
thorough understanding and determination of the costs incurred, due to plant loading, must be made for
the appropriate wastewater costs to be assigned to the respective customer classes. .
Task 8—Allocation of Revenue Requirements
One of the most important considerations in the setting of fair and equitable rates for utility service is the
establishment of the appropriate grouping of customers (i.e., customer classes for cost distribution after
costs are classified). Generally, a customer class should only include those customers who: (a) are in a
similar location in relation to the utility; (b) use the same or similar service from the utility; and (c)
receive similar service from the utility and place similar demands upon the utility. The Project Team
will analyze the usage patterns of the presently defined customer classes in the above context and
evaluate whether a new classification of customers should be recommended. To the extent that new
classes are warranted,the Project Team will assist in determining the specifications for the new customer
classes. Project Team members will meet with City Staff to discuss our findings regarding the City's
current and/or proposed grouping of customers as well as the customer class cost allocations.
Task 9—Development of Retail Rate Design
In the formulation of a rate and fee design plan, a clear and distinct understanding of the City's overall
goals and objectives should serve as the foundation for the development of options since rate and fee
design enables the utility to meet its service pricing objectives. Pricing objectives could include, but
would not be limited to, cost of service recovery, revenue stability, water conservation, and economic
growth. Members of the Project Team will conduct an on-site meeting with City Staff to discuss and
determine the rate design alternatives that will meet the City's pricing goals and objectives. At this
meeting, the Project Team will also discuss best management practices that have been identified with
regards to rate design.
The not-to-exceed price provided in this proposal incorporates a maximum of one water rate structures
and one wastewater rate stnictures to be developed. Additional rate structure alternatives desired by the .
City�vill be provided on a mutually agreed upon price.
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Scope of Services and Price Proposaf
Task 10—Determination of Realizable Revenue at Proposed Rates
This task is one of critical significance as it confirms that the rates established are sufficient to meet the
City's goals and objectives. The Project Team will analyze and compare the revenues forecasted to be
generated, by customer class, to the forecasted revenue requirement to determine the adequacy and
accuracy of the projections.
Task 11 —Rate Comparison Review
The Project Team will compare the City's current and proposed water and wastewater rates to water and
wastewater rates of similar municipal utilities. In addition, to the extent that information is able to be
obtained,J. Stowe& Co. will also provide consumption and customer data for the comparable municipal
utilities.
Task 12—Draft Report Preparation and Presentation
The Project Team will develop a draft report summarizing findings and recommendations of the water
and wastewater rate study. J. Stowe & Co. is committed to ensuring that the City thoroughly
understands the recommendations in the draft report and will be available to discuss findings, answer
questions, and receive input. The Project Team will present the findings to City staff and ensure that
these individuals have enough time to address their concerns andlor questions.
Task 13—Final Report Preparation and Presentation
Upon receipt of City Staff recommendations and comments, the Project Team will make appropriate
changes and provide the City with the final report. After completion of the final report, if requested, the
Project Team will make a presentation to the City Council.
Task 14—Finalization of Model and Training Session
The development of the rate model will occur throughout the course of the project. Once the project has
been finalized, the Project Team will work to form this model into a"user-friendly" program for use by
City Staff. The model, developed in Microsoft Excel, will allow for "what-if' scenarios including, but
not limited to, changes in operating and capital costs, customer and volume growth or decline, debt
service structure, source costs, inflation, capital project financing, and funding sources. The model will
allow the user to assess the impact various scenarios will have on an existing typical monthly bill. The
model will generate financial statistics such as debt coverage ratios and average dollar and percentage
change for each customer class. The model wili also be developed so as to allow the user to compare
actual performance to the projections produced by the model. Inputs and assumptions in the model will
be clearly marked and defined and instructions will be included for each model worksheet or form.
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Scope of SeNices and Price Proposal
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Deliverables
Upon completion of this study we will provide the City with the following:
■ Draft Report
Presented within 90-120 days of notification of award, given the timely receipt of the required
financial and operational data, one electronic copy of a draft report will be provided for the
City's review and comment that summarizes the Project Team's findings and recommendations.
■ Final Report
Twelve(12) bound copies and one electronic copy will be provided to the City within two weeks
after delivery of the draft report, given the timely receipt of the Ciry's comments. Additionally,
if requested, the Project Team will make one formal presentation of the Final Report to the City
Council.
■ Meetings
Our proposed project budget reflects a total of four (4) on-site meetings and/or presentations,
which is inclusive of one City Council presentation and the Electronic Rate Model Training
Session. Additional on-site meetings will be provided at time and expense.
■ Electronic Rate Model and Training Session(4 hours on-site)
Price Proposal
Based upon our understanding of the scope of services requested by the City, for this engagement and
the enclosed work plan,J. Stowe&Co. proposes a not-to-exceed project budget of$53,000, inclusive of �►
all labor and expense charges. This price will remain in effect for ninety (90) days from the date of this
proposal.
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